https://www.thebalance.com/could-the-great-depression-happen-again-3305685
US Economy Hot Topics
Are We Headed for Another Great Depression?
Six Reasons Why 50 Percent of Americans Think Another Depression Is Likely
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By Kimberly Amadeo
Updated June 25, 2019
If the United States had an economic downturn on the scale of the Great Depression of 1929, your life would change dramatically. One out of every four people you know would lose their job. The unemployment rate would quintuple from around an average rate of 5 percent to 25 percent.
Economic output would plummet 25 percent. The gross domestic product would fall from near a $20 trillion level to near $14 trillion. Instead of inflation at about 2 percent, deflation would cause prices to drop. The Consumer Price Index fell 27 percent between November 1929 to March 1933, according to the Bureau of Labor Statistics. Trade wars caused international trade to shrink 65 percent.
Could it happen again? In a 2011 CNN poll, almost 50 percent of Americans believed it could. They thought it would happen within a year. Fortunately, they were wrong. However, many people are still worried about a depression reoccurring. Others are convinced we are already in a depression. They can't see where the drive for growth will come from. What makes these Americans so worried?
Unemployment
First, almost 25 percent of the unemployed have been looking for work for six months or more. Hundreds of thousands of discouraged workers have given up looking for work, and are no longer counted in the unemployed numbers, which drives the labor force participation rate down. Not everyone has returned to the job market. Approximately five million people are working part-time because they can't find a full-time job. This is all despite the fact that the unemployment rate is near the 4 percent natural rate of unemployment.
Stock Market Volatility
Second, volatility spooks investors when the Dow swings 400 points up or down a day. Stock market losses suffered during the 2008 stock market crash were devastating. The Dow dropped 53 percent from its high of 14,043 in October 2007 to 6,594.44 on March 5, 2009. It dropped 777 points during intra-day trading on September 29, 2008, its largest one-day drop ever. Investors who lost money are understandably still spooked by that experience. The Dow closing history shows the behavior of the stock market since the Great Depression.
Its fluctuations follow the phases of the business cycle.
In early 2016, stock prices plummeted. Investors lost trillions, and some countries went into recession. That followed losses in 2015 when almost 70 percent of all U.S. investors lost money. According to some, it was the worst year for stocks since 2008. Almost 1,000 hedge funds shut down, and junk bonds were crashing.
Five of the ten largest one-day point drops in the Dow have occurred in 2018. The largest ever one-day point drop in the history of the Dow occurred on February 5, when it dropped 1,175 points. This was followed closely by the second-largest ever drop on February 8, when it dropped 1,032 points. The three other massive one-day drops were 831 points on October 10, 724 points on March 22, and 665 points on February 2.
Oil Prices
Oil prices have also been volatile. They rose to $50 a barrel after plummeting to a 13-year low of $26.55/barrel in January 2016. That was just 18 months after a high of $100.26/barrel in June 2014. Oil prices were pushed down by an increase in supply from U.S. shale oil producers and the strength of the U.S. dollar. Volatility makes people want to save, in case prices skyrocket again. The oil price forecast for the next 30 years reveals that oil prices could increase to over $200/barrel to meet demands from China and emerging markets.
The Financial Crisis of 2008
Third, the 2008 financial crisis weakened the economy's structure. It faces future global stresses without its normal resilience.
The housing collapse was worse in the recession than the Great Depression. Prices fell 31.8 percent from their peak of $229,000 in June 2007 to $156,100 in February 2011. They fell 24 percent during the Depression. In the early stages of the recovery, foreclosures made up 30 percent of all home sales.
Many homeowners were upside down in their mortgages. They couldn't sell their homes or refinance to take advantage of record-low interest rates. The housing collapse was caused by mortgage financing reliant upon mortgage-backed securities. After 2008, banks stopped purchasing them on the secondary market. As a result, 90 percent of all mortgages were guaranteed, Fannie Mae or Freddie Mac. The government took ownership, but banks still aren't lending without Fannie or Freddie guarantees. In effect, the Federal government is still supporting the U.S. housing market.
A primer on the subprime mortgage crisis clarifies how rising interest rates triggered the crisis.
Business credit froze up. Demand for any asset-backed commercial paper disappeared. The panic over the value of these commercialized debt obligations led to the financial sector's crisis, causing the intervention of the Federal Reserve and the Treasury. The governments of the world stepped in to provide all the liquidity for frozen credit markets. The U.S. debt was downgraded. Europe wasn’t much better. Even worse, all that addition to the money supply didn't find its way into the regular economy.
Banks sat on cash, unwilling to lend. They paid back the $700 billion bailout.
Expansionary Monetary Policy and the Federal Reserve
Fourth, the Federal Reserve used up its usual expansionary monetary policy tools to fight the financial crisis. It ended quantitative easing, but that only means it isn't adding to its bloated balance sheet. It keeps rolling over the $4 trillion in U.S. debt that it purchased for that program.
Fifth, the federal government is unlikely to come to the rescue with stimulus spending as it did in 2009. The nearly $22 trillion debt means that Congress would prefer to cut spending instead.
Six Reasons Why the Depression Could Reoccur
Six Reasons Why the Depression Won't Reoccur
Outcome
There is a long-term threat that could cause another Great Depression. That is the worsening peril from climate change. In May 2018, Stanford University scientists calculated how much global warming would cost the world's economy. If the world's nations adhered to the Paris Climate Agreement, and temperatures only rose 2.5 percent, then the global gross domestic product would fall 15 percent. However, if nothing is done, temperatures will rise by 4 degrees Celsius by 2100. Global GDP would decline by more than 30 percent from 2010 levels, which would be worse than the Great Depression, where global trade fell 25 percent.
The only difference is that it would be permanent.
When the economy is uncertain, it's time to get defensive. The only way to do that is to increase your income and reduce your spending. That way, you'll have money to reduce your debt. Make sure you have a cushion, and then build up your savings. The best investment is still a diversified portfolio.
If possible, make sure you have a college degree. Education is the great divide in this society. The unemployment rate for college grads is half the average. Although housing is historically cheap, as are interest rates, only buy a house you can easily afford. The smaller the house, the less furniture you'll have to buy to fill it. The economy is going to experience a lot of uncertainty due to climate change. The best way to prepare is to have enough resources to be flexible.
https://www.thebalance.com/u-s-economy-collapse-what-will-happen-how-to-prepare-3305690
US Economy Collapse, What Would Happen and How to Prepare
Your Survival Guide to an Economic Collapse
By Kimberly Amadeo
Updated March 26, 2019
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© The Balance
If an economic collapse occurs, it would happen quickly. No one would predict it. The surprise factor is, itself, one of the causes of a collapse. The signs of imminent failure are difficult for most people to see.
