In Focus: Recession 2019
We are not headed for a recession. We will experience slower growth, but positive growth. These were former Fed Chairman Ben Bernanke's thoughts in November 2007, a month before the U.S. economy went into a recession.
“The Federal Reserve is not currently forecasting a recession,” Ben Bernanke stated in January 2008, a month into the U.S. recession.
It does feel like we've stepped out of the Delorian and back into 2007. Earlier this month - September 2019 - current Fed Chair Jerome Powell stated "We’re not forecasting or expecting a recession." Powell admitted that trade uncertainty is weighing on business investment, but he expects the problem will be contained and not become a major issue.
When addressing the issues that would eventually cause the recession in 2008 Bernanke had this to say, "...The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained." A month before the last quote Bernanke stated "Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good..."
In summary the Fed does not forecast for recessions and the issues likely to push the economy into a recession should be or are going to be contained.
What is a Recession
There is no universally accepted definition of a recession, but people tend to agree that consecutive quarters of declining GDP indicates a recession. At the moment, Germany, France, Italy, Japan, and the United Kingdom are coming close to recession territory.
The Environment is Ripe
The environment is ripe for a recession. The Brexit referendum was voted on in June 2016, but the U.K.s exit from the E.U. has yet to take place. The U.K. saw a 0.2% decrease in GDP in the quarter ending in June 2019, and economist believe there is still some economic fall out to come once Brexit is complete.
Brexit, a big issue in 2016 has been moved to the back of the queue of world issues with serious economic consequences. The economic war between the world's two largest economies continues to play out almost two years after the first tariffs were put in place by the Trump administration. The negative effects of the trade war between the U.S. and China are starting to show in the U.S. as well as abroad.
The Trump administration announced steel and aluminum tariffs in March 2018. If we use steel company U.S. Steel (X) as an indicator for how steel tariffs are working out, they don't appear to be working at all. U.S. Steel's stock closed March 2018 trading at $35.18 per share, the stock currently trades at $10.81 per share, a 70% decline. In addition to the massive loss of market capitalization, U.S. Steel has recently announced layoffs at its Michigan facility.
In Germany, manufacturing has slowed as a result of the U.S. - China trade war. China, a larger consumer of German exports, has decreased machine and automobile purchases from Germany.
Yemen continues to serve as a battle ground for a proxy war between Saudi Arabia and Iran. The recent drone attack on multiple Saudi Arabian oil processing plants has increased tensions between Iran and Saudi Arabia. Iran has denied responsibility for the attacks on Saudi Arabia but the United States confidently believes Iran initiated the attacks.
Venezuela has slowly shifted out of the spotlight of main stream news, but the country's issues still persist. Two political parties continue to battle for the country's top spot while a humanitarian catastrophe prolongs. All of this in the country with the worlds largest oil reserve.
The inverted yield curve is a good sign that a recession is on the way, but it needs a cause or kicker to get a recession on its way. Brexit, the U.S.- China trade war, Germany's slowing economy, the increasing tensions in the Middle East, and the tragedies of Venezuela could collectively contribute to a global economic recession.
Recession Delay Plan
The European Central Bank and the United States Federal Reserve are attempting to fend off a recession as best they can. The ECU recently announced an interest rate cut and plans to inject €20 billion a month into the financial markets. Jerome Powell and the U.S. Federal Reserve have cut interest rates for a second time in 2019. Whether these measures will prevent an economic recession is anyone's guess.
The Average Joe & Jane
Over the past few years issues concerning the average worker has made headlines and started conversations. The conversation surrounding raising the minimum wage to $15 was a big win for workers. The Economic Policy Institute believes a $15 per hour minimum wage could boost pay for 40 million adults.
The discussions around student loans has also been a win for the average worker. An all out student loan forgiveness may be far fetched, but having politicians acknowledge that the student loan debt burden is a major issue to society has been a step in a positive direction for the average Joe or Jane. Then there is employment, specifically in the U.S. where the unemployment rate sits at 3.7%, the lowest it's been since 1969.
A recession now could delay or pause a push of a $15 per hour minimum wage. It could also take talks of student loan debt relief off of the table, and unemployment will more than likely raise. During the Great Recession the unemployment rate grew from 5 percent in December 2007 to 10 percent in October 2009. These are serious consequences for the average nine-to-fiver.
Nobel Prize winning economist Jospeh Stiglitz believes we can avert a recession by deploying economic redistribution. Finding a way to move money from the 1 percent to the middle-class and lower middle class. He also thinks governments like the U.S. and Germany should take advantage of the low interest rate environment and invest in badly needed infrastructure upgrades. Infrastructure upgrades is a great talking point for politicians during campaigning season, but once in office talks of upgrades seem to fade away. Unless you consider one massive border wall an upgrade to infrastructure.
Are We or Aren't We
I don't know if we're in a recession or heading toward a recession, but the atmosphere is starting to feel different. The markets were able to digest the Yemen Civil War in 2015 and Brexit in 2016. The markets continued to rise while those issues took place. But from the monthly chart above, the Dow Jones has moved sideways since 2018 as it's dealt with trade war issues, slowing economies, and the turmoil in Venezuela.
Prior to the fall out of the dot.com bubble, the Dow Jones had a tough time holding a level over 11,200. From August 1999 to June 2001 the Dow traded through and above the level, but would close below the level the following month. Finally, in June 2001 the markets had no more fight left to hit the 11,200 level and started to sell off. Today, the Dow is having issues holding the 27,000 level, the next step could be a massive sell off.
A part of me wonders if it is all in our heads? The markets have been on a major bull run since 2009, are we wishing a recession into existence because what goes up must come down?
I also wonder what the next step will be for the U.S. if interest rate cuts don't prevent a recession, which I don't believe they will. I tend to side with those that believe rate cuts are just a form of kicking the can down the road, and at some point or another the economy needs to take a breather before it can make its next great run.
When it comes to investments, my mindset is always bullish. I'm not taking time off to wait and see what the market does. I'm still researching companies and industries, and looking for the next great undervalued find. But as I stated earlier the atmosphere feels different, so I may not go all in on a particular investment right now. For the foreseeable future I'll be nibbling. Buying a third of my normal position with plans to average down. I'm also looking at a put position on an ETF that tracks the Dow. The plan is to short off of that resistance line in the chart above.
This is where I leave you, with some insight on what a recession is, how the Fed's actions today are similar to their actions in 2007 and 2008, the issues that could push us into a recession, what's being done to prevent it, what could be done in addition to prevent it, and my thoughts on it. Thanks again for checking out this week's In Focus.