Inevitable Recession in 2019 or 2020?
A recession seems inevitable for the U.S. economy as it stands right now. If not in 2019, then a slowdown could be ahead in 2020. Why? Because key indicators suggest this could happen.
Look at the chart below, for example. It plots the yield curve, essentially plotting the difference between 10-year U.S. bonds and the three-month U.S. Treasury. The yield curve has been a great indicator for a recession in the U.S. economy. Whenever this difference falls in negative territory, a recession follows in the subsequent quarters.
Economists follow this indicator very closely.
The yield curve plotted below has predicted the past two recessions precisely.
Chart courtesy of StockCharts.com
What to Expect When Expecting a Recession
Here’s the thing; if a recession does become reality, it could have dire consequences. That is something I want to focus on right now.
There are a few things to keep in mind in case a recession happens, and they are listed below.
1. Increased Misery for Average Americans
Misery for average Americans is going to get worse. Over the past few years, they have accumulated a lot of debt and haven’t really saved much.
Know that in times of economic slowdown, businesses cut expenses by reducing their workforce. So, all of a sudden, it wouldn’t be shocking to see a large number of Americans being unable to pay for their mortgage, cars loans, and other such debt because they don’t have jobs.
2. Growing Dependence on the U.S. Government
If misery for Americans grows in the next recession, they could be looking for help from the government.
At the end of 2018, there were 37.9 million Americans using food stamps. (Source: “Supplemental Nutrition Assistance Program (SNAP),” U.S. Department of Agriculture, March 8, 2019.)
That is already more than the entire population of Canada.
In the next slowdown, this figure could jump significantly.
3. Soaring U.S. National Debt
The U.S. government is already spending without any remorse.
At the time of writing, U.S. national debt stood at $22.0 trillion and is growing every second.
In times of economic slowdown, governments are forced to spend more on infrastructure and other such things to boost the economy. So, all of a sudden, we could see U.S. national debt surge higher.
This could hurt the U.S. dollar big-time and creditors to the U.S. could become skeptical when it comes to lending money. This would open up a major can of worms.
4. A Stock Market Crash Could Be Possible
Businesses come under fire in recessions.
Know that if there’s a slowdown, no matter how hard a business may try, it has a very hard time selling its product and earning higher profits.
We are already seeing recession indicators warn of troubles ahead, and profits guidance is already falling hard.
For some perspective, the first quarter of 2019 isn’t even don’t yet, but 77 companies on the S&P 500 have issued negative guidance about their first-quarter earnings. Currently, analysts expect first-quarter earnings for the S&P 500 to fall 3.7% year-over-year. (Source: “Earnings Insights,” FactSet Research Systems Inc., March 22, 2019.)
If profits fall, don’t be shocked if corporate America pulls back on investments.
Falling profits could lead to a stock market crash, too.
A recession in the U.S. could trigger the next stock market crash. Earnings are hands down the most critical factor that sends the stock market higher or lower. Falling earnings causes crashes.
This could hurt the wealth of many Americans; at the end of 2018, Americans held $16.1 trillion in stocks. (Source: “Households and nonprofit organizations; corporate equities; asset, Level,” Federal Reserve Bank of St. Louis, last accessed March 27, 2019.)
A stock market crash could impact this number by a lot.
Also, don’t forget that pensions funds own stocks. So retirement for many could be on the line as well.
5. No Way Out for the Federal Reserve?
Finally, the Federal Reserve could really be pushed against the wall in the next recession.
The Federal Reserve has raised rates because it thought the U.S. economy was heating up. Now, as recession noise is building up, the Fed may be forced to take extreme measures.
For beginners, it wouldn’t be shocking to see the Fed lower rates back to zero, and even below zero. We already have negative rates in the eurozone and Japan. The Fed could try it too.
But it could also begin printing money. We could see another quantitative easing in the midst of a recession.