Are We Poised For A Recession?

Two Questions To Ask Yourself About The Current Economic Climate

I came across this interesting take from Anneken Tappe at CNN on what the rising debt levels may signal for the economy in the near future. As I was reading through this, a couple of important questions came up for me:

1.) By how much is the economy slowing?

That’s a tough one to answer precisely. There are certainly reasons to think seriously about the impact of high government debt, high corporate debt, and global trade disputes on the economy. While making accurate predictions about recessions is difficult, there do seem to be multiple data points suggesting that the economy is slowing down. 

Recent studies have shown specifically that middle-class Americans are now less optimistic about their financial futures than they were in recent months and years. Contributing to these feelings are widely publicized factors like a slowing housing market and a very public trade war with China. 

While mortgage delinquencies and defaults remain low, much of that good performance is clearly driven by very low unemployment. If unemployment rises, we can expect the early signs of deterioration in unsecured credit, which are already appearing, to rise significantly.

In addition to very high levels of government and corporate debt, consumer debt is at an all time high. While consumer spending has driven growth for years now, at some point consumers will likely pull back. 

We should remember that the current recovery from the Great Recession is the longest running economic expansion in American history. Any prudent person has to recognize that we have not reached the end of economic cycles. Plenty of smart people are wondering how much longer this expansion can continue. 

2.) Will policymakers take extraordinary steps to provide stimulus? 

The Federal Reserve itself seems to recognize that the economy is slowing, and observers accordingly expect the Fed to reduce interest rates as much as 50 basis points by the end of the year.

With huge partisan divisions and quickly shifting tides in Washington, it’s almost impossible to say whether policymakers could unite and focus long enough to push through a stimulus package or any trade legislation in the near future. 

For me, the Fed’s interest rate decisions will be the main influencers on housing for the foreseeable future.

To summarize, I’m not predicting a recession in the next year or two of the magnitude of what we experienced a decade ago, but all of these factors should give lenders and consumers reasons to be alert and cautious. 

And even with all that said, it would not be the first time that we realized a recession was coming only after it had already arrived. Indeed, that’s often the way it works!