Most recently, the U.S. economy almost collapsed on September 17, 2008. That's the day the Reserve Primary Fund broke the buck. Panicked investors withdrew a record $140 billion from money market accounts where businesses keep cash to fund day-to-day operations. If withdrawals had gone on for even a week, the entire economy would have halted. That meant trucks would stop rolling, grocery stores would run out of food, and businesses would shut down. That's how close the U.S. economy came to a real collapse, and how vulnerable it is to another one.
Fortunately, the Federal Reserve Chairman and U.S. Treasury Secretary noticed the signal and knew what it meant. Ben Bernanke was a Great Depression scholar. Hank Paulson was a Wall Street veteran. Their bailout plan supplied enough cash to prevent a total collapse. The 2008 financial crisis did plenty of damage, but it could have been much worse.
If you want to understand what life is like during a collapse, talk to people who lived through the Great Depression. The stock market collapsed on Black Thursday. By the following Tuesday, it was down 25 percent. Many investors lost their life savings that weekend. The Dow didn't recover until 1954.
By 1933, one out of four people were unemployed. Wages for those who still had jobs fell. U.S. gross domestic product was cut in half. Thousands of farmers and other unemployed workers moved to California in search of work. Most became homeless hobos or moved to “Hooverville" shantytowns.
What Would Happen in an Economic Collapse
If the economy collapses, you would lose access to credit. Banks would close. Demand would outstrip supply of food, gas, and other necessities. If the collapse affected local governments and utilities, then water and electricity would no longer be available. As people panic, they would revert to survival and self-defense modes. The economy would return to a traditional economy, where those who grow food barter for other services.
A U.S. economic collapse would create global panic. Demand for the dollar and U.S. Treasurys would plummet. Interest rates would skyrocket. Investors would rush to other currencies, such as the yuan, euro, or even gold. It would create not just inflation, but hyperinflation, as the dollar became dirt cheap.
How Close Are We to a Total Economic Collapse?
Any of the following seven scenarios could create an economic collapse.
Collapse Versus Crisis
Be very clear that an economic crisis is not the same as an economic collapse. As painful as it was, the 2008 financial crisis was not a collapse. Millions of people lost jobs and homes, but basic services were still provided.
Other past financial crises seemed like a collapse at the time, but are barely remembered now. Here are some these past economic crunches:
1970s Stagflation – The OPEC oil embargo and President Richard Nixon’s abolishment of the gold standard triggered double-digit inflation. The government responded to this economic downturn by freezing wages and labor rates to curb inflation. The result was a high unemployment rate. Businesses, hampered by low prices, could not afford to keep workers at unprofitable wage rates.
1981 Recession – The Fed raised interest rates to end the double-digit inflation. That created the worst recession since the Great Depression. President Ronald Reagan had to cut taxes and increase government spending to end it.
1989 Savings and Loan Crisis – One thousand banks closed after illegal real estate investments turned sour. Charles Keating and the other S&L bankers had used bank depositor’s funds. The consequent recession triggered an unemployment rate as high as 7.8 percent. The government was forced to bail out some banks to the tune of $126 billion, an addition to the U.S. national debt.
Recession after the 9/11 Attacks – Four terrorist attacks on September 11, 2001, sowed nationwide apprehension and prolonged the 2001 recession until 2003. America’s response, the War on Terror, added $2 trillion to the already burgeoning national debt.
2008 Financial Crisis – The early warning signs were rapidly falling housing prices and increasing mortgage defaults in 2006. Left untended, the resulting subprime mortgage crisis, which panicked investors and led to massive bank withdrawals, spread like wildfire across the financial community. The U.S. government had no choice but to bail out “too big to fail” banks and insurance companies, like Bear Stearns and AIG, or face both national and global financial catastrophes.
Will the U.S Economy Collapse?
The U.S. economy's size makes it resilient. It is highly unlikely that even these events could create a collapse. When necessary, the government can act quickly to avoid a total collapse.
The Federal Reserve can avoid a financial collapse with a few phone calls. For example, it can use its contractionary monetary tools to tame hyperinflation. The Federal Deposit Insurance Corporation insures banks. There is little chance of a banking collapse similar to that in the 1930s.
The president can release Strategic Oil Reserves to offset an oil embargo. Homeland Security can address a cyber threat. The U.S. military can respond to a terrorist attack, transportation stoppage, or rioting/civil war. In other words, most federal government programs are designed to prevent just such an economic collapse.
But these strategies won't protect against the widespread and pervasive crises caused by climate change. Rising sea levels, depletion of fish stocks, and extreme weather are just some of the effects. If nothing is done, the World Bank warned that temperatures will increase by 4 C if nothing is done. That's when all the ice sheets in Greenland and West Antarctica would melt. Sea levels would rise 33 feet, flooding every major coastal city. Once sea levels rise 10 feet, it would flood 12.3 million people.
Seas would continue to rise by one foot per decade. That's too fast to allow humans to build anew. The damage would exceed $600 trillion, double the total wealth of everyone on the planet. That would shrink the global economy by 20% from what it is today. That's worse than the worst year of the Great Depression.
How to Prepare for an Economic Collapse
Protecting yourself from a collapse is difficult. A catastrophic failure can happen without warning. In most crises, people survive through their knowledge, wits, and by helping each other.
Here are six steps you can take now to prepare for a potential collapse.
https://www.nytimes.com/2019/07/28/business/economy/economy-recession.html
A Recession Is Coming (Eventually). Here’s Where You’ll See It First.
Economists don’t know when the decade-long expansion, now the longest in American history, will end. But here are the indicators they will be watching to figure it out.
CreditCreditChris Gash
By Ben Casselman
Economists often say that “expansions don’t die of old age.” That is, recessions are like coin flips — just because you get heads five times in a row doesn’t mean your next flip is more likely to come up tails.
Still, another recession will come eventually. Fortunately, economic expansions, unlike coin-flip streaks, usually provide some hints about when they are nearing their end — if you know where to look. Below is a guide to some of the indicators that have historically done the best job of sounding the alarm.One caveat: Economists are notoriously terrible at forecasting recessions, especially more than a few months in advance. In fact, it’s possible (though unlikely) that a recession has already begun, and we just don’t know it yet.
“Historically, the best that forecasters have been able to do consistently is recognize that we’re in a recession once we’re in one,” said Tara Sinclair, an economist at George Washington University. “The dream of an early warning system is still a dream that we’re working on.”
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Indicator 1: The Unemployment Rate
What to watch for: Rapid increases, even from a low level.
What it’s saying: All clear.
Discussion: The unemployment rate is near a 50-year low, but that isn’t what matters for recession forecasting. What matters is the change: When the unemployment rate rises quickly, a recession is almost certainly on its way or has already arrived.
