Coming soon: A recession?

It’s always a risk talking about the possibility of a coming recession because they’re such emotional things. Some people don’t even like to say the word.

Let’s say, for example, that we say the signs are that a recession is coming next year. If you’re not already fully protected against a contracting economy — and who is other than wealthiest, perhaps? — you cut your spending to the bone and try to save as much as you can to survive the carnage. Consumer spending stops, companies put the brakes on hiring and, maybe, start laying people off — and , voila, a contracting economy.

There’s also danger in whistling by the graveyard. If you’re not preparing for the coming recession, there’s a good chance you’ll be one of its victims.

Granted, economic predictions are often guesses by people with nice wardrobes and often they’re wrong. Sometimes they’re right. Who wants to gamble that CNBC’s story today predicting a recession in 2018 is wrong?

Employment is still healthy, economist Ardavan Mobasheri acknowledges. But he says payroll gains — jobs — in August were the worst in six years and, if history is a guide, it signals an economy running out of gas.

Twelve months prior to the start of the 2008-2009 recession, payrolls were growing at 1.55 percent. They were growing at 2.6 percent a year before the 2001 recession, and at 2.39 percent a year before the 1990 recession. In fact, payroll gains have averaged 2.67 percent 12 months prior to the beginning of all recessions since 1947.

He says not since 1947 has there been a period of payroll growth this weak that didn’t result in a recession within a year.

But, wait! There’s less!

Loans to business have slowed dramatically, according to Mobasheri.

No wonder the growth rate in jobs has weakened. Since the end of World War II, such weak growth rates in business lending have always occurred either during a recession or immediately following one.

And when combining these two all-important indicators, the picture becomes even bleaker. The American economy needs healthy business investment, hiring and consumer spending to sustain growth. And while business confidence surveys, especially for the small business segment, remain strong, they are not showing up either in the pace of hiring or in demand for credit.

The longest and deepest recessions tend to follow real estate busts, Ruchir Sharma wrote in a New York Times op-ed this week.

There’s a stock market that remains on fire while the economy itself is in a slow walk.

Nonetheless most economists — even conservative deficit hawks who worry about the Fed “blowing bubbles” — still look mainly for economic threats to the financial markets, rather than the threat that overgrown markets pose.

They thus don’t recognize fully that the world has changed, and the tail now wags the dog. Many mainstream economists still argue that the economy can’t be overheating if consumer price inflation is quiet, and they want to keep rates lower for longer, hoping that easy money will stoke growth in the economy, and jobs, for the poor and the working class.

However, since 2008, easy money has produced an unusually weak economic recovery alongside an unusually long and strong run-up in prices for stocks, bonds and housing. The rich own the fattest share of these assets, so wealth inequality is increasing. In addition, easy money is fueling monopoly power by helping entrenched companies borrow.

Consumer prices being low tends to fuel housing bubbles.

Asset prices from stocks to real estate have never been this expensive simultaneously, he notes.

It’s the sort of thing that can suggest a coming…

  • MrE85

    Hang on a little longer, economy! I’m not retired, yet…

    • Exactly. And when we retire, we’ll have more time to worry about our grown kids surviving recessions.

      It never ends, eh?

      • Samuel Sneed

        I am at the eldest of the millennial generation, graduated in 2001 from High School and the economy and the world has not been the same since. Two recessions in the mix,expensive wars, inflation and stagnation to really hamper us. Work and school has been the mantra but if you did not come from strong means it is really hard to get ahead. Mostly just tread water for now.

  • Sam M

    Any time I start hearing “all time highs” I start to feel low.

  • QuietBlue

    There’s supposedly been a recession right around the corner for several years now. I suppose the prediction will come true eventually, but I’d want to see some better analysis (business loans are slow during recessions? you don’t say…) before I start worrying too much. Slower growth, sure, I can see that — it’s hard to hire people when there aren’t as many people to hire, for example. And I do think that there could be events that could cause a recession to occur, but they wouldn’t show up in data like this anyway, and we probably wouldn’t know about them until it was too late.

  • Jeff

    There was an economist on the radio this week with Kerry Miller who was espousing that high growth rates were sustainable principally because there’s a tremendous amount of cash businesses and banks hold that’s sitting on the sidelines just waiting to be invested. Banks still have a post-recession hangover and are reluctant to take any risk. (Just repeating the contrary point of view.)

    • Rob

      I’m with you. Tough to have a recession when so many big companies are awash in Benjamins.

  • It won’t be as bad as 2007 for a few reasons, but the underlying factors in our economy don’t support the kind of growth in assets we’ve been seeing. That being said, Economists knew the housing bubble was coming long before it burst and markets have a history of staying irrational long after almost everybody involved knows that they are irrational.

