The odds of the U.S. slipping into a recession in 2020 are getting longer.
The probability of a downturn has fallen to about 1 in 3 following a tentative trade war truce with China and a resilient job market. But that doesn’t mean there won’t be one.
Here’s the good news: Economists believe a recession that starts next year would probably be relatively short and mild – more like the slumps of the early 1990s and early 2000s than the devastating collapse that led to nearly 9 million job losses during the Great Recession of 2007-09.
That’s largely because consumer finances are in good shape and there’s little sign of the excesses – like runaway inflation or housing or stock market bubbles – that triggered previous slides.
“The balance sheets of households, businesses and banks remain strong,” says Cristian deRitis, deputy chief economist at Moody’s Analytics. “We have the capacity to absorb a recession, restructure and see growth recover.”
Think of the 10½-year-old economic expansion as a slow but steady jogger who gradually stumbles to a halt in the latter stages of a marathon but can quickly resume the race after a brief rest. By contrast, the mid-2000s economy that ended with the Great Recession was a sprinter who burned out and crashed.
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Here’s the rub: The recovery from a recession that begins late next year is likely to be tepid as well, partly held back by some of the same forces that cause the downturn.
“It’ll be a mild recession with a mild recovery,” says Diane Swonk, chief economist of Grant Thornton.
A report by deRitis shows the 11 recessions since World War II can be grouped into three categories:
From 1948 to 1968, the U.S. experienced classic boom-and-bust downturns. Consumer and business spending surged, prices soared and producers responded by making too much stuff, leading to a shakeout and lower prices that revived demand.
The recessions of the 1970s and 1980s were marked by oil price shocks that dampened consumer spending. And downturns since the early 1990s largely have been set off by financial bubbles, or run-ups, that eventually burst.
For some perspective on where a 2020 downturn might fit, here’s a look at the past three recessions in the financial-bubble era.
Congress: July 1990 to March 1991
The eight-month-long downturn was at least partly sparked by savings-and-loans institutions that ratcheted up lending for risky commercial real estate projects that went bust, resulting in the failure of a third of the S&Ls and discouraging housing and other loans. Other factors included a leap in oil prices after the U.S. invasion of Kuwait and earlier Federal Reserve interest rate hikes to fight inflation.
Economic output declined by about 1.2% and the unemployment rate rose from 5.2% to 6.8% as 1.4 million jobs were lost. But even after the recession ended, employers continued to cut jobs or hire sparingly, pushing unemployment to 7.8% by June 1992 and creating the first “jobless recovery.”
Congress: March 2001 to November 2001
The eight-month slump was triggered by the collapse of the dot-com stock bubble, which led to a pullback in business investment. Also contributing: Fed rate hikes to fight inflation in 2000, the September 11 terrorist attacks and the corporate accounting scandals of the early 2000s.
Economic output actually increased slightly during this mild recession. But the unemployment rate rose from 4.2% to 5.5% as 1.4 million jobs were shed. After the downturn officially ended, unemployment continued to climb to 6.3% by June 2003 and nearly 1 million more jobs were lost in another jobless recovery.
Economists have partly blamed the jobless rebounds of the early 1990s and early 2000s on financial meltdowns that chilled lending and investment. A study by the Kansas City Fed cites skittish employers who brought on temporary and part-time workers, and increased overtime, instead of hiring more full-time workers.
Congress: December 2007 to June 2009
The Great Recession, the worst downturn since the Great Depression, lasted 18 months and grew out of the risky mortgages banks provided to marginal borrowers. When home prices fell, homeowners couldn’t refinance their loans, leading to millions of foreclosures and pushing the nation’s largest banks to the brink of failure.
Lending dried up, consumer spending tumbled and businesses laid off 8.7 million workers. Economic output fell by nearly 4% and the unemployment rate doubled to 10% by October 2009.
Job growth resumed in February 2010 but increased modestly for several years. Economic growth generally has been lackluster, averaging 2.3% a year. For years, consumers and businesses spent cautiously and banks tightened lending standards, though activity has picked up the past few years.
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Congress: The next recession
Unlike the past three recessions, no widespread financial bubbles are likely to spark the next downturn. And in contrast to 1990 and 2001, don’t blame the Fed. After raising interest rates in 2018, the Fed has cut rates three times this year to a historically low range of 1.5% to 1.75% amid low inflation and recession worries.
Next time, the culprits will almost certainly be jittery businesses, deRitis and Swonk say. President Donald Trump’s trade war with China and a sluggish global economy have spawned uncertainty that has dampened business investment and clobbered manufacturing. Economists forecast growth of less than 2% in the current quarter and next year.
Despite a tentative “Phase 1” U.S. trade deal with China, larger conflicts with Beijing remain unresolved and Trump could eventually impose tariffs on $160 billion in Chinese-made consumer products that were planned for mid-December but suspended because of the tentative agreement.
Swonk says it likely would take such a “shock” to frighten companies into reining in hiring that has added a healthy 180,000 jobs a month this year. That would dent consumer spending, which makes up 70% of economic activity and has held up well amid solid job and wage growth. And it could result in a recession.
Scott Anderson, chief economist of Bank of the West, says it wouldn’t necessarily take an escalation of the trade fight to tip the U.S. into a descent. A 15% plunge in the record high stock market could spook households already on edge.
“I think we’re slouching toward recession,” he says.
If there is one, deRitis and Swonk predict a relatively brief six-month episode, shorter than the past three and the 11-month average since World War II.
DeRitis expects a 1.2% drop in economic output, below the average 2% decline over the past 70 years. He also sees the unemployment rate rising by 1.6 percentage points, in line with a typical downturn. About 600,000 jobs likely would be lost, he says, well below the millions that vanished during the past few recessions.
That doesn’t mean there won’t be pain. Less educated and other vulnerable workers are the most likely to be laid off, the Moody’s paper says.
A big reason the next tailspin is likely to be mild is the chill cast by the Great Recession. Besides tighter credit standards, banks maintain deep capital cushions as a result of post-crisis regulations, allowing them to continue lending to creditworthy customers. And after peaking during the last downturn, household debt as a share of gross domestic product has fallen to the lowest level since the early 2000s.
“Consumers will have greater resources available to manage their existing debts and increase their spending to support the economy,” deRitis wrote in the report. As prices for land, equipment and labor fall, enterprising businesses will likely scoop them up, reigniting growth, he says.
There are minefields that could extend the downturn. Corporate debt is at a record high, with the biggest risks centered on companies with low credit ratings. A recession could intensify if those firms default and start laying off workers, Swonk says.
Perhaps more worrisome is that the upswing is likely to be uninspiring.
Policymakers “don’t have the tools” to generate a more robust recovery, Swonk says.
The Fed, which has cut interest rates an average of about five percentage points in previous recoveries, won’t have that luxury with its key short-term rate at 1.5% to 1.75%, though it almost certainly will resume bond purchases to lower long-term rates.
And after Trump took the unusual step of spearheading tax cuts and spending increases during the expansion, helping push the national debt to $22 trillion, Congress may have less appetite for a big stimulus to dig out of a slump, the economists say.
Also, global growth probably won’t ramp up anytime soon, deRitis says, continuing to squeeze American manufacturers that rely on exports.
“It’ll be a jobless recovery,” Swonk says.
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