Even small increases are significant. Claudia Sahm, an economist at the Federal Reserve, recently developed a rule of thumb that compares the current unemployment rate to its low point over the previous 12 months. (Both are measured using a three-month average, to smooth out short-term blips.) When that gap hits 0.3 percentage points, the risks of a recession are elevated. At half a percentage point, the downturn has probably already begun.
Unemployment is considered a “lagging” indicator, and it is unlikely to be the first place to pick up on signs of trouble. But what it lacks in timeliness, it makes up for in reliability: The unemployment rate pretty much always spikes in a recession, and it rarely rises much without one.
Which is why right now the unemployment rate should be a source of comfort: Not only is it low, it’s trending down. When that has been the case historically, there has been less than a one in 10 chance of a recession within a year, according to a Brookings Institution analysis that worked off Ms. Sahm’s measure.
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Related indicators: Initial claims for unemployment insurance; payroll job growth.
Indicator 2: The Yield Curve
What to watch for: Interest rates on 10-year Treasury bonds falling below those on three-month bonds. (It has already happened.)
What it’s saying: Storm warning.
Discussion: The yield curve is less intuitive than the unemployment rate, but it has historically been among the best predictors of recessions.
The fundamentals are straightforward: The curve essentially shows the difference between the interest rate on short-term and long-term government bonds. When long-term interest rates fall below short-term ones, the yield curve is said to have “inverted.”
Think of the yield curve as a measure of how confident investors are in the economy. In normal times, they demand higher interest rates in return for tying up their money for longer periods. When they get nervous, they’re willing to accept lower rates in return for the unrivaled safety bonds offer. (That’s the simplified version. My colleague Matt Phillips gave a more detailed explanation last year.)
The Federal Reserve Bank of New York has developed a handy metric that translates fluctuations in the yield curve into recession probabilities. Right now, it puts the chance of a recession starting in the next year at about one in three — up sharply from a year ago, and not far from where it was on the eve of the Great Recession.
Don’t panic yet, though. Many economists argue that the yield curve means less than it used to, partly because the Fed was until recently raising short-term interest rates, even as the huge holdings of bonds that it accumulated during the recession are putting downward pressure on long-term rates. Taken together, those actions could be skewing the shape of the yield curve. And, in any case, it has taken as long as two years for a recession to follow a yield-curve inversion in the past.
Related indicators: The Financial Conditions Index (from the Chicago Fed); the stock market.
Indicator 3: The ISM Manufacturing Index
What to watch for: The index falling below about 45 for an extended period.
What it's saying: Mostly cloudy.
Discussion: Every month, the Institute for Supply Management surveys purchasing managers at major manufacturers about their companies’ orders, inventories, hiring and other activity. It then aggregates those responses into an index: Readings above 50 indicate that the manufacturing sector is growing; below 50, it is contracting. (The institute also releases a measure of activity in the service sector, but that index doesn’t go back as far.)
The manufacturing index has some significant advantages. It is released early, often on the first day of the subsequent month, and unlike lots of economic data, it doesn’t get revised. Most importantly, the index is a true leading indicator: It has historically shown signs of trouble before the broader economy hit the skids.
On the other hand, manufacturing no longer drives the American economy, which means a contraction in the sector doesn’t guarantee a recession. The ISM index fell below 50 for several months in 2015 and 2016, for example, signaling an “industrial recession” that never turned into the real thing. But steep downturns in manufacturing tend to be signs of trouble — it is rare for the index to fall much below 45 or so without a recession hitting.
Right now, American manufacturers are being battered by a global slowdown and by trade tensions. As of June, the index is still in expansion territory, but barely. Many economists think it will fall below 50 in the coming months but don’t expect a steeper drop.
Related indicators: New orders for capital goods; regional manufacturing surveys from Federal Reserve banks; the employment and compensation components of the National Federation of Independent Business’s monthly survey.
Indicator 4: Consumer Sentiment
What to watch for: Declines of 15 percent or more over a year.
What its saying: Partly cloudy.
Discussion: Consumers drive the economy, now more than ever. It is pretty much impossible for the economy to keep growing if Americans decide to keep their wallets closed.
The trouble is, by the time spending slows, a recession is probably already underway. Measures of consumer confidence, such as the long-running indexes from the Conference Board and the University of Michigan, provide insight into how consumers will spend in the future.
Confidence indexes are volatile from month to month, and they sometimes drop sharply as consumers react (and overreact) to the stock market, political developments and other events. Those declines often don’t translate into real changes in spending.
But sustained declines are another matter. Economists at Morgan Stanley recently found that a 15 percent year-over-year drop in the Conference Board’s index is a reliable predictor of a recession.
By that metric, the economy isn’t in trouble. Consumer confidence is basically flat compared to a year ago, but it has fallen since late last year.
Related indicators: Retail sales; average hourly earnings; real personal income.
Indicator 5: Choose Your Favorite
O.K., this is cheating. But no single indicator can tell the whole story of the $20 trillion United States economy, and the measures that performed well in the past might not do so in the future. So it pays to keep an eye on a variety of data sources.
The indicators above are among the most common inputs into the formal models that economists use to forecast recessions. But many economists have a favorite indicator (or maybe a couple) that they also watch as a gut check.
Ben Casselman writes about economics, with a particular focus on stories involving data. He previously reported for FiveThirtyEight and The Wall Street Journal. @bencasselman • Facebook
A version of this article appears in print on July 29, 2019, Section B, Page 1 of the New York edition with the headline: A Recession Is Coming (Eventually). Here’s Where You’ll See It First.. Order Reprints | Today’s Paper | Subscribe
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Why everybody’s worried about a recession again
Is a recession coming in 2019? Perhaps.
By Emily Stewart Aug 15, 2019, 11:20am EDT
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The yield curve inverted and everybody’s all worked up about a recession again. Johannes Eisele/AFP/Getty Images
The seemingly sudden onslaught of recession alarm bells in the United States and around the globe lately might make it easy to panic — but try not to.
Economists, investors, and market observers have started to sound a little extra gloomy when it comes to their economic predictions in recent days. Bank of America and Goldman Sachs have warned of a rising risk of recession, and the infamous yield curve (more on that later) is signaling things might soon get dark. The Dow Jones Industrial Average fell by 800 points on Wednesday, marking its worst day of 2019 and prompting CNBC to declare, in an ominously red graphic, “markets in turmoil.”
The US economy is in the midst of its longest expansion ever, so why the sudden worry about a recession?
The Great Recession continues to loom large in people’s minds, and millennials who entered the working world in its aftermath still fall behind Gen Xers and baby boomers in terms of homeownership and having children. It makes fears of a recession easy to stir up, especially when there are a few signs of contraction.
