Do you recognize any of the signs of an economic slowdown that lead to a recession?
The economic slowdown you see on the horizon is not limited to the US but is a global event. The economy is still moving along, but no longer quickly. China’s economy is also flattening, and Europe says when China slows down, the world slows down. According to Ray Dalio, world’s largest Hedge fund founder, 2019 may not see a recession but expect to enter another recession in 2020.
Interest rates on CDs have passed 3 (%) percent for the first time in decades. Stocks and Bonds are in a roller coaster ride. And Several other Recession markers may be lining up. Decide for yourself. Which of the pre-recession indicators do you recognize?
- The yield curve on various Treasury bonds appears to be flattening. The gap between long term bonds and short term bonds has narrowed. Short term rates higher than long term rates has preceded every recession in the last hundred years, and though that inversion has not yet happened, the narrowing of that divide bears watching.
- Unemployment rate is holding steady or is rising. U.S. unemployment rate has dropped steadily since 2009’s ten percent (10%). Last year saw unemployment hitting record lows in multiple states. But the low numbers have begun to inch upward and there may be multiple reasons why. Four percent (4%) unemployment rate is hard to improve on because it causes other changes. If there is a small pool of unemployed workers, companies looking for skilled workers have a deficit of options. That compresses production and contributes to add to inflation pressure, if higher wages are needed to attract new employees.
- Inflation is beginning to pick up. Inflation hit two point four percent (2.4%) in July 2018. The normal target rate of inflation is two percent (2%). Though inflation seems a sign of a robust economy, over time, inflation causes a rise in the price of goods and services. People then tend to cut back on discretionary spending and save more, leading to a decline in the GDP, which boosts unemployment rates as companies lay off workers to reduce costs. It is possible the US is entering that cycle. The federal reserve hiked interest rates four times in 2018 and has hinted at two more rate hikes in 2019. Fed Chairman Jerome Powell mentioned patience by central bankers given the current subdued inflation.
- Home sales begin to decline in Key markets. CoreLogic sees California’s housing market as a leading indicator to the U.S. Housing industry. In the second half of 2018, sales dipped by a double-digit percentage. Dave Ramsey notes that home prices are likely to rise in 2019 but at a much slower pace with fewer homes for sale. Part of the reason for the slowing in the housing market is the uncertainty in our economy. If you are looking to buy a home, this could be a good time as rates are still relatively low and home prices are expected to level off. You may even be able to negotiate with sellers for more favorable terms such as paid closing costs or lower purchase price.
- Credit card debt and late payments begin to rise. According to CNBC, consumer debt has been continually growing since 2012. Credit card debt hit $420.22 billion by the end of 2018 according to NerdWallet. About ten percent (10%) of individual’s monthly income is spent on non-mortgage debt. According to LendingTree’s MagnifyMoney, “Americans paid banks $110 billion in credit card interest and fees in 2018, up 13% from the $98 billion in interest paid in 2017, and up 45% over the last five years.” Either people are living beyond their means, or the cost of living has grown beyond the majority’s ability to pay for it. That amount is expected to continue to grow throughout 2019, in spite of the knowledge that the level of consumer debt is already indicating looming recession in the U.S.
- Economic cycle indicates a contraction. The good news is that we are in a long expansion, only surpassed by the dot.com bubble expansion of 120 months. The bad news is that historically, every expansion has an end. The timing of the downturn is not a sure thing, but based on the history of economic cycles in the United States, another recession is on the horizon.
What do you think? Will we be in a recession in 2019, 2020 or not?