say what? a recession?


The International Monetary Fund upgraded the U.S. Growth Forecast for 2018 to 2.9%. U.S. corporations are showing robust earnings and we have the lowest unemployment in 17 years. Why all the ominous predictions of a recession in 2019 or 2020?

Recession Historical Precedent

Every decade since 1850 the U.S. has had a recession. Our last recession ended in June 2009. We are experiencing the second longest expansion in U.S. history. In one more year we will pass the 1991-2001 record expansion.

The Tightening of the Yield Curve

Typically 10 Year Treasury Bonds pay a higher interest rate than 2 Year Short Term Bonds, because taking on longer term bonds means taking on the risk of what might happen. The gap between the long term bonds and the two year bonds, the yield curve, has been shrinking.

“The yield curve may sound boring, but some believe that a flat or inverted yield curve is a recessionary canary in a coal mine,” says Scott Simon, former portfolio manager at PIMCO. “If people think the economy is going to slow and inflation is going to go down, long term interest rates tend to go down.”

Possible Trade War

National Public Radio reported that “Just about all economists agree there is one thing that could eventually drive the economy into a recession: a trade war.” The
ongoing, unclear White House policy on trade could cause businesses to delay investments due to the uncertainty and that would slow growth. If the current trade “fight” escalates into a “war” that would “definitely drive the U.S. into a recession.”

Fiscal Stimulus Policies

Corporate and personal income tax cuts of $1.5 billion were made in January 2018. Congress passed a $300 billion federal spending increase in February 2018. The IMF warned that these hikes are increasing risks to the global economy by boosting debt, potentially stoking inflation and pushing the dollar higher. These fiscal stimulus policies that are currently pushing U.S. growth aren’t sustainable and by 2020 their positive impact will run out.

Massive Public Debt

The continuing, dramatic increase in the public debt means the possibility of more unconventional monetary policies if needed to prevent a recession will be limited by our bloated balance sheets. Bailouts, like those in the last recession, will be more intolerable across the globe as more countries with resurgent populist movements and near insolvent governments become the norm.

Whew! Is there any good news?

From the 1850’s to the end of WWII the average contraction in the economy was over 22%. Since WWII that number has averaged 2.3%. The time between downturns has lengthened as well. Before WWII every 2.5 years there was a recession, after WWII the time between contractions lengthened to 5.3 years on average. The Fed has helped the U.S. Economy become less volatile over time, and the U.S. Economy has matured from the emerging market it was before WWII. Also, expansions don’t die of old age. Australia hasn’t had a recession since 1991.

What is your prediction, and how will it impact your career? Interested in further conversations? Contact Smith Hanley Associates’ Executive Recruiter in the Credit Risk Practice Area, Sean Murphy, at [email protected] or 312.589-7584.

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