The good news is that just because it’s been a while since we’ve had a recession doesn’t mean the US economy is about to take an enormous dive. An old adage among economists is that expansions don’t die of old age; something has to happen to cause them.
And even though certain factors signal a recession might be coming, that doesn’t mean it’s a foregone conclusion — the stock market got extra rocky at the end of 2018, partly because of fears of a recession, and here we are more than six months later and it hasn’t happened yet.
While recessions certainly aren’t great, they’re not usually as bad as the last one. Prior to the recession that started in late 2007, the previous one was in 2001. It lasted for eight months and was so mild that we didn’t know that it was happening until it was basically over.
More on what recessions are, why there’s worry about one now, and what you can do about it (not much, but maybe stay away from your 401(k) for a second), below.
Recessions, briefly explained
A recession essentially means that the economy, instead of growing, gets smaller. Vox explained the more formal definition of it earlier this year:
The US economy has seen dozens of cycles of expansions and recessions throughout history — in fact, they used to happen a lot more often, but in the late 20th century they slowed down as periods of growth grew longer. The reason is that “we’re much less of an industrial economy,” Richard Sylla, professor emeritus of economics at New York University, told me earlier this year.
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Vox/Javier Zarracina
Since about the 1980s, with the exception of the Great Recession, business cycle fluctuations have been a lot less volatile. The ups haven’t been as up, and the downs haven’t been as down. It’s generally been referred to as the Great Moderation. That means recessions aren’t as drastic, but periods of growth that make up for them aren’t as great, either.
Why people are more nervous about a recession now
Recessions don’t just pop up out of thin air — something has to cause one. And right now, there are a handful of factors experts say could do it.
One big issue: President Donald Trump’s trade war with China. Tensions between the US and China have been escalating, and a resolution is looking increasingly unlikely in the near term. At the start of the month, Trump announced he would put a 10 percent tariff on $300 billion of Chinese goods, and China retaliated by stopping buying agricultural goods from the US and allowing its currency to weaken. Amid market turmoil this week, the Trump administration said it would delay its latest round of tariffs from their September 1 start date to December 15, but China shrugged it off.
Goldman Sachs analysts said in a note to clients over the weekend that they “no longer expect a trade deal before the 2020 election” and increased their estimates for how much they think the trade war will affect the economy.
Economists and investors also worry that business investment is slowing — despite the tax cuts that were supposed to juice it — and that the Federal Reserve, which just cut interest rates in July, won’t do it again. The German economy is also showing signs of slowing. Sen. Elizabeth Warren (D-MA) in July warned that she sees “serious warning signs” of an economic crash, including ballooning household debt and potential shocks to the system, such as the debt ceiling and Brexit.
And then there is the “yield curve,” a wonky concept that is often taken as a signal of what’s to come. As Robert Samuelson recently explained at the Washington Post, the yield curve refers to the relationship between short-term and long-term interest rates, generally on Treasury notes. Normally, long-term interest rates are higher than short-term rates because it’s riskier for investors to lend money for longer periods of time. When short-term rates get higher than long-term rates, the yield curve becomes “inverted,” and that’s often a bad indicator. Every US recession for the past 60 years was preceded by an inverted yield curve.
This week, the yield curve inverted.
Vox’s Matt Yglesias explained what it means and why it potentially matters but why it’s not a sign of imminent doom, either:
What you can do (spoiler: not much)
There’s not a whole lot you, personally, can do to prevent a recession, or to prepare for one. Obviously, it’s always good to save and have a rainy day fund in case of emergencies. But that’s not easy for everyone — only 40 percent of Americans have enough savings to cover a $1,000 unexpected expense, according to the personal finance website Bankrate.
Part of the issue with economic and market downturns is that the panic around them can result in self-fulfilling prophecies. People worry something bad is about to happen, so consumers stop spending, investors pull their money out of the markets, or businesses don’t make the investments they were going to, and then that makes things worse.
And if and when the recession hits, a lot of people stick in a holding pattern. They get nervous to change jobs and put off making big life decisions, such as buying a home.
If you do invest in the stock market, now might not be the time to panic and sell everything, and beware that trying to play the market is always tricky. As Yglesias put it:
One person who’s rooting against a recession: Trump, who has tethered his success in office to the economy and the stock market. But if one does come, he already has a plan for whom to blame — the Fed. And, basically, anyone but himself.
US Economy Hot Topics
Are We Headed for Another Great Depression?
Six Reasons Why 50 Percent of Americans Think Another Depression Is Likely
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By Kimberly Amadeo
Updated June 25, 2019
If the United States had an economic downturn on the scale of the Great Depression of 1929, your life would change dramatically. One out of every four people you know would lose their job. The unemployment rate would quintuple from around an average rate of 5 percent to 25 percent.
Economic output would plummet 25 percent. The gross domestic product would fall from near a $20 trillion level to near $14 trillion. Instead of inflation at about 2 percent, deflation would cause prices to drop. The Consumer Price Index fell 27 percent between November 1929 to March 1933, according to the Bureau of Labor Statistics. Trade wars caused international trade to shrink 65 percent.
Could it happen again? In a 2011 CNN poll, almost 50 percent of Americans believed it could. They thought it would happen within a year. Fortunately, they were wrong. However, many people are still worried about a depression reoccurring. Others are convinced we are already in a depression. They can't see where the drive for growth will come from. What makes these Americans so worried?
Unemployment
First, almost 25 percent of the unemployed have been looking for work for six months or more. Hundreds of thousands of discouraged workers have given up looking for work, and are no longer counted in the unemployed numbers, which drives the labor force participation rate down. Not everyone has returned to the job market. Approximately five million people are working part-time because they can't find a full-time job. This is all despite the fact that the unemployment rate is near the 4 percent natural rate of unemployment.
Stock Market Volatility
Second, volatility spooks investors when the Dow swings 400 points up or down a day. Stock market losses suffered during the 2008 stock market crash were devastating. The Dow dropped 53 percent from its high of 14,043 in October 2007 to 6,594.44 on March 5, 2009. It dropped 777 points during intra-day trading on September 29, 2008, its largest one-day drop ever. Investors who lost money are understandably still spooked by that experience. The Dow closing history shows the behavior of the stock market since the Great Depression.
Its fluctuations follow the phases of the business cycle.
In early 2016, stock prices plummeted. Investors lost trillions, and some countries went into recession. That followed losses in 2015 when almost 70 percent of all U.S. investors lost money. According to some, it was the worst year for stocks since 2008. Almost 1,000 hedge funds shut down, and junk bonds were crashing.
