Friday, September 20th, 2019 September20th2019

Sell for More Trivia: What would a recession next year look like?

Published on September 20th, 2019

Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.

 

It’s healthy to exercise your brain.  So indulge me…what would a recession next year look like?

The unmistakable message that global investors in the bond market are sending is “we fear a global recession may be on the horizon.”  Longer-term interest rates have plunged which historically means:

We’ve entered a “shift.”  Look for 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.  There is no sign of the kind of huge, obvious bubbles that triggered the last two recessions.

Some are even predicting a “self-inflicted-wound type of recession”.  Often, a recession results when some widely held belief about the world frightens the markets to the extent participants want to exit.  This time around, people are concerned the world will only become more unstable and disconnected over time.  And others question whether trade, currency and diplomatic relationships can be counted upon.

China and many of its Asian neighbors are getting weaker, partly as a result of the trade war with the United States.

The already week European economy may be tumbling into a recession.  And who knows what will happen if Britain crashes out of the European Union with no exit deal.

And when it comes to stimulating growth, I’m not sure the central banks have any bullets left in their guns.

So what could lead us into a recession?

It could all start with a slow down in business spending.  The trade war between China and the United States is a big deal.  The conflict has made it difficult for many global firms to plan their operations which may lead them to sit on their hands rather than invest.

And in our nation’s factories, the rate of growth has slowed for five consecutive months.  The July reading was the weakest in years.

That said, business spending only accounts for about 14% of our economy.  If we’re going to dip into a recession the American consumer will need to stop spending.  They must be frightened.  Consumer spending accounts for a whopping two-thirds of the American economy.

So far, American consumers are spending enthusiastically which is driving overall growth. But that could change.  The 24/7 news coverage of turbulence in global markets could reduce consumer confidence.  After all, if enough people agree that we’ve entered a recession then we effectively have.  It’s a self-fulfilling prophecy.  That’s tricky to navigate.

And if businesses pull back on investment spending then layoffs, hiring freezes and cuts to overtime may follow.

If that’s the worst of it – trade wars, slower business spending and weaker overseas economies – the US could probably weather it without falling into contraction. But there are risks out there that may toss gas on the fire.

One reported landmine is the buildup of corporate debt. Businesses have taken on more debt in this 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 highly leveraged business sector will amplify any economic downturn because companies will be forced to lay off workers and cut back on investments.

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.  Not now.  The Fed’s main target interest rate is just over 2% now, compared with 5.25% heading into the 2007 recession.  Other global central banks have even fewer options.

And who knows what the politicians will do.  A polarizing president (that is heading into a re-election battle) and a divided Congress are unlikely to find much common ground in stimulating the economy.

To summarize, what would a recession in 2020 look like?

  • The trade wars and a breakdown in international economic diplomacy cause businesses around the world to pull back.
  • The 24/7 negative news cycle scares the American consumer…consumer spending pulls back.
  • The business spending pull back leads to further tumbles in markets and job losses…causing consumers to pull back on spending even more.
  • High corporate debt loads create a wave of bankruptcies throwing gas on the fire.
  • Central bank policy proves impotent.

Right now chances of a near-term recession are only about 30% according to most forecasters. But if it does develop, what effective tools do we have to fight it?

 


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About Beau Beach, CCIM

Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.

Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee, South Florida and Chicago markets.

He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.

Beau can be reached at 800-721-3287, click to schedule a call or Beau@ProwessIRES.com