Recession coming? Consensus Points to “When” not “If”
- by: Hank Berkowitz
- July 28, 2019
Rick Telberg (@CPA_Trendlines) and I did a quick show of hands at last week’s @Accounting Show in New York. To begin our presentation, we asked audience members if they thought we were heading into a recession. More than half the hands shot up immediately and a few more were raised tentatively. That aligned with our 2019 CPA/Wealth Advisor Confidence Survey™ which found that almost half (47%) of the 300 financial advisors who responded expected a recession within 12 months–up from 33 percent who felt a recession was imminent at this time a year ago.
On Friday, the Commerce Department reported that GDP rose by only 2.1-perent in Q2, down from the first quarter’s 3.1 percent. It was the weakest quarterly increase since Q1 of 2017 when President Trump first took office. Further, the Federal Reserve Bank of New York’s recession probability chart indicated a 30 percent chance of a downturn over the next 12 months, up from 10 percent early this year. Experts say the Fed’s probability chart is heavily influenced by the inverted yield curve.
While it’s not time to run for the hills and stuff your money under a mattress, it’s pretty sobering considering the current economic backdrop: Unemployment is supposedly at lowest level since Neil Armstrong man first walked on the moon. GDP growth remains positive and stocks are just about at their all-time high–up 50 percent since 2016.
Yes, we’re savoring the longest bull market and longest economic expansion on record. But, as any gambler or elite athlete will tell you, winning streaks never last forever.
Bob Doll, chief equity strategist and senior portfolio manager at Nuveen wrote in Financial Advisor last week, that stocks are up by double digits this year, as the S&P 500 Index has climbed nearly 19 percent. “The end of the second quarter marks the fourth time that index has been trading in the 2,950 range over the past 18 months (after previously reaching this level in January 2018, September 2018 and May 2019). That means stocks really haven’t gone anywhere in a year-and-a-half,” noted Doll.
And then there’s the the yield curve, which inverted earlier this year. Yield curve inversions don’t cause recessions, but inversions have preceded every single one of the last seven U.S recessions. In fact, the inverted yield curve signaled both the 2001 and 2008 recessions about one year in advance.
Matt Topley, chief investment officer at Fortis Wealth in Valley Forge, PA told me that recently while the stock pullback at the end of 2018 was a buying opportunity, “we are now in a more precarious situation.” He said the inverted yield curve should not be ignored, “and our economy is running out of qualified workers as the jobless rate settles below 4 percent. “Amazingly we have not experienced inflation despite such a historically low unemployment rate, so the stock market continues to rise,” added Topley. That being said, he is cautioning investors to prepare mentally for “recession-size drawdowns in equities in the range of 30 to 40 percent,” but to be aggressive when stocks are on sale.
Meanwhile, The Economist’s R-word index (number of times national financial journalists have been mentioned the word recession ticked up at about the same time. Today, the yield curve suggests that a recession may be imminent, and America’s leading newspapers are discussing recessions more often than at any point since 2012, although Topley says to “ignore the headlines and doomsayers, especially as elections approach.”
Timing is the real challenge
Traditionally, we had to wait for the National Bureau of Economic Research (NBER) to announce a recession after we’ve already been feeling the pain for a, or wait for the Commerce Department to confirm that GDP had declined over the last two consecutive (completed) quarters. That’s like finding out over Halloween that it was a record heat wave in August. It’s certainly not helpful for policymakers, or more importantly for people losing their paychecks or trying to keep their businesses afloat.
As The Brookings Institution reported last month: “The NBER announced the Great Recession in December 2008, a full year after the recession started—far too late to initiate a timely monetary or fiscal policy response.” Brookings, says it’s important NOT to focus on the unemployment rate itself, but on rapid increases in the jobless rate.