Five of the ten largest one-day point drops in the Dow have occurred in 2018. The largest ever one-day point drop in the history of the Dow occurred on February 5, when it dropped 1,175 points. This was followed closely by the second-largest ever drop on February 8, when it dropped 1,032 points. The three other massive one-day drops were 831 points on October 10, 724 points on March 22, and 665 points on February 2.
Oil Prices
Oil prices have also been volatile. They rose to $50 a barrel after plummeting to a 13-year low of $26.55/barrel in January 2016. That was just 18 months after a high of $100.26/barrel in June 2014. Oil prices were pushed down by an increase in supply from U.S. shale oil producers and the strength of the U.S. dollar. Volatility makes people want to save, in case prices skyrocket again. The oil price forecast for the next 30 years reveals that oil prices could increase to over $200/barrel to meet demands from China and emerging markets.
The Financial Crisis of 2008
Third, the 2008 financial crisis weakened the economy's structure. It faces future global stresses without its normal resilience.
The housing collapse was worse in the recession than the Great Depression. Prices fell 31.8 percent from their peak of $229,000 in June 2007 to $156,100 in February 2011. They fell 24 percent during the Depression. In the early stages of the recovery, foreclosures made up 30 percent of all home sales.
Many homeowners were upside down in their mortgages. They couldn't sell their homes or refinance to take advantage of record-low interest rates. The housing collapse was caused by mortgage financing reliant upon mortgage-backed securities. After 2008, banks stopped purchasing them on the secondary market. As a result, 90 percent of all mortgages were guaranteed, Fannie Mae or Freddie Mac. The government took ownership, but banks still aren't lending without Fannie or Freddie guarantees. In effect, the Federal government is still supporting the U.S. housing market.
A primer on the subprime mortgage crisis clarifies how rising interest rates triggered the crisis.
Business credit froze up. Demand for any asset-backed commercial paper disappeared. The panic over the value of these commercialized debt obligations led to the financial sector's crisis, causing the intervention of the Federal Reserve and the Treasury. The governments of the world stepped in to provide all the liquidity for frozen credit markets. The U.S. debt was downgraded. Europe wasn’t much better. Even worse, all that addition to the money supply didn't find its way into the regular economy.
Banks sat on cash, unwilling to lend. They paid back the $700 billion bailout.
Expansionary Monetary Policy and the Federal Reserve
Fourth, the Federal Reserve used up its usual expansionary monetary policy tools to fight the financial crisis. It ended quantitative easing, but that only means it isn't adding to its bloated balance sheet. It keeps rolling over the $4 trillion in U.S. debt that it purchased for that program.
Fifth, the federal government is unlikely to come to the rescue with stimulus spending as it did in 2009. The nearly $22 trillion debt means that Congress would prefer to cut spending instead.
Six Reasons Why the Depression Could Reoccur
- Stock market crashes can cause depressions by wiping out investors' life savings. If people have borrowed money to invest, then they will be forced to sell all they have to pay back the loans. Derivatives make any crash even worse through this leveraging. Crashes also make it difficult for companies to raise the needed funds to grow. Finally, a stock market crash can destroy the confidence required to get the economy going again.
- Lower housing prices and resultant foreclosures totaled at least $1 trillion in losses to banks, hedge funds, and other owners of subprime mortgages on the secondary market. Banks continue to hoard cash even though housing prices have increased. They are still digesting the losses from one million foreclosures.
- Business credit is needed for businesses so they can continue to run on a daily basis. Without credit, small businesses can't grow, stifling the 65 percent of all new jobs that they provide.
- Bank near-failures frightened depositors into taking out their cash. Although the Federal Deposit Insurance Corporation insures these deposits, some became concerned that this agency would also run out of money. Commercial banks depend on consumer deposits to fund their day-to-day business, as well as make loans.
- High oil prices could return once U.S. shale producers are forced out of business. Millions of jobs were lost when oil prices plummeted. At the same time, many consumers bought new cars and SUVs when gas prices were low. They will be pinched when prices rise again.
- Deflation is an even bigger threat. Low oil and gas prices have had a deflationary impact, and so has a 25 percent increase in the U.S. dollar that depresses import prices. These deflationary pressures seem like a boon to consumers, but they make it difficult for businesses to raise wages. The result could be a downward spiral. That is similar to what happened during the Great Depression.
Six Reasons Why the Depression Won't Reoccur
- Stock price declines haven't exceeded 11 percent in one day or 30 percent in a year. The kick-off to the Depression was the Stock Market Crash of 1929. By the stock market's close on Black Tuesday, the Dow had fallen 25 percent in just four days.
- Housing prices and foreclosures have recovered. Rental rates are relatively high, which has brought investors back to the housing market. Now that confidence has been restored, housing prices will continue to rise. The foreclosure pipeline, which once seemed endless, has disappeared.
- Business credit has been affected the most. The world's central banks have pumped in much of the liquidity needed. In effect, they have replaced the financial system itself.
- Monetary policy is expansionary, unlike the contractionary monetary policies that caused the Great Depression. During the recession in the summer of 1929, the Fed decreased the money supply by 30 percent. It raised the fed funds rate to defend the value of the dollar. Without liquidity, banks collapsed, forcing people to remove all funds and stuff them under the mattress, causing economic collapse. The FDIC helps prevent bank runs by insuring deposits.
- Economic output fell 4 percent from its high of $14.4 trillion in the 2nd quarter of 2008 to its low of $13.9 trillion a year later. It fell a whopping 25 percent during the Depression. It has recovered to $18 trillion.
- There is a big difference between a recession and a depression. Even if another Great Recession does occur, it is unlikely to turn in a global depression.
Outcome
There is a long-term threat that could cause another Great Depression. That is the worsening peril from climate change. In May 2018, Stanford University scientists calculated how much global warming would cost the world's economy. If the world's nations adhered to the Paris Climate Agreement, and temperatures only rose 2.5 percent, then the global gross domestic product would fall 15 percent. However, if nothing is done, temperatures will rise by 4 degrees Celsius by 2100. Global GDP would decline by more than 30 percent from 2010 levels, which would be worse than the Great Depression, where global trade fell 25 percent.
The only difference is that it would be permanent.
When the economy is uncertain, it's time to get defensive. The only way to do that is to increase your income and reduce your spending. That way, you'll have money to reduce your debt. Make sure you have a cushion, and then build up your savings. The best investment is still a diversified portfolio.
If possible, make sure you have a college degree. Education is the great divide in this society. The unemployment rate for college grads is half the average. Although housing is historically cheap, as are interest rates, only buy a house you can easily afford. The smaller the house, the less furniture you'll have to buy to fill it. The economy is going to experience a lot of uncertainty due to climate change. The best way to prepare is to have enough resources to be flexible.
https://www.thebalance.com/u-s-economy-collapse-what-will-happen-how-to-prepare-3305690
US Economy Collapse, What Would Happen and How to Prepare
Your Survival Guide to an Economic Collapse
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By Kimberly Amadeo
Updated March 26, 2019
© The Balance
If an economic collapse occurs, it would happen quickly. No one would predict it. The surprise factor is, itself, one of the causes of a collapse. The signs of imminent failure are difficult for most people to see.
