Recession Or Not – That Is The Question!ByRaymond D. Matkowsky
There is no question, a recession will occur sometime in the future. Normally, a recession occurs every four to six years. It has been almost ten years since the end of the last one. Does this indicate one is coming? No! Not by itself. Remember though, that recessions occur periodically to bring economic excesses and excessive risk taking back into balance. I doubt that we will ever be recession free. It is human nature to take risks. Sometimes humans take on more risk than they should. Recessions correct this behavior.
More and more forecasters are predicting a recession in 2020 though. Some even feel that one will come in late 2019. I count myself among those that feel a recession in 2019 is a real possibility and businesses should be prepared for it.
Many people quote the positive signs in the economy: the Gross Domestic Product (GDP) is growing at a high rate, unemployment is low, corporate profits are high and inflation is low. However, I do believe many are misreading these signals and that the government of The United States and the media does their best to encourage this misreading. Also, for every positive sign there is a negative one.
I would also remind people that as a group, economists have a 100% track record. 100% wrong! Also, a recession is typically declared six months after it started and declared to be over six months after it has ended. If you listen to the official pronouncements, you will be robbing yourself of the valuable time needed to make the transition between the two.
Economy
The economy has been “expanding” for the last 114 months. However, the rate of expansion is much lower than what the Bureau of Economic Activity (BEA) says. The Small Business Management article I wrote last month compares the final GDP for each year over the last nine years to that of the BEA’s quarterly estimates. You could obtain the article here. It shows that overall the BEA’s estimates are very variable and inaccurate much of the time. Actually, the rate of expansion has been fairly consistent over the last four years and ranges from 1.3% to 2.9%. The average annual growth rate over 2010 to 2017 has been 2.16%. We do not know what 2018 will be until March of 2019. However, it is expected to range in the 2s%. This is a far cry from the 3 to 4% presently highlighted by many in and out of government. The economy isnot roaring. It is stumbling along waiting for something to possibly disrupt it.
There is one thing that needs to be said about the economy. Wall Street and corporate profits are not the economy. Do not look at corporate profits as a measure of the economy! Many factors that have nothing to do with the economy go into corporate profit calculations. Wall Street functions on emotion just as much as on economic factors.
Unemployment
The economy is really supported by the personal spending of the people. If people are unemployed or underemployed they do not have the money to spend.
We are told that unemployment has reached a fifty year low. This is deceiving. There are still many long term unemployed that probably have little chance of finding employment in their past industries. The government keeps on fooling them by saying they’re going to resurrect these. They are not!
Even more troubling is the U.S. Labor Department quoting employment growth numbers without telling people what they mean. The United States must generate 150,000 jobs a month just to stay even with population growth. In other words, if 190,000 jobs were created in a given month, this represents an employment growth of only 40,000 open jobs. This explains why many times you will see the number of jobs increasing and the unemployment rate staying the same or even increasing not decreasing. A number lower than 150,000 actually means that the number jobs available is shrinking not expanding.
Employment/unemployment, itself, can bring on a recession. Full employment can cause a shortage of workers. That means that industry cannot grow and produce the amount of goods they could sell, plus they probably have to pay more which increases their cost of labor and inflation. Large unemployment levels means that the population cannot afford to buy their goods. I don’t think anyone knows where the happy medium is.
Are layoffs a precursor to a recession? Originally, the Tax Reform measures passed in 2017 were sold to the public as a 40% rate reduction for corporations that would create jobs and increase wages for workers. Very little of that has happened. In fact, there are only about 500 companies that have given back anything to its workers and sometimes these give backs have had strings attached. So far 17 of the U.S. largest companies have announced 33,569 plus layoffs. Some say there is more to come. For these people, the recession has already started.
Debt
In 2007 to 2009, it was mortgage debt that brought on a recession. That is not going to happen now. The industry now has been forced to be much more responsible. However, American families are now carrying more credit card debt than before. This is a sign that these families cannot make ends meet on their income alone. They are filling the gap with credit. This is a situation that contradicts a good economy with economic expansion.
However, credit cards are not the biggest concern. Student debt is. The total private debt now stands at US$13.51 trillion. According to a NerdWallet survey, 9% of Americans believe that they will never be debt free. If you are not debt free, you cannot spend as much. Spending drives the economy. Without spending, you will have a recession.
Debt creates economic cycles also. You have borrowing which is nothing more than spending more than you have. This debt has to be serviced and paid back sometime in the future. Therefore, you will need to spend less than you make sometime in the future. Now multiply this factor by a million and this describes the possible ebbs and flows of the present economic cycle in the United States.
Debt extends into the public sector also. Governments throughout the world are way over leveraged. It is doubtful that they will ever be able to pay off their borrowings. The more government debt, the less money is available to put into the economy. Many countries will default. Defaults will put the whole world into recession.
Outside Influences
Don’t forget that economic disturbances do not have to originate in your home country. The way the world of finance is interconnected these days, a bank failure in Italy could reverberate in New York or a New York failure may effect a bank in London or Berlin.
The European economy is weakening. The author and economist Victor Hill recently publish an article entitled “News from Euroland-Recession Imminent.” He lists a critical number of events that are coinciding. If you wish to read his article, you can obtain it here.
Can someone predict a recession? No and I certainly can’t. I would definitely prefer not to see a recession, but I can be aware of the possibilities and plan for them. As a business owner or manager, regardless of where in the world you are, you should also prepare for one should it occur!
If you have any further suggestions, do not keep it to yourself. Help your fellow readers!
If you have any questions, comments or suggestions drop me a line at rdm@datastats.com.
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