Recession Imminent?

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Recession Imminent?

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You may have heard on the news or from your friends that people are saying a recession is on its way for the US, and possibly the global economy. There’s no real, universally agreed-upon way to tell exactly when a recession will begin or how bad it will end up being, but then again economists don’t fully agree on what constitutes the “beginning” of a recession to begin with. That said, there are several indicators that US economists have identified which typically predict future economic behavior with some degree of accuracy, particularly when multiple of these indicators are pointing in the same direction. As it happens, several of these indicators are currently pointing to a recession sometime soon, while others are pointing to a more measured decline, if a decline occurs at all.

Let’s start with the indicator most fervently pointing towards a coming recession, what economists refer to as the “inverted yield curve”. It’s not as complicated as you might think; basically, the “yield curve” refers to a graph which compares the interest rates on two types of US Treasury bonds: the two-year and the ten-year bond. A bond is a unit of debt which is issued by the government and can be purchased by individuals or companies, who in purchasing said bond are essentially loaning money to the government, which it then pays back (theoretically) with interest. Typically, the ten-year bond has a much higher interest ratein other words, a much higher “yield”than the two-year. This is because investors require a greater incentive to have their money tied up for a longer period of time. When confidence in the short-term performance of the economy declines, however, then the demand and thus the interest rate on two-year bonds will increase relative to ten-year bonds because investors will see the short-term as a greater risk than the long-term. If this continues to the extent needed for the two yield curves on the graph to crossin other words, for two-year bonds to have a higher yield than ten-year bondswe say that the yield curve has inverted. Economists have found that a yield curve inversion usually means a recession is coming sooner rather than later. 

Secondly, it seems as if the Federal Reserve is preparing for some kind of downturn. From the New York Times: “Fed Chairman Jerome Powell said last week that the economy was in a ‘favorable place,’ but reiterated that the U.S. central bank would ‘act as appropriate’ to keep the economic expansion on track. The Fed lowered its short-term interest rate by 25 basis points last month for the first time since 2008, citing trade tensions and slowing global growth.” It’s important to note that the interest rate mentioned here is different from the interest rates on government bonds, however they are related. When the Fed lowers interest rates, it means that they believe the economy is headed downward, and by artificially lowering the base interest rate in the economylowering the cost of borrowing moneythey hope to increase spending and lending to give the economy a preemptive boost. If the Fed decides to lower interest rates further sometime this month or next, it could reinforce the likelihood of a recession.

All that said, there are some reasons to be positive. Consumer spending remains high even as sentiment begins to decline, which could signify that any recession would be relatively mild or at least farther off than seems by looking at other indicators. Continually stagnant wages compared to the cost of living could undermine this, however. If spending declines significantly in the next few months, it could signify a recession is imminent. In addition, unemployment is at record lows in many sectors, and job security is relatively high, even as more jobs continue to be outsourced and key sectors such as manufacturing and agriculture are being hit especially hard by Trump’s trade war with China. 

In conclusion, anyone who says they know exactly what’s going to happen or when the recession is going to hit, if at all, is either lying or blinded by arrogance. Overall, it does appear that a recession of some kind is likely within the next 12 months, however the exact cause, timing and magnitude are impossible to determine with 100 percent accuracy until after the recession has already begun. As conditions in the economy change, these and other indicators will change and will alter the likelihood of a recession, and thus our expectations will have to change as well. The best thing to do now is wait, observe and try our best to see the crash coming before it hits.