Most recently, the U.S. economy almost collapsed on September 17, 2008. That's the day the Reserve Primary Fund broke the buck. Panicked investors withdrew a record $140 billion from money market accounts where businesses keep cash to fund day-to-day operations. If withdrawals had gone on for even a week, the entire economy would have halted. That meant trucks would stop rolling, grocery stores would run out of food, and businesses would shut down. That's how close the U.S. economy came to a real collapse, and how vulnerable it is to another one.
Fortunately, the Federal Reserve Chairman and U.S. Treasury Secretary noticed the signal and knew what it meant. Ben Bernanke was a Great Depression scholar. Hank Paulson was a Wall Street veteran. Their bailout plan supplied enough cash to prevent a total collapse. The 2008 financial crisis did plenty of damage, but it could have been much worse.
If you want to understand what life is like during a collapse, talk to people who lived through the Great Depression. The stock market collapsed on Black Thursday. By the following Tuesday, it was down 25 percent. Many investors lost their life savings that weekend. The Dow didn't recover until 1954.
By 1933, one out of four people were unemployed. Wages for those who still had jobs fell. U.S. gross domestic product was cut in half. Thousands of farmers and other unemployed workers moved to California in search of work. Most became homeless hobos or moved to “Hooverville" shantytowns.
What Would Happen in an Economic Collapse
If the economy collapses, you would lose access to credit. Banks would close. Demand would outstrip supply of food, gas, and other necessities. If the collapse affected local governments and utilities, then water and electricity would no longer be available. As people panic, they would revert to survival and self-defense modes. The economy would return to a traditional economy, where those who grow food barter for other services.
A U.S. economic collapse would create global panic. Demand for the dollar and U.S. Treasurys would plummet. Interest rates would skyrocket. Investors would rush to other currencies, such as the yuan, euro, or even gold. It would create not just inflation, but hyperinflation, as the dollar became dirt cheap.
How Close Are We to a Total Economic Collapse?
Any of the following seven scenarios could create an economic collapse.
- If the U.S. dollar rapidly loses value, it would create hyperinflation.
- A bank run could force banks to close or even go out of business, cutting off lending and even cash withdrawals.
- The internet could become paralyzed with a super-virus, preventing emails and online transactions.
- Terrorist attacks or a massive oil embargo could halt interstate trucking. Grocery stores would soon run out of food.
- Widespread violence erupts across the nation. That could range from inner-city riots, a civil war, or a foreign military attack. It's possible that a combination of these events could overwhelm the government's ability to prevent or respond to a collapse.
- In March 2019, the Federal Reserve warned that climate change could threaten the financial system. Extreme weather caused by climate change is forcing farms, utilities, and other companies to declare bankruptcy. As those loans go under, it will damage banks' balance sheets just like subprime mortgages did during the financial crisis. A study by Pennsylvania State University predicted that extreme weather in North America will increase 50% by 2100. It will cost the U.S. government $112 billion per year, according to the U.S. Government Accountability Office.
- Natural disasters could cause a localized collapse. If Hurricane Irma had hit Miami, its damage would have been worse than Hurricane Katrina. If the 2019 polar vortex breakup had lasted weeks instead of days, cities would have shut down. Munich Re, the world's largest reinsurance firm, blamed global warming for $24 billion of losses in the California wildfires. It warned that insurance firms will have to raise premiums to cover rising costs from extreme weather. That could make insurance too expensive for most people.
- Some believe the Federal Reserve, the president, or an international conspiracy are driving the United States toward economic ruin. If that's the case, the economy could collapse in as little as a week. The economy is run on confidence that debts will be repaid, food and gas will be available when you need it, and that you'll get paid for this week's work. If a large enough piece of that stops for even several days, it creates a chain reaction that leads to a rapid collapse.
Collapse Versus Crisis
Be very clear that an economic crisis is not the same as an economic collapse. As painful as it was, the 2008 financial crisis was not a collapse. Millions of people lost jobs and homes, but basic services were still provided.
Other past financial crises seemed like a collapse at the time, but are barely remembered now. Here are some these past economic crunches:
1970s Stagflation – The OPEC oil embargo and President Richard Nixon’s abolishment of the gold standard triggered double-digit inflation. The government responded to this economic downturn by freezing wages and labor rates to curb inflation. The result was a high unemployment rate. Businesses, hampered by low prices, could not afford to keep workers at unprofitable wage rates.
1981 Recession – The Fed raised interest rates to end the double-digit inflation. That created the worst recession since the Great Depression. President Ronald Reagan had to cut taxes and increase government spending to end it.
1989 Savings and Loan Crisis – One thousand banks closed after illegal real estate investments turned sour. Charles Keating and the other S&L bankers had used bank depositor’s funds. The consequent recession triggered an unemployment rate as high as 7.8 percent. The government was forced to bail out some banks to the tune of $126 billion, an addition to the U.S. national debt.
Recession after the 9/11 Attacks – Four terrorist attacks on September 11, 2001, sowed nationwide apprehension and prolonged the 2001 recession until 2003. America’s response, the War on Terror, added $2 trillion to the already burgeoning national debt.
2008 Financial Crisis – The early warning signs were rapidly falling housing prices and increasing mortgage defaults in 2006. Left untended, the resulting subprime mortgage crisis, which panicked investors and led to massive bank withdrawals, spread like wildfire across the financial community. The U.S. government had no choice but to bail out “too big to fail” banks and insurance companies, like Bear Stearns and AIG, or face both national and global financial catastrophes.
Will the U.S Economy Collapse?
The U.S. economy's size makes it resilient. It is highly unlikely that even these events could create a collapse. When necessary, the government can act quickly to avoid a total collapse.
The Federal Reserve can avoid a financial collapse with a few phone calls. For example, it can use its contractionary monetary tools to tame hyperinflation. The Federal Deposit Insurance Corporation insures banks. There is little chance of a banking collapse similar to that in the 1930s.
The president can release Strategic Oil Reserves to offset an oil embargo. Homeland Security can address a cyber threat. The U.S. military can respond to a terrorist attack, transportation stoppage, or rioting/civil war. In other words, most federal government programs are designed to prevent just such an economic collapse.
But these strategies won't protect against the widespread and pervasive crises caused by climate change. Rising sea levels, depletion of fish stocks, and extreme weather are just some of the effects. If nothing is done, the World Bank warned that temperatures will increase by 4 C if nothing is done. That's when all the ice sheets in Greenland and West Antarctica would melt. Sea levels would rise 33 feet, flooding every major coastal city. Once sea levels rise 10 feet, it would flood 12.3 million people.
