Is a Recession Imminent?

Practical Economics

Is a Recession Imminent?

Shoppers will have to carry the load for now because weak business investment shows no sign of perking up anytime soon. Odds are, they’ll be able to.

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The warning signs are getting stronger. And financial markets are growing nervous. Risks to the economic expansion are rising. But we still don’t think a recession is near.

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It’s natural to worry about the economy. Bond yields are down — a sign that investors are concerned about the prospects for GDP growth. Yields on long-term bonds have slipped below those on short-term debt — often a sign of recession ahead.

Commodity prices are softening — again, a signal that future economic activity will be weak.

Manufacturing is contracting in the U.S. and across the world as the trade war continues.

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Still, there are reasons for some optimism. Most of them hinge on the U.S. consumer. Despite talk of trade wars and manufacturing slumps and possible recession in Europe — all real problems — U.S. consumers continue to shop and spend freely. Unemployment is near a 50-year low. Wages are up. Home values and 401(k) balances are quite high.

Shoppers will have to carry the load for now because weak business investment shows no sign of perking up anytime soon. Odds are, they’ll be able to. Some readings on consumer sentiment have declined lately, and a few categories of spending are starting to tail off. But for the most part, folks are spending, even on discretionary things like boats.

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None of this means that all is well with the economy. Growth is slowing after coming in strong last year. There are plenty of problems overseas: Brexit. Weakness across Europe. A sharp slowdown in China. Flagging global trade.

The best-case scenario: GDP gains of 2.3% this year and 1.8% next year — far short of recession, but no boom, either. For some industries, such as farming and manufacturing, business conditions will continue to feel akin to a recession.

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Growth could also slow more sharply, to 1% or even less next year if consumers get spooked by worrisome economic headlines. Manufacturing makes up only 11% of the overall economy, but if job losses there start to mount and cause the unemployment rate to inch up, other workers could get nervous. That in turn would ding consumer spending, which accounts for 68% of GDP.

Whether the economy slows modestly or sharply, a few things seem clear:

  • Interest rates will stay quite low, especially after the Federal Reserve implements additional rate cuts to stave off potential damage from the trade war.
  • Prices of industrial metals and other commodities will remain muted, too.
  • The global economy will stay shaky. And the trade situation will worsen before it gets better. Both the U.S. and China are clearly digging in for a long fight.