A 2020 recession looming

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How the Recession of 2020 Could Happen

The freeze-up in business confidence, caused in part by the trade war, could wind up affecting consumer confidence.

    Aug. 17, 2020

These three things are all true: The United States almost certainly isn’t in a recession right now. It may well avoid one for the foreseeable future. But the chances that the nation will fall into recession have increased sharply in the last two weeks.

That is the unmistakable message that global investors in the bond market are sending. Longer-term interest rates have plunged since the end of July — a shift that historically tends to predict slower growth, interest rate cuts from the Federal Reserve, and a heightened risk that the economy slips into outright contraction.

This is happening in an economy that, by most indicators, is solid. The United States economy is growing at a roughly 2 percent rate and keeps adding jobs at a healthy clip. There is no sign of the kind of huge, obvious bubbles that triggered the last two recessions, the equivalent of dot-com stocks in 2000 or housing in 2007.

So if there’s going to be a recession in 2020 — if the pessimistic signals in the financial markets prove correct — how would it happen? There are plenty of clues, in the details of recent economic reports, in signals from the markets, and in the recent history of recessions and near recessions.

President Trump’s on-again-off-again execution of the trade war with China and other countries has fed uncertainty into businesses’ decision-making. Corporate investment spending is softening, despite the big tax cut that Mr. Trump said would boost it . And the combination of central banks that are at the outer limits of their ability to stimulate growth, and an inward turn by many countries, could make governments less effective at responding to a downturn.

“It is potentially a self-inflicted-wound type of recession,” said Tara Sinclair, an economist who studies business cycles at George Washington University. “But how deep that gash goes depends on many other characteristics of the economy and the policy response thereafter.”

There are parallels to the past. Often, a recession results when some widely held belief about the world turns out to be false. In 2001, it was that a technology boom would fuel the economy and the stock market indefinitely; in 2007, it was that the housing market would never melt down across all regions at once.

This time around, the belief in doubt is that the world will only become more stable and interconnected over time, and that trade, currency and diplomatic relationships can be counted upon.

Recessions result not just when something bad happens in the economy; bad things happen all the time. Recessions occur when those initial shocks are multiplied, in ways that reverberate worldwide. The dot-com crash was accentuated by the Sept. 11 terrorist attacks in 2001 and a rash of corporate scandals. The 2007 housing bust in the United States became a global financial crisis in 2008 only because banks worldwide took huge losses on mortgage debt.

The starting point for the international tensions that could lead to a recession in the United States is business investment spend ing, especially in the industrial sector. As corporate C.E.O.s look around the world and make their plans for investment and hiring in the year ahead, they aren’t liking what they see.

The economies in China and many of its Asian neighbors are getting weaker, partly as a result of the trade war with the United States. The European economy, which has muddled along for years with low growth, may be tumbling into a recession, and if Britain crashes out of the European Union with no exit deal on Oct. 31, Europe could face still deeper challenges.

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Already, a key measure of business capital spending in the United States, “fixed nonresidential investment,” was in negative territory in the second quarter. And in the nation’s factories, the rate of growth has slowed for five consecutive months, according to the Institute for Supply Management’s index. Although this measure still showed growth, the July reading was the weakest since August 2020.

The trade war between China and the United States is a big part of the reason. The conflict has made it difficult for many global firms to plan their operations — and in some cases, it may lead them to sit on their hands rather than invest. The American strategy has been more successful at escalating trade tensions than in resolving them, so companies do not know whether tariffs will go away soon or will be a continuing cost of doing business.

“The president says we’re going to get a great deal and a great deal soon, but he’s been saying that for over a year,” said Phil Levy, a former trade official in the George W. Bush administration and a chief economist at Flexport, a freight forwarder that works with many companies involved in international trade. “You end up paralyzed. You have to make plans, but there is risk all over the place, so businesses get cautious and hold back on investment.”

It’s not just companies directly involved in trade with China that may see reason to hold back on investment. The turmoil in financial markets spurred by the trade war could make businesses of all sorts more cautious.

Still, if the downturn remains confined to business spending, it will be hard — just as a matter of arithmetic — for an overall contraction to result. Consumer spending accounts for more than two-thirds of the American economy, versus about 14 percent for business investment.

