Is it time to start planning for a recession?
Fred McKinney
In Greek mythology, Apollo fell in love with Cassandra, the daughter of the King and Queen of Troy.
As a present, the Greek god gave Cassandra the gift of foresight and the ability to predict the future. Soon after receiving the gift, Cassandra told Apollo to get lost. Rejection is not something Greek gods or current American presidents take well.
The spurned Apollo cursed Cassandra by making it certain that while she could accurately forecast the future, no one who heard her prescient statements would believe her. This turned out to be fatal to the Trojans, because Cassandra warned her people the Greeks were stowed away in that giant horse, but nobody bought it.
Maybe nobody will believe me, but there are reasons for us to be concerned about the state of the economy. Here is a partial listing of the factors that could turn the current expansion into a recession in 2019:
1. The length of the current business cycle
Despite some politicians' rosy outlooks, most economists long ago gave up on the notion that economic expansions could last forever. Like taxes and death, the business cycle is here to stay.
We are now in an expansion that began during the spring of 2009 and has continued for almost 10 years. Since 1930, only the expansion between 1991 and the dot-com bubble of 2001 has been longer than this one. We are nearing the point — sooner rather than later — that this expansion will come to an end.
There is a developing consensus among economists, this will be prior to 2020.
One thing that could help portend an upcoming recession is the yield curve, which is the difference between the interest rate on 10-year and two-year government bonds. When it becomes negative, i.e. short-term rates get higher than long-term rates, it signals a recession.
Every recession since 1976 was preceded by a negative yield curve, and never has a recession not happened within 17 months when the yield curve turned negative. The yield curve now is less than 0.23 percent, almost in negative territory.
2. The chaos in Washington
The federal government partial shutdown, which furloughed hundreds of thousands of workers without pay, not only was an inappropriate use of political brinkmanship, it was damaging to the health of the economy.
This and other uncertainties caused by political dysfunction and the threat of impeachment are likely to exacerbate the uncertainty that destabilizes markets and the economy.
3. The federal deficit
In terms of fiscal policy, the federal deficit was $458 billion in fiscal 2008, the year before the Great Recession started in 2009.
The deficit reached a historic high in fiscal 2009 of $1.4 trillion before declining to under $500 billion in fiscal 2015. The Congressional Budget office is projecting the fiscal 2019 deficit will approach $1 trillion.
4. China
President Trump has drawn a line in the sand with China. If the Asian nation does not change its trade practices by March 2, Trump has threatened to increase the current destructive 10 percent tariffs to what could be catastrophic tariffs of 25 percent.
This, along with the slowing of the Chinese economy, is likely to result in falling prices as the Chinese attempt to maintain market dominance. These forces are clearly damaging to the U.S. economy and can transform growth into recession.
I don't know if you are listening, but like Cassandra, the signs are pointing toward an economic slowdown. Small and large businesses are beginning to take steps to prepare for the coming storm. These actions contribute to the likely slowdown.
John Maynard Keynes, the great English depression-era economist, called this the “Paradox of Thrift.” The very act of large numbers of consumers and businesses increasing their savings for a rainy day, decreases spending and makes the recession even more likely.
Buckle up. I hope I am wrong.
Fred McKinney is the Carlton Highsmith Chair for Innovation and Entrepreneurship and director of the Center for Innovation and Entrepreneurship at the Quinnipiac University School of Business.
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