  • Quicken announced this last year and it turned out it’s actually tied to Freddie Mac’s 3% HOme Possible program. Quicken lends the 2% to people buying single family homes or condos with FICO scores about 680, making less than median and a debt ratio of 45% or less.

    I don’t know who would qualify for that in the real world.

    I also don’t know how young people today buy homes when they’re going for $230,000 for basic homes that often need work.

    If the Bank of Mom and Dad is available, there’s always that but otherwise, I don’t know how young people today do it, particularly when the era of stable employment is over.

    • Kassie

      The mortgage on that $230k house is less than the rent they are paying.

      • Yes if you ignore taxes and insurance.

        • Kassie

          Our mortgage, plus tax, insurance and mortgage insurance is less than our rent was and we were living in a not great neighborhood in East St Paul where rents are cheap. Rents, especially for single family homes in decent neighborhoods, are sky high right now and interest rates remain low.

          • QuietBlue

            It depends on where, and what, you’re renting. A house? Yeah, owning will almost always be less expensive, at least month-to-month. An apartment can be a different story. In my neck of the woods, I could still rent a decent 2BR apartment for less than the mortgage (including taxes and insurance, including mortgage insurance) of a $230K house, albeit maybe not for too much longer. And that’s before getting into maintenance and repair costs.

        • Glsai

          Bob, we just purchased a starter house in that price range. Including the cost of taxes and insurance our costs are 3.8% more per month for our mortgage than one of the cheaper 2 bedroom/1 bath duplexes in our neighborhood. Considering we are coming out ahead and with a 3 bedroom (one is non conventional)/1.75 bath house in our neighborhood I’d say buying is cheaper.

          *edited to add* at least for us.

          • Did you have to buy anything that you didn’t have to buy when you were renting?

          • Glsai

            Hmmmm we did buy some patio furniture for the porch (we moved our old patio furniture to the back yard), we had to get some shovels/rakes/hoses that sort of thing, but we were able to source those for free from friends/family/next door app. I’ll admit getting a snow blower and a lawn mower were nice to get for free. We did purchase some used table/seating, but that would possibly happen if we’d moved to a new apartment/condo anyways.

  • Moved a fair chunk of mine to fixed rate as a hedge. If the equities crash , I’ll buy more.

  • Gordon near Two Harbors

    I’m very leery about the growth of stock values this year. I’m not sure what has been driving it. Maybe blind confidence? My intuition (whatever that’s worth) tells me that high student debt levels, credit card debt (again!), and inflated real estate prices can only lower consumer spending. The stock market and economy may follow suit.

  • BJ

    One sign to me is the number of people doing home based businesses. I have clothing, toothpaste and about 70 other things people are hawking in my Facebook time line. Growth in low paying jobs isn’t enough.

    • QuietBlue

      Yes, just because the economy is doing well at the macro level, doesn’t necessarily mean it is at the micro. There are numerous places in the country where recession (and even depression) conditions are already the norm. Such is the nature of a heavily bifurcated national economy. I’m skeptical that a national recession is imminent, but that doesn’t mean things are great for everyone, either.

      • BJ

        The people I see doing the multi level marketing stuff have high paying regular jobs (50k+ per year) and multi income families. They are not seeing pay increase, I haven’t for 3 years, but expenses have increased. Healthcare is such a mess, it’s going to cause huge ripples in the economy.

  • Jack Ungerleider

    This relates to the discussion of Baseball stats in an earlier post. If you take the numbers and you look at them from one angle you see recession, from another angle maybe stagnation, and from a third slow steady growth. So yeah a recession is always around the corner for some group of economists, while others are sure that we’re in for a period of slow growth.

    • The difference is the baseball statistics analyze what has already happened. Economics experts use them to predict the future.

      It’s snake oil.

  • Tyler

    I’m less inclined to worry when I see help wanted signs at the gas station and fast food joints. That says to me that people have gotten better-paying jobs, and the bottom end of the employment ladder is short-handed.

  • lindblomeagles

    As long as salaries continue to grow slowly while stock marketeers continue to keep gains all to themselves, I believe we’re more likely to see recessions much more frequently, and therefore lean on increasingly thin government resources to make up the difference. Politically speaking, Democrats want to keep adding services but don’t fight hard enough for bigger worker salaries in Washington, while Republicans want all these tax cuts and less government services, but likewise, won’t fight hard enough for bigger worker salaries from the nation’s wealthiest corporations and billionaires. Larger salaries is what keeps government services low, keeps the economy moving forward, and helps the wealthy gain tax cuts.