Get ready: the next recession could start July 1.
Now, let’s be honest: Of course, I don’t know if that’s true now. I can’t foresee the future.
What’s worse, is that I think like an economist. I got a graduate degree with a focus on the subject, and taught it at the community college level for five years. It ruined me.
And, it’s worth noting that almost every economist missed the recession last time – more than 10 years ago.
That doesn’t change the fact that it looks like we may be in a recession starting July 1.
Let me give you a few reasons why I think I can be so specific.
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1. A recession is defined as two quarters of negative economic growth.
That’s important. By definition, we can’t know we’re in a recession until after we look at the data. And, it takes two quarters of consecutive economic shrinkage to tell us when that has happened.
Because we generally define an economy by political boundaries, and because our media is mostly national, we often consider a recession to occur when the national economy has experienced two quarters of decline. Sure, this definition applies by state, too, but since most of our levers for economic manipulation exist at the federal level – like setting short term interest rates – recessions are generally discussed as national events.
2. It takes up to 11 months to know when you were in a recession.
Last month, we learned that Washington State grew at 5.7% in 2018. Those are great numbers. They lead the nation.
But it took us till May – the fifth month of the following year – to put together the numbers for the final half of 2018.
In other words: To know both the third quarter and fourth quarter numbers for 2018, we had to wait until May, 2019. If both the third and fourth quarters had negative economic growth, we would have only have known it this last month.
Now, that’s somewhat academic. Sure, we could not have known that we were in a hypothetical recession in the last half of last year until May of this year in definitional terms. But working folks, retirees, people living on fixed or tight incomes, probably could tell you when things start to look bleak for them, economically speaking. They would have experienced the downturn in real, pocketbook and household level terms – rather than statistics and data.
This creates something of a gap between the lived experience of folks and the national conversation playing out in Washington DC.
Now, if the national economy started to contract, you won’t hear policy makers talk about this much. Frankly, the more public figures or the media talk about a looming recession, the more likely consumers will hold off on spending. The more that happens, the more likely an economic contraction will take place. It becomes a vicious cycle where talking about a recession can create an actual one.
3. If we were to find out in 11 months that a national recession started in July, 2019, many of today’s related data points would tell us we should have seen it coming.
For example, we’d look at job growth, interest rates, real personal income, business investment and net exports.
And, looking at those numbers today doesn’t look good.
Last week, monthly ADP’s job growth numbers were the lowest they’ve been since March 2010. In sum, 27,000 jobs were created last month. Small businesses lost 52,000 positions. The Bureau of Labor Statistics said the net job growth was higher, at 75,000. For perspective, we need about 175,000 jobs just to stay even, given net new entrants to the work force. This last month was the third in the last four months that the US didn’t hit that threshold.
Interest rates are often inverted lately – one of the surest signs of a recession. Think of interest as the price of money. The longer the term of the loan, the greater likelihood that something will happen and the loan won’t get paid back. That’s why the price of a loan – interest – is higher over longer-term periods than over shorter-term periods. Short term loans, and their consequent price (interest), have less intrinsic risk.
Except for recently. Recently, longer term interest rates are often lower than short term interest rates set by the market. In other words, there is greater likelihood short term loans won’t get paid back than the risk from longer term loans. That’s one of the best indicators that the market is worried about the short term more than the long term – a reliable indicator of a looming recession.
When we look at personal income, we find that 43% of Americans don’t have enough to afford the basic necessities of modern life. They are “Asset Limited, Income Constrained, Employed” – or ALICE. In Washington State, that number is better at 37% – but that’s still not great when a level of poverty hits more than one in three in the state. It’s more than half of residents in our more rural counties.
Business investments come in the form of capital expenditures or building up surpluses of inventories. One of the primary forces of downward pressure is economic uncertainty. That uncertainty comes in various forms, but we can see it in the Business Confidence Index (BCI). The BCI just moved into negative territory for the first time in the Trump Administration. Meanwhile, businesses have been building inventory surpluses as a result of the looming trade wars, likely creating a bubble in recent business investment numbers. Both of these things mean the third quarter could be rough.
Finally, in the most trade dependent state in the country, where one in three jobs is connected to trade, we should be particularly sensitive to this indicator. Wire reporter Sara Gentzler writes the Port of Seattle tells her trade volume at the port is shifting. Exports are going down, hurting American businesses. Imports are holding steady, in spite of tariffs, hurting American consumers. It’s a bad combination.
In 11 months, we might look back at these indicators and say “it was obvious.”
If you take all of these things together, it paints a bad picture of July 1.
If the third and fourth quarters slide into economic decline nationally, it will be because of the rough numbers coming out at the macro and micro levels I mention above. We won’t have the definitive declaration about the recession until next May or so, right when we’re in the middle of the general election. That anxiety from our politics in 2020 won’t help the economy.
Sure, Washington State may lag this national trend a bit, but not by much. That just means a new legislature in 2021 will be watching each revenue forecast dip deeper and deeper into the red. Ask Gov. Gregoire how fun that will be.
I know this seems like a long way off, it would mean the recession could be starting July 1, 2019. It could be here before you know it.
Don’t say I didn’t warn you.
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