Seas would continue to rise by one foot per decade. That's too fast to allow humans to build anew. The damage would exceed $600 trillion, double the total wealth of everyone on the planet. That would shrink the global economy by 20% from what it is today. That's worse than the worst year of the Great Depression.
How to Prepare for an Economic Collapse
Protecting yourself from a collapse is difficult. A catastrophic failure can happen without warning. In most crises, people survive through their knowledge, wits, and by helping each other.
Here are six steps you can take now to prepare for a potential collapse.
- Make sure you understand basic economic concepts so you can see warning signs of instability. One of the first signs is a stock market crash. If it's bad enough, a market crash can cause a recession.
- Keep as many assets as liquid as possible so that you can withdraw them within a week.
- As for cash, it may not be useful in a total economic collapse because its value might be decimated. Stockpiles of gold bullion may not help because they would be difficult to transport if you needed to move quickly. In a severe collapse, they may not be accepted as currency. But it would be good to have a stash of $20 bills and gold coins, just in case. During many crisis situations, these are commonly accepted as bribes.
- In addition to your regular job, make sure you have skills that you'd need in a traditional economy, such as farming, cooking, or repair.
- Make sure your passport is current in case you'd need to leave the country on short notice. Research target countries now and travel there on vacation, so you are familiar with your destination.
- Keep yourself in top physical shape. Know basic survival skills, such as self-defense, foraging, hunting, and starting a fire. Practice now with camping trips. If you can, move near a wildlife preserve in a temperate climate. That way, if a collapse occurs, you can live off the land in a relatively unpopulated area.
https://www.nytimes.com/2019/07/28/business/economy/economy-recession.html
A Recession Is Coming (Eventually). Here’s Where You’ll See It First.
Economists don’t know when the decade-long expansion, now the longest in American history, will end. But here are the indicators they will be watching to figure it out.
CreditCreditChris Gash
By Ben Casselman
- July 28, 2019
Economists often say that “expansions don’t die of old age.” That is, recessions are like coin flips — just because you get heads five times in a row doesn’t mean your next flip is more likely to come up tails.
Still, another recession will come eventually. Fortunately, economic expansions, unlike coin-flip streaks, usually provide some hints about when they are nearing their end — if you know where to look. Below is a guide to some of the indicators that have historically done the best job of sounding the alarm.One caveat: Economists are notoriously terrible at forecasting recessions, especially more than a few months in advance. In fact, it’s possible (though unlikely) that a recession has already begun, and we just don’t know it yet.
“Historically, the best that forecasters have been able to do consistently is recognize that we’re in a recession once we’re in one,” said Tara Sinclair, an economist at George Washington University. “The dream of an early warning system is still a dream that we’re working on.”
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Indicator 1: The Unemployment Rate
What to watch for: Rapid increases, even from a low level.
What it’s saying: All clear.
Discussion: The unemployment rate is near a 50-year low, but that isn’t what matters for recession forecasting. What matters is the change: When the unemployment rate rises quickly, a recession is almost certainly on its way or has already arrived.
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Even small increases are significant. Claudia Sahm, an economist at the Federal Reserve, recently developed a rule of thumb that compares the current unemployment rate to its low point over the previous 12 months. (Both are measured using a three-month average, to smooth out short-term blips.) When that gap hits 0.3 percentage points, the risks of a recession are elevated. At half a percentage point, the downturn has probably already begun.
Unemployment is considered a “lagging” indicator, and it is unlikely to be the first place to pick up on signs of trouble. But what it lacks in timeliness, it makes up for in reliability: The unemployment rate pretty much always spikes in a recession, and it rarely rises much without one.
Which is why right now the unemployment rate should be a source of comfort: Not only is it low, it’s trending down. When that has been the case historically, there has been less than a one in 10 chance of a recession within a year, according to a Brookings Institution analysis that worked off Ms. Sahm’s measure.
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Related indicators: Initial claims for unemployment insurance; payroll job growth.
Indicator 2: The Yield Curve
What to watch for: Interest rates on 10-year Treasury bonds falling below those on three-month bonds. (It has already happened.)
What it’s saying: Storm warning.
Discussion: The yield curve is less intuitive than the unemployment rate, but it has historically been among the best predictors of recessions.
The fundamentals are straightforward: The curve essentially shows the difference between the interest rate on short-term and long-term government bonds. When long-term interest rates fall below short-term ones, the yield curve is said to have “inverted.”
Think of the yield curve as a measure of how confident investors are in the economy. In normal times, they demand higher interest rates in return for tying up their money for longer periods. When they get nervous, they’re willing to accept lower rates in return for the unrivaled safety bonds offer. (That’s the simplified version. My colleague Matt Phillips gave a more detailed explanation last year.)
The Federal Reserve Bank of New York has developed a handy metric that translates fluctuations in the yield curve into recession probabilities. Right now, it puts the chance of a recession starting in the next year at about one in three — up sharply from a year ago, and not far from where it was on the eve of the Great Recession.
Don’t panic yet, though. Many economists argue that the yield curve means less than it used to, partly because the Fed was until recently raising short-term interest rates, even as the huge holdings of bonds that it accumulated during the recession are putting downward pressure on long-term rates. Taken together, those actions could be skewing the shape of the yield curve. And, in any case, it has taken as long as two years for a recession to follow a yield-curve inversion in the past.
Related indicators: The Financial Conditions Index (from the Chicago Fed); the stock market.
Indicator 3: The ISM Manufacturing Index
What to watch for: The index falling below about 45 for an extended period.
What it's saying: Mostly cloudy.
Discussion: Every month, the Institute for Supply Management surveys purchasing managers at major manufacturers about their companies’ orders, inventories, hiring and other activity. It then aggregates those responses into an index: Readings above 50 indicate that the manufacturing sector is growing; below 50, it is contracting. (The institute also releases a measure of activity in the service sector, but that index doesn’t go back as far.)
The manufacturing index has some significant advantages. It is released early, often on the first day of the subsequent month, and unlike lots of economic data, it doesn’t get revised. Most importantly, the index is a true leading indicator: It has historically shown signs of trouble before the broader economy hit the skids.
On the other hand, manufacturing no longer drives the American economy, which means a contraction in the sector doesn’t guarantee a recession. The ISM index fell below 50 for several months in 2015 and 2016, for example, signaling an “industrial recession” that never turned into the real thing. But steep downturns in manufacturing tend to be signs of trouble — it is rare for the index to fall much below 45 or so without a recession hitting.
