America’s on a roll, but will it roll over into recession?
Think low for 2019. Low gas prices. Low unemployment. Low interest rates. But one thing’s higher — the odds we will land in a recession.
Forecasts focus on when — not whether — the next U.S. recession is coming.
The hand wringing mostly is about the United States’ trade war with China, the Federal Reserve’s plan for interest rate hikes, oil’s plunging price tag and Wall Street’s sudden year-end fire sale on stocks.
As for good news, economists largely agree a recession is not in the cards this year despite all their buzz about a coming downturn.
“The economy’s not falling apart, not by any stretch of the imagination,” said Mark Vitner, senior economist at Wells Fargo Securities Economics Group.
So why all the talk?
Because much of the rest of the world economy already has begun to slow, and that is adding to the slow down in the U.S. economy expected this year. Forecasters put off the next recession until 2020 largely because the U.S. economy currently enjoys a brisk pace of growth.
Even without a recession, this year might hurt.
“This is going to feel like a fairly sharp slowdown in 2019,” warned economist Scott Anderson at the Bank of the West.
Economic expansion will continue
A recession watch seems out of place. The economy’s so healthy that America is about to set a record.
We just have to get through July without having a recession.
At that point, the U.S. economic expansion, which officially began July 1, 2009, will have become the longest on record. It will surpass the decade-long expansion that followed the recession that ended in March 1991.
We’ll make it.
“There’s plenty of gas in the tank,” Vitner says.
Consumers are confident, carry low debt burdens and keep spending money. The tax cut that fattened paychecks in 2018 will generate a “record-high tax refund season,” according to Morgan Stanley’s outlook for 2019.
Cheap gasoline prices add another boost to consumers’ budgets. Globally, however, the swift drop in oil prices that brought cheap gas offers more evidence that economic activity in the rest of the world is slowing down.
Meanwhile, U.S. employers clamor for employees, raise wages at a pace largely missing throughout much of this economic expansion and see employees confidently quit because they’ve found a better job.
Investment manager Ken Green hears about the healthy job market when he talks with companies whose stocks he considers buying and when talking to clients who also are small business owners. They have jobs to fill and have trouble filling them, he said.
If the economy were getting “toppy,” he said, employers would be saying they’re good with the staff they have.
“We’re just a long way away from that,” said Green, president of Mitchell Capital Management in Leawood.
Statistically, the nation’s gross domestic product grew by about 3 percent in 2018, the strongest since the Great Recession ended. Unemployment is low at 3.7 percent and heading lower next year, according to forecasts.
But the economy is slowing down, which shows up in forecasts for growth in 2019: 2.7 percent say Wells Fargo and IHS Markit, 2.3 percent say Morgan Stanley and Moody’s. They also generally expect the economy to get weaker and weaker as the new year progresses.
Pressure on the economy comes from U. S. import tariffs that have boosted steel and aluminum prices for U.S. manufacturers and from the retaliation by China against American exports. More trade barriers seem likely with a March 1 deadline for reconciliation with China approaching.
Economically, the trade war already is slowing U.S. growth and China’s growth even more, economists say.
Policymakers can fix that, or make matters worse.
Potential trade policy mistakes “remain the biggest threats to global growth,” said Nariman Behravesh, chief economist at IHS Markit.
Behravesh, however, isn’t forecasting a recession this year.
Recessions happen, he said, when an economy has built up a dangerous excess. For example, the Great Recession was kicked off by an excess in housing markets, the recession before that by the dot-com tech stock bubble and the one before that by an overblown commercial real estate market.
“Those excesses just aren’t there right now in the U.S. economy,” Behravesh said.
It seems 2020 looks more like the year for a recession. Anderson, with Bank of the West, sets the odds at a coin-flip’s chance.
“That’s partly due to the Fed’s poor track record in landing the plane,” Anderson said.
By landing the plane, he means the Fed’s effort to return interest rates to normal levels after having held them near zero for seven years in the wake of the Great Recession. The Fed first raised rates in late 2015 and most recently in mid-December, which marked its fourth hike during 2018.
Along the way, consumers have seen mortgages, credit card balances and car loans cost a bit more. Business borrowings, too, have gotten more expensive.
Fed Chairman Jay Powell, speaking after the December rate increase, acknowledged that the Fed’s policymakers had been thinking about three rate increases in 2019 but pared that back to only two. The number of future rate increases, and when they happen, will depend on what happens with the economy.
But wait, there’s more. The Fed also is unwinding its controversial practice of buying trillions of dollars worth of U.S. Treasury and mortgage-backed bonds to fight off the Great Recession.
Those purchases, called quantitative easing or QE, helped the economy by holding down long-term interest rates and by providing financial resources to the economy. Unwinding QE works on the economy much like raising interest rates does, and it has some forecasters worried.
Economist David Rosenberg, with Gluskin Sheff + Associates Inc., calculates that the Fed’s current unwinding plans are the equivalent of raising interest rates by an additional 1.3 percentage points in 2019. At that point, Rosenberg said, the Fed will have “tightened” by almost 5.5 percentage points.
“No expansion ever survived that degree of (Fed) policy restraint,” Rosenberg said, adding that “the bond market is starting to sniff out the recession, which could well begin next year.”
Others agree that the Fed may end up pushing the economy into a hard landing, but most likely in 2020.
“If they follow through (with earlier plans), we would absolutely, no doubt, be in a recession in the next 12 to 18 months,” said Gary Cloud, co-chief investment officer of fixed income at FCI Advisors in Kansas City.
Wall Street has had trouble taking all this in.
Riding high until early October, the Dow Jones industrial average suffered a 5.63 percent loss in 2018. The broader S&P 500 fell 6.24 percent, and the tech-stock driven Nasdaq 3.88 percent.
Not terrible, until you remember that investors had been counting gains just months earlier. The Dow had been up by 8.53 percent on Oct. 3, the S&P up by 9.62 percent in mid-September, and the Nasdaq up by 17.47 percent at the end of August.
At its worst, on Christmas Eve, the S&P 500 was down 19.78 percent from its mid-September peak. That’s within a whisker of what analysts consider a bear market, which generally means stocks have fallen by 20 percent or more.
The Nasdaq and the Russell 2000, a stock index made up of smaller companies’ shares, each mathematically entered a bear market in December.
“The stock market is acting like recession is around the corner,” said Ed Yardeni, of Yardeni Research.
Some worry that the stock market may lead the economy into a recession.
In the past, investors have suffered a bear market without a recession. But Yardeni points out that drop included the October 1987 crash when markets fell more than 20 percent in one day. Another point to keep in mind is that, at least since World War II, there hasn’t been a recession without a bear market in stocks.
An optimist would say the downdraft means stocks are relatively cheap compared to just a few months ago. Optimism is hard to come by.
Stock prices need to find some stability first, said Bill Greiner, chief economist at Mariner Wealth Advisors in Overland Park. Currently he is neutral on stocks.
“As we start to see some degree of stability, we’re looking for ideas, looking for ways to deploy capital,” Greiner said. “There’s probably one more, at least one more, push upward in equity prices in 2019.”
Equity investors can expect some big ups an downs waiting for the trade war to end and the Federal Reserve to find the right path, said Douglas Coe, managing director at Moody Reid in Kansas City.
His cure is a diversified portfolio. Investors need a mixture of stocks, bonds and cash-like holdings. Their stocks need to come from a diversified mix of companies, big, medium and small, and from a mix of markets, U. S. and international.
“We went nine years with artificially low rates. We have to somehow normalize that, and it’s not going to be pretty,” Coe said. “But if we do it gradually, equity investors will come out fine.”