So far, American consumers are spending enthusiastically, driving overall growth. But there are a few ways the freeze-up in business confidence could change that.

Turbulence in global markets — and the news reports attached to that turbulence — could reduce consumer confidence, and lead Americans to pull back on their buying. The University of Michigan survey of consumer sentiment fell sharply in its August reading, announced Friday.

Or more directly, if businesses pull back on investment spending, they may also make moves that reduce consumers’ incomes, including layoffs, hiring freezes and cuts to overtime.

If that’s the worst of it — trade wars, slower business spending and weaker overseas economies — the United States could probably weather it without falling into contraction. But there are risks out there that could multiply those shocks.

One is the buildup of corporate debt. Businesses have taken on more debt in an era of low interest rates, which leaves them more vulnerable to failure if the economy were to soften or interest rates were to rise. A pullback because of trade wars could cause a wave of bankruptcies that turns a mild slowdown into something worse.

“A highly leveraged business sector could amplify any economic downturn as companies are forced to lay off workers and cut back on investments,” the Federal Reserve chair, Jerome Powell, said in a May speech.

But the biggest risk multiplier may come out of the policy world. In past recessions, the Fed had plenty of room to cut interest rates as a stimulus measure, and fiscal policymakers have been willing to pour money into weaker economies.

The Fed’s main target interest rate is just over 2 percent now , compared with 5.25 percent heading into the last recession in 2007. Other global central banks have even less wiggle room.

And a polarizing president and a divided Congress are unlikely to find much common ground in stimulating the economy. In early 2008, for example, as a recession took hold, the George W. Bush administration negotiated a $152 billion stimulus package with a Democratic Congress to try to lessen the damage.

It seems unlikely that President Trump, heading into a re-election battle, would find the same harmony with Democrats today.

“You could get a widespread fiscal response to a recession,” said Megan Greene, a senior fellow at Harvard’s Kennedy School. “That would be really nice, but I’d also like a unicorn for my birthday.”

International coordination would be even harder in the current geopolitical moment. In the fall of 2008, finance ministers and central bankers of the Group of 20 major economies released a joint statement pledging to work together to end the financial crisis. With many nations facing inward, it is hard to imagine that today.

How would a 2020 recession happen?

The trade wars and a breakdown in international economic diplomacy cause businesses around the world to pull back. This leads to further tumbles in markets and job losses, prompting American consumers to become more cautious. High corporate debt loads create a wave of bankruptcies. And central bank policy proves impotent, combined with fiscal policy that is nonexistent.

Chances of a near-term recession are only about one in three, in the view of most forecasters. But if it does develop, the big question will be whether the usual tools to fight it are up to the task.

Economist Noel Perry Sees US Recession Looming in Late 2020

Transportation economist Noel Perry with the firm Transport Futures is a lot like the famous character in the vintage television commercial from the 1970s for the financial services company EF Hutton. At the critical moment in the spot, everyone gets quiet when the announcer solemnly proclaims, “When EF Hutton talks, people listen.”

In the trucking, freight and logistics industry, when Perry talks, people listen.

In an interview on Transport Topics Radio on SiriusXM Channel 146 that will air Nov. 23 at 1 pm Eastern time, Perry said the state of the U.S. trucking economy has been decent in 2020, though not at the record-setting level of 2020-18.

But he sees trouble in 2020.

“The slowdown we have already seen, which is a fact in both manufacturing and trucking in 2020, is typical of the year before a recession. So, yes, I am specifically forecasting a recession beginning in the third quarter of 2020,” Perry said. “There are two things that are occurring that are classic precursors to a recession. The global economy is slow and that has affected our exports, and it’s knocked out as much as the trade problems we have had. That’s the first half.

“The second half is that the business cycle that causes recessions and recoveries is tired. People who manufacture things, who invest in things, they’re slowing down.”

As evidence of Perry’s theory about the importance of exported goods, exports at the nation’s busiest port, the Port of Los Angeles, fell in October by 19.2%. The ports of Los Angeles and nearby Long Beach are the busiest facilities in the country when it comes to trade with Asian nations, and China leads the list.

Perry says the trade dispute is just one symptom of a slowing economy.