Right now, American manufacturers are being battered by a global slowdown and by trade tensions. As of June, the index is still in expansion territory, but barely. Many economists think it will fall below 50 in the coming months but don’t expect a steeper drop.
Related indicators: New orders for capital goods; regional manufacturing surveys from Federal Reserve banks; the employment and compensation components of the National Federation of Independent Business’s monthly survey.
Indicator 4: Consumer Sentiment
What to watch for: Declines of 15 percent or more over a year.
What its saying: Partly cloudy.
Discussion: Consumers drive the economy, now more than ever. It is pretty much impossible for the economy to keep growing if Americans decide to keep their wallets closed.
The trouble is, by the time spending slows, a recession is probably already underway. Measures of consumer confidence, such as the long-running indexes from the Conference Board and the University of Michigan, provide insight into how consumers will spend in the future.
Confidence indexes are volatile from month to month, and they sometimes drop sharply as consumers react (and overreact) to the stock market, political developments and other events. Those declines often don’t translate into real changes in spending.
But sustained declines are another matter. Economists at Morgan Stanley recently found that a 15 percent year-over-year drop in the Conference Board’s index is a reliable predictor of a recession.
By that metric, the economy isn’t in trouble. Consumer confidence is basically flat compared to a year ago, but it has fallen since late last year.
Related indicators: Retail sales; average hourly earnings; real personal income.
Indicator 5: Choose Your Favorite
O.K., this is cheating. But no single indicator can tell the whole story of the $20 trillion United States economy, and the measures that performed well in the past might not do so in the future. So it pays to keep an eye on a variety of data sources.
The indicators above are among the most common inputs into the formal models that economists use to forecast recessions. But many economists have a favorite indicator (or maybe a couple) that they also watch as a gut check.
- Temporary staffing levels: Temp workers are, by definition, flexible — companies hire them when they need help quickly and get rid of them when demand dries up. That makes them a good measure of business sentiment. As of June, temp staffing is near a record high, but it has pretty much stopped growing.
- The quits rate: When workers are confident in the economy, they are more likely to quit voluntarily. The quits rate, a favorite indicator of Janet Yellen, the former Fed chair, bottomed out shortly after the Great Recession ended and rose steadily until leveling off in the middle of last year.
- Residential building permits: The housing market has frequently led the economy both into and out of recessions. That has made building permits — which are generally issued several weeks before construction begins — one of the best historical indicators of economic activity. But construction has lagged since the last recession, and housing makes up a smaller share of the economy than in the past, so permits may not be as meaningful now.
- Auto sales: After houses, cars are the most expensive thing most families buy. And while owning a car is effectively required in large parts of the country, buying a new one almost never is. So when new car sales are strong, it’s a sign consumers are feeling good. Retail car sales have typically peaked before recessions, then dropped sharply once one began. So it isn’t a great sign that sales are falling.
Ben Casselman writes about economics, with a particular focus on stories involving data. He previously reported for FiveThirtyEight and The Wall Street Journal. @bencasselman • Facebook
A version of this article appears in print on July 29, 2019, Section B, Page 1 of the New York edition with the headline: A Recession Is Coming (Eventually). Here’s Where You’ll See It First.. Order Reprints | Today’s Paper | Subscribe
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Why everybody’s worried about a recession again
Is a recession coming in 2019? Perhaps.
By Emily Stewart Aug 15, 2019, 11:20am EDT
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The seemingly sudden onslaught of recession alarm bells in the United States and around the globe lately might make it easy to panic — but try not to.
Economists, investors, and market observers have started to sound a little extra gloomy when it comes to their economic predictions in recent days. Bank of America and Goldman Sachs have warned of a rising risk of recession, and the infamous yield curve (more on that later) is signaling things might soon get dark. The Dow Jones Industrial Average fell by 800 points on Wednesday, marking its worst day of 2019 and prompting CNBC to declare, in an ominously red graphic, “markets in turmoil.”
The US economy is in the midst of its longest expansion ever, so why the sudden worry about a recession?
The Great Recession continues to loom large in people’s minds, and millennials who entered the working world in its aftermath still fall behind Gen Xers and baby boomers in terms of homeownership and having children. It makes fears of a recession easy to stir up, especially when there are a few signs of contraction.
The good news is that just because it’s been a while since we’ve had a recession doesn’t mean the US economy is about to take an enormous dive. An old adage among economists is that expansions don’t die of old age; something has to happen to cause them.
And even though certain factors signal a recession might be coming, that doesn’t mean it’s a foregone conclusion — the stock market got extra rocky at the end of 2018, partly because of fears of a recession, and here we are more than six months later and it hasn’t happened yet.
While recessions certainly aren’t great, they’re not usually as bad as the last one. Prior to the recession that started in late 2007, the previous one was in 2001. It lasted for eight months and was so mild that we didn’t know that it was happening until it was basically over.
More on what recessions are, why there’s worry about one now, and what you can do about it (not much, but maybe stay away from your 401(k) for a second), below.
Recessions, briefly explained
A recession essentially means that the economy, instead of growing, gets smaller. Vox explained the more formal definition of it earlier this year:
There are some more specific parameters out there. Some define recessions as two consecutive quarters of negative GDP growth. The National Bureau of Economic Research has a broader definition and defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
The manufacturing sector, which declined for two straight quarters this year, is currently, technically, in a recession.The US economy has seen dozens of cycles of expansions and recessions throughout history — in fact, they used to happen a lot more often, but in the late 20th century they slowed down as periods of growth grew longer. The reason is that “we’re much less of an industrial economy,” Richard Sylla, professor emeritus of economics at New York University, told me earlier this year.
Since about the 1980s, with the exception of the Great Recession, business cycle fluctuations have been a lot less volatile. The ups haven’t been as up, and the downs haven’t been as down. It’s generally been referred to as the Great Moderation. That means recessions aren’t as drastic, but periods of growth that make up for them aren’t as great, either.
Why people are more nervous about a recession now
Recessions don’t just pop up out of thin air — something has to cause one. And right now, there are a handful of factors experts say could do it.
One big issue: President Donald Trump’s trade war with China. Tensions between the US and China have been escalating, and a resolution is looking increasingly unlikely in the near term. At the start of the month, Trump announced he would put a 10 percent tariff on $300 billion of Chinese goods, and China retaliated by stopping buying agricultural goods from the US and allowing its currency to weaken. Amid market turmoil this week, the Trump administration said it would delay its latest round of tariffs from their September 1 start date to December 15, but China shrugged it off.
Goldman Sachs analysts said in a note to clients over the weekend that they “no longer expect a trade deal before the 2020 election” and increased their estimates for how much they think the trade war will affect the economy.
Economists and investors also worry that business investment is slowing — despite the tax cuts that were supposed to juice it — and that the Federal Reserve, which just cut interest