The economic expansion is the second longest in U.S. history, leading many economists to forecast a recession as early as next year. Two-thirds of the economists surveyed by the National Association of Business Economics are predicting a recession by the end of 2020.
Why? Just because things seem to be going so well. The late stage of an economic expansion is most vulnerable to a popping of the bubble. It’s typically when unemployment falls, inflation heats up, the Federal Reserve raises interest rates to cool the economy down, often going too far with investors and consumers pulling back.
Economists are concerned that the yield curve is flattening and could easily become inverted. It hasn’t happen yet, but it is getting very close. An inverted yield curve is when short term rates, the two year yield on Treasury notes are higher then the ten year yield. It signals a lack of faith by investors and has predicted the last 5 recessions. (A recession will occur 12-18 months following an inverted yield curve)
The most likely road to recession is runaway inflation. Falling unemployment and rising wages are a good thing, but eventually higher pay forces companies to raise prices more sharply. That could prompt the Fed to raise rates faster. Higher rates and inflation fears push up other borrowing costs for consumers and businesses, including mortgage rates, curtailing home sales as well as household spending and business investment broadly.
Other triggers that could spark a recession:
- Escalating trade conflicts: President Trump has recently slapped 25% tariffs on 16 billion worth of imports from China and China has responded with 25% tariffs on American goods. So far, both China and the U.S. have now imposed tariffs of $50 billion on each other’s goods. The United States has also threatened to slap 25% tariffs on an additional $200 billion of imported goods from China.
- Higher energy prices: Oil price spikes have contributed to every recession since World War II by sapping consumer purchasing power, according to Moody’s. U.S. benchmark crude oil prices of about $65 a barrel are up from a low of about $26 in early 2016 and $59 early this year but well below the $112 reached in 2014. And average gasoline prices are just under $3 a gallon compared with more than $4 four years ago.
- Budget battles: Early this year, Congress raised budget spending caps by about $300 billion, with most of that devoted to higher defense spending, but that deal expires in late 2019. And the nation’s debt limit must be raised in early 2019. Both issues set up dramatic showdowns in Congress, especially if the midterm elections this year result in a more even split between Democrats and Republicans.
- Trouble overseas: The new populist government in Italy has vowed to reverse the country’s austerity measures and give citizens a minimum income. Such measures could revive the country’s debt crisis. They also could pose threats to European banks that hold the debt and spell new risks to the European economy, hurting global stocks and U.S. exports.
Keep in mind that stock markets will decline six months before the start of the next recession. No need to panic yet, but it maybe a good time to review your investment accounts.
- Consider taking some profits on some of your more aggressive equity positions
- Re-balance your bond holdings to more short term duration from long term
- Put any extra cash into high saving accounts
- Pay down debt
A recession is when your neighbor loses his job, a depression is when you lose your job.