“I don’t think the trade problems are big enough to fundamentally change the result. They are definitely a negative, and they may be a positive long term if we can get some concessions from China. But in the short term, they’re a negative,” he said. “I don’t think they’re a grueling negative. I think they’re just another contributor to a bunch of things, other things that are more powerful that are taking us down.”

With the U.S. economy showing a gross domestic product of 1.9% in the third quarter, and unemployment at its lowest level in 50 years, Perry says he’s not surprised many economists believe the more than 10-year-long recovery can continue.

“The overall economy is not in a recession yet. Manufacturing is. But retail and the consumption activity that makes up 80% of the economy is doing OK. It’s very normal now for late recovery times,” he said. “After 10 years, people are hiring and people are giving raises, they feel good about their businesses, and so they hire a few more people and they give a bit more in the way of raises.

“Consumption activity to include services usually peaks late in a recovery and that’s where we are now. The retail sector has not joined the manufacturing sector and the transportation sector in slipping. I still expect that to happen.”

At the American Trucking Associations annual economic conference in September, ATA Chief Economist Bob Costello said contract rates remain strong, albeit not at 2020-18 levels, but the spot market rates continued to be very soft. Perry expects a slight upturn in late November for the spot market.

“The only thing that happens now in the fall is there is a little bump in spot rates, because the retailers get behind on some critical products, and they got to have it for Cyber Monday and they got to have it for the day after Thanksgiving and they will pay a premium for it,” he said.

Perry said now is the time for trucking industry officials to prepare for a downturn. He’s optimistic it won’t be a long or deep recession.

“Once the economy starts going up, and we have not had a recession that lasted more than two years since the Depression, and then, once it goes up, you can make hay,” Perry said. “Everyone else is in the bunker thinking about how they can survive, and they’re not thinking about expanding and growing. Rather than competing with everyone else, you’re only competing with a few people. Everyone else is trying to get back to where they were. Great opportunities.”

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Next Housing Recession in 2020, Predicts Zillow

The housing market in the U.S. could enter a recession in under five years, with online real estate company Zillow predicting that it will happen in 2020.

In a research report in which Zillow polled 100 real estate experts and economists about their predictions for the housing market, it disclosed that nearly half of all survey respondents said the next recession will commence in 2020, with the first quarter of the year cited the most as to when the recession will start. The main culprit for the housing recession: monetary policy.

Key Takeaways

  • The U.S. housing market has recovered from the 2008–09 financial crisis, with home prices exceeding the pre-collapse valuation in many areas.
  • Despite a record bull market over the past decade, the housing market in the U.S. could enter a recession in 2020, according to Zillow.
  • This prediction is based on their own outlook combined with results from a survey of homeowner sentiment.

What Zillow Thinks

Zillow is a popular website for aggregating real estate price information and gauging market sentiment for homebuyers and sellers. In this research report, several Zillow experts weighed in on the results.

“As we close in on the longest economic expansion this country has ever seen, meaningfully higher interest rates should eventually slow the frenetic pace of home value appreciation that we have seen over the past few years, a welcome respite for would-be buyers,” said Zillow senior economist Aaron Terrazas in the research report. “Housing affordability is a critical issue in nearly every market across the country, and while much remains unknown about the precise path of the U.S. economy in the years ahead, another housing market crisis is unlikely to be a central protagonist in the next nationwide downturn.”

Zillow Survey Insights

If the survey respondents’ predictions prove true, the current economic expansion will be the longest ever recorded. While a housing collapse ushered in the Great Recession of 2008 and 2009, most survey respondents don’t think a downturn in the economy will be centered on the housing market this time around. They think the Federal Reserve’s actions when it comes to interest rates will be the biggest reason for the looming recession. After all, if rates go up, it will be more costly to take out a mortgage, shutting some buyers out of the purchasing process. They noted that, if the Fed raises rates too quickly, it could slow down the economy and thus lead to a recession.

Zillow pointed out that, less than a year ago, survey respondents were more concerned with geopolitical issues, citing a crisis on that front as the most likely cause of a future recession. Those worries are now below monetary policy concerns. Other concerns are focused on a trade war with China, a stock market correction, and unexpectedly high inflation. Those same respondents expect the housing market to continue to grow, with home values expected to rise 5.5% this year. At this time a year ago, the real estate experts thought home values would increase 3.7% this year.

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