Should I Be Freaking Out About All This Recession Talk?
Earlier this week, U.S. president Donald Trump took to Twitter to assure the world that rumblings of a looming economic downturn have been greatly exaggerated. "The Fake News LameStream Media is doing everything possible the 'create' a U.S. recession, even though the numbers & facts are working totally in the opposite direction," he wrote. "Our Economy is sooo strong, sorry!"
Many key "numbers & facts," however, tell a different story. On August 14, the Dow Jones Industrial Average plummeted 800 points—its worst day all year—after the federal bonds market experienced what economists call an "inverted yield curve." Inverted yield curves have preceded all nine recessions in the American economy since 1955, and only once, back in the mid-1960s, did a recession not begin within 24 months of a dreaded inversion. That inversion, the Federal Reserve Bank of San Francisco helpfully clarified last year, was followed merely by an "economic slowdown," but "not an official recession." A week later, on August 21, the yield curve inverted again.
Put differently: At this point, it would be premature to liquidate your sneaker collection, buy as much gold as you can carry, and go live in a remote cabin until the 2024 Summer Olympics. But at the very least, there are good reasons to be concerned right now. As experts and pundits argue about whether there is a recession coming or not, here's what you need to know.
What counts as a recession, exactly?
Many economists, especially in Europe, define "recession" to mean two consecutive quarters of negative economic growth as measured by gross domestic product, or GDP. GDP refers to the total value of goods and services produced within a given period of time; it is, in effect, longhand for "size of the economy." When an economy is shrinking over an extended period of time, it is in recession.
Politicians and journalists often use this definition in the United States, too, since it's quick and intuitive. But technically, the task of determining whether a domestic downturn qualifies as a "recession" falls to the National Bureau of Economic Research, a nonprofit, nonpartisan research organization, which defines the term more broadly as "a significant decline in economic activity spread across the economy, lasting more than a few months." NBER economists examine trends in real income, employment, industrial production, and wholesale and retail sales, in addition to monthly GDP estimates, when making these recession-or-no-recession calls.
What happens in a recession?
Jobs disappear, and the unemployment rate spikes. During the Great Recession, which lasted from late 2007 until mid-2009, it peaked at 10 percent; during the Great Depression, it was 24.9 percent. Entrepreneurs have trouble getting the financing they need to start new businesses, and with less disposable income rattling around the economy, existing businesses may be forced to close their doors. Those that stay open are less likely to expand their operations or otherwise make new investments. Real estate values may fall, even though monthly mortgage payments stay the same. People who lose their jobs may lose their homes, too. And of course, the stock market collapses, wreaking havoc on investment portfolios and retirement accounts. During the Great Recession, the Dow lost more than half its value in just six months.
Perhaps the most significant consequences, though, are those that manifest themselves in the years that follow. As a 2009 report published by the nonpartisan Economic Policy Institute puts it, no recession is really a "one-time" event, since "economic hardships for parents will mean more economic hurdles for their children," too. Things like extended periods of joblessness, abandoned education plans, and inadequate access to health care all create lingering costs that the economy will still be repaying long after the recession is officially over.
What's with the inverted yield curve?
The federal government funds a good chunk of its operations by issuing bonds—essentially, loans it pledges to repay with interest at a certain future date. Ordinarily, investors expect higher yields on longer-term bonds, since those lock up their money for the longest period of time. And so, the yield curve—the returns on different types of bonds—usually increases with the amount of time to maturity.
When demand for long-term bonds goes up, though, their yield goes down. And when it gets to the point where yields are higher on short-term bonds than they are on their long-term counterparts, the yield curve inverts. That's generally a sign that people are spooked about the economy's health. Investors, anticipating interest rate cuts and inflation slowdowns that tend to accompany recessions, are suddenly more inclined to park their money in safe 10- or 30-year assets, avoiding the risk associated with shorter-term bonds in the potentially-tumultuous months to come.
As the Federal Reserve Board of San Francisco noted in a research paper last year, the inverted yield curve boasts a "strikingly accurate" record for forecasting recessions. And these recent inversions of two- and ten-year Treasury bond yields, the Financial Times points out, are the first since 2007. The Great Recession that began the following year, of course, plunged the country, and the world, into the worst economic downturn since the Great Depression. It would be more than half a decade before the market returned to its pre-crash levels.
What would cause a recession this time around?
For starters: Trump's scorched-earth trade war with China. In July, New York University economist Nouriel Roubini pointed to fallout from the dueling tariffs and volatility in the global oil market as potential recession triggers. In an interconnected global economy, an economic stalemate between the world's two largest exporters of goods has devastating ripple effects. China is already in the midst of an economic downturn, spurred on by Trump's trade policy, cautious consumer spending, and China's reliance on debt-fueled growth. Last month, the nation experienced its lowest factory output in 17 years.
Meanwhile, the prospect of a "no-deal Brexit"—the nightmare scenario in which the United Kingdom leaves the European Union without a new trade agreement in place—has investors everywhere on edge. By some estimates, a no-deal Brexit could cause the U.K.'s GDP to decline by 3.5 percent; by another estimate, the U.K. economy may be in recession already. Earlier this month, Germany's central bank warned that thanks to Brexit worries and U.S.-China uncertainty and slumping sales of German cars and industrial equipment, that country—the world's third-largest exporter—is headed towards recession, too.
More than a decade ago, Roubini earned the nickname "Dr. Doom" for making dire predictions about an impending financial meltdown which, he said, would be brought on by an unprecedented housing market collapse, the failure of Wall Street investment firms, and the implosion of the mortgage-banked securities that were powering the global economy. At the time, he was ridiculed as a pessimist. As recounted in a New York Times profile, after Roubini delivered one of his trademark warnings in a 2006 speech at the International Monetary Fund, the moderator earned laughter from the audience by quipping, "I think perhaps we will need a stiff drink after that." Roubini's forecast, it turns out, was a prescient one; so was the moderator's.
What are some of the other warning signs?
Global trade wars aside, there are other, subtler hints that something is amiss. After two straight quarters of decline, the American manufacturing industry is already embroiled in its own mini-recession. The freight industry—trucking, rail, and air—has been quietly sliding over the last year, which can be an early signal of a coming recession, since companies that anticipate fewer sales respond by shipping fewer goods. The same is true of sales of RVs and brand new cars—luxury goods that are among the first things consumers skip when money gets tight.
Also in July, Massachusetts senator and 2020 presidential candidate Elizabeth Warren pointed to record-high levels of outstanding household and corporate debt, which could prove disastrous if a recession causes interest rates to increase and/or incomes to decrease, she warned. Like Roubini, Warren's perspective merits special attention because she, too, sounded unheeded alarm bells about the risks created by the pre-2008 housing bubble. "When you load up more debt on your house," she said in a 2004 PBS interview, discussing the proliferation of families taking out second mortgages to make ends meet, "you are rolling the dice at the table in Las Vegas." Today, the global economy is again so fragile that it may not be able to withstand further shocks; if the Trump administration fails to raise the debt ceiling this fall, for example, or if a no-deal Brexit goes through, she wrote, such a crisis could "bring it all down."
What's the Trump administration trying to do about it?
A lot of different things. The president, nervous about how a sagging economy could affect his re-election odds, has already delayed implementation of a set of new tariffs on Chinese-made consumer products—video game consoles and computers among them—until December 15, citing a desire to prevent higher prices from affecting the holiday shopping season. (This is the same president, remember, who once promised voters that trade wars are "easy to win.") He floated cuts to corporate and payroll taxes to infuse cash into the economy, only to back off days later. "We have a strong economy," he explained.
Trump's favorite recession-related pastime, though, is taking to Twitter to blast Federal Reserve chairman Jerome "Jay" Powell—appointed by Trump just 18 months ago—for his "horrendous lack of vision." The Fed has the power to lower short-term interest rates, which Trump believes would put all downturn-adjacent worries to rest. (In theory, lowering rates could help goose spending and make borrowing money a more attractive prospect for businesses and consumers alike.) "Doing great with China and other Trade Deals," he tweeted in a representative gripe. "The only problem we have is Jay Powell and the Fed."
The ballooning federal deficit, however, which the Congressional Budget Office expects to approach $1 trillion in 2019, limits Powell's ability to reduce already-low interest rates—especially if a recession is on the way. (As the Washington Post notes, during previous recessions, the Fed has aggressively slashed rates to jump-start economic growth.) This week, Trump launched the Actually, Recessions Are Good era of his White House tenure, arguing that a recession might be an unfortunate-but-inevitable byproduct of his unfortunate-but-mandatory trade war. "I'm taking on China," he said. "I am the chosen one. Somebody had to do it."
How accurate are these terrifying predictions going to be?
As the Securities and Exchange Commission requires all mutual funds to remind potential customers, past performance does not necessarily guarantee future results. Barron's, for example, points to strong consumer spending as evidence that a recession is unlikely. Consumer confidence is high, and unemployment is low and getting lower. Although former Federal Reserve chair Janet Yellen allowed that the odds of recession have "clearly risen," she thinks they're still low, all things considered. "I think the U.S. economy has enough strength to avoid that," she opined in an August 14 interview on Fox Business Network.
Given the slow-but-steady accumulation of historical warning signs, a lot of the recent skittishness stems from the fact that based on previous boom-bust cycles, a recession is long overdue. In an August 2019 survey of 226 economists conducted by the National Association for Business Economics, 38 percent of respondents said they believe the U.S. will enter its next recession in 2020, and 34 percent picked 2021; only 14 percent say it will occur after that. Meanwhile, this July marked the 121st consecutive month of economic expansion since the depths of the Great Recession, making this the single longest period of uninterrupted growth in U.S. history. (Thanks, Obama.) Sooner or later, something has to give.
Is there any way I can prepare for a recession?
First, a disclaimer: Please do not make potentially life-altering financial decisions based on advice from me, a person who begins every conversation with a financial advisor by asking him to explain concepts as if he were addressing a third-grader.
That said: Now might be a good time to look at your saving habits and how much cash you keep on hand in the event of a job loss, medical emergency, or some other unexpected event. Maintaining a robust rainy day fund will reduce the likelihood that you'll have to pay tax penalties associated with tapping into retirement accounts early, or sell off investment assets at a time when those assets might be worth less. Try to pay off debt that carries a higher interest rate, too, since that's the variety of debt that will grow the fastest if you fall behind on payments.
Otherwise, should the sky fall, try not to panic. No recession has ever been permanent, and after each one, the economy has eventually made a more-than-full recovery. But also, remember that normal people who are not billionaires cannot game a cataclysmic global economic recession, slickly evading its worst consequences by reading a few articles online. If leaner times are indeed ahead, doing the little things now will at least better prepare you to face them.
The tariffs aren't doing what the White House wants them to do. A $12 billion emergency aid package isn't going to help.
Originally Appeared on GQ