Not all jobs created are worth taking
Here at HB, we’ve long been skeptical of the historically low jobless rate, because wage growth has been so meager during this 10-year expansion and because many of the newly created jobs during have been in the low to midrange of the wage scale. In fact, the Labor Depart says almost of one-fourth of those who are out of work have been looking for over six months. The standard measures of unemployment do not count the millions who are back in the workforce, but at a fraction of their former salaries. The stats don’t take into account millions of gig economy workers (young and old), plus mid-career and older professionals who are consultants and contract workers who are doing okay, but who’d rather be employed somewhere full-time with benefits.
The Brookings folks seem to agree with us: “Of course, changes in the national unemployment rate do not tell us everything we might want to know about the health of labor markets. In particular, they do not capture the extent to which workers have left the labor force or are under-employed, both of which are important for understanding the degree of labor market slack,” reported Brookings.
Recession at a 4.1% jobless rate?
As economist Claudia Sahm wrote in a new Hamilton Project at Brookings and Washington Center for Equitable Growth book, if the unemployment rate (in the form of its three-month average) is at least 0.50 percentage points above its minimum from the previous 12 months, then the economy is already in a recession. Still skeptical. Well Sahm’s Recession Indicator has never called a recession incorrectly since 1970 and is usually four to five months ahead of any other credible economists or analysts.
See helpful charts here courtesy of Brookings.
According to Brookings, the unemployment rate in November 2000 was 4.0 percent and by June of 2001, it was had edged up to 4.5 percent. While 4.0 or even 4.5 percent are low unemployment rates by historical standards, a recession had in fact begun in March of 2001, and the unemployment rate continued to rise rapidly. The Sahm indicator called this recession at the beginning of July when the unemployment data for June was released.
So here we are at a half-century low jobless rate of 3.6 percent. Whether you agree with that number or not, if the unemployment rate rises to 4 percent (still extremely low by historical standards), the Sahm index suggests a 76 percent likelihood of recession and if the jobless hits 4.1 percent – just half a percent higher than today—there’s a 97 percent likelihood of recession in the coming months.
There are also a number of sobering housing indicators suggesting it’s not a matter of “if,” but “when.” See William Emmons’ Recession Signals: Four Housing Indicators to Watch in 2019.
Emmons is an assistant vice president and economist at the Federal Reserve Bank of St. Louis and the lead economist for the Bank’s Center for Household Financial Stability. “Data on single-family home sales through May 2019 confirm that housing markets in all regions of the country are weakening,” wrote Emmons. “The severity of the housing downturn appears comparable across regions—in all cases, it’s much less severe than the experience leading to the Great Recession, but similar to the periods before the 1990-91 and 2001 recessions.”
Last week, Senator Elizabeth Warren (D-Mass.) published a scathing Medium post entitled “The Coming Economic Crash–And How to Stop It.” The Democratic Presidential contender pointed the finger at manufacturing slump and recklessly high levels of corporate debt—akin to the junk mortgages we saw during the global financial crisis.
“The overall numbers about GDP or the stock market are great, but they don’t reflect the lived experiences of most Americans,” Warren wrote. “Wages haven’t gone up in a generation and yet the cost of housing, the cost of health care, the cost of childcare, the cost of sending a kid to college have all gone through the roof. The middle class squeeze is real and it has gotten tougher for people over the last few years.”
Finally, a Gallup poll found that even as Americans‘ approval of the overall economy have risen, anxieties about their own personal finances have remained largely the same over the last few years.
Bottom line: you can’t stop a recession any easier than you can hold back the ocean. But you can make a real difference in your clients’ lives by helping them manage their finances and personal dreams when economic prosperity hits is next inevitable speed bump. For more about what your peers think about the economy, the recession and their own firm’s growth prospects, see my recent presentation of the 2019 CPA/Wealth Advisor Confidence Survey™ with the one and only Rick Telberg @CPA_Trendlines.
# Recession #yield curve #Sahm Recession Indicator #Rick Telberg @CPA_Trendlines @Accounting Show #Matt Topley
*** Take our latest InstaPoll: To what extent is the Inverted Yield Curve a reliable recession indicator?