Will there be a recession in 2020?

Will there be a recession in 2020?

From the stock market to the White House, this is the question in everyone’s minds.  Will I get to keep my job?  Will my business do well?  Or will it take recent college graduates a long time to find meaningful employment?  Will bankruptcies and layoffs become common?

While this is difficult to know for certain (try predicting if you will be healthy in December, or how long the coronavirus will be a problem), we can try to answer this question with some fundamental concepts and with some data.  My goal in this post is not to give a full answer – that would take too long – but to give you a hint of the sorts of things you should look at.  Here’s the quick take: the visible symptoms are those that typically precede a recession by about 12 months.

A recessions is a widespread contraction in economic activity – less buying, less selling, less producing, less hiring – across the economy, for an extended period of time.  People have jobs if businesses want to produce, and business want to produce if people want to buy their production.  This suggests some data worth looking at:

·         Retail and food service sales
·         Breaking ground for new housing construction
·         Automobile sales
·         Orders for new machines

Let’s take each of these in turn.  The most obvious sign of a bad economy is empty shopping districts (nowadays, fewer Prime deliveries).  Retail sales took a big dive in the last recession.  In other recessions, we would see a similar pattern – or at least a significant slowdown in retail sales: for example, retail sales flattened out in the 2001 recession.  Retail sales have been growing steadily since the recession ended in June 2009, with very few blips … except for a bad holiday shopping season in 2018 and some significant “flattening” in the last six months.  It’s too early to tell, but is this a sign of a recession later this year?

Let’s take a deeper look.  Of all of the purchases families make, the decision to buy a car might be the most momentous (besides buying a house). Think about a car’s usefulness – also think about the long-term commitment of a monthly car payment.  It tells us a lot about how consumer are feeling about their personal prospects and their outlook for the economy.  Also think about the implications of weak car sales for production and jobs all across the US. 

Car sales were very strong in the nineties.  They never really recovered from the 2001 recession, which is an indication of how weak the economy felt back then, even as housing boomed … but that’s a story for another time.  They collapse when the financial crisis started.  Would you replace your beat-up minivan if your mortgage is underwater (that is, if the price of the home is less than you borrowed for it) and if you are unsure if you will have a job in a month?  Car sales recovered, but (in inflation-adjusted terms) have stayed fairly flat over the last three years.

Can we use car sales as a recession predictor?  You can see that car sales essentially flattened out a year before the 2001 recession started and that they began to fall about two years before the 2008 recession.  Is the slowdown in car sales over the last few years a bad portent?

What about homebuying?  If I buy a new house, I am saying that I believe my personal finances are stable (and that I believe my employer is likely to do well).  So we can use homebuying as a proxy for consumer confidence.

Even better, we can use home builders’ choice to start construction as an indicator of their confidence in the economy.  A “new housing start” is a sign of builders’ beliefs regarding all sorts of things, from the price of construction materials to mortgage interest rate to potential buyers’ purchasing power.  Home construction also impacts a wide variety of supporting industries (from contractors and specialists to the financial industry to moving companies to restaurants that feed the workers).  This indicator used to be the most potent indicator of the health of the economy: the ups and downs of housing starts almost perfectly matching the upswings and downswings of the whole economy.

In 2001 the link was weakened: a combination of aggressively low interest rates and tax cuts kept home starts from falling, although possibly this set up the stage for the housing boom and collapse that followed.  Housing starts in 2009 hit record lows.  Since then, they’ve recovered to about average (even counting the most recent blip in December of 2019, which could very well be reversed or be an error of measurement).  This may be an optimistic sign, a sign of an evenly-keeled economy.  If you were to worry, you would be concerned about the flattening of this indicator between mid-2015 and late 2019.

Suppose you are a manufacturer.  You see all sorts of signs of a booming economy, especially how your factory is working overtime.  Your machines are so overused, you need to replace them – or expand your factory.  So you put in “new orders for durable goods,” meaning new machinery.  In inflation adjusted terms, this indicator also helps us sense when a recession is coming: notice that it stopped growing about a year and a half before the 2001 recession and about a year before the 2008 recession. 

The “recovery” in the last twelve years has felt flat – and indeed is flat for producers of manufacturers’ durable goods.  Since 2012, except for a small boomlet between Aug 2017 and Sept 2018 (perhaps in anticipation of the December 2017 tax cut), durable goods orders have not grown like they did in the previous two expansions, and indeed have been contracting for a year and a half.  Manufacturers do not seem convinced that this is the time to expand their factory.  However, durable goods orders contracted between mid-2014 and mid-2016 without a recession following.

Summarizing: the economy has been behaving in a way that would be consistent with a late-2020 recession.  Some might argue that, no, what we are seeing is a “soft landing” and that the economy will just experience lower growth (but no contraction).  “Soft landings” are mythical creatures.  The flattening of durable-goods sales (for households and businesses) that we are seeing now is typically followed (a few months later) by a recession.

Could this be wrong?  Absolutely!  We’ll know it when we get there.

In later installments, we’ll look at other important determinants of the health of the economy.  In the meantime, I hope I have given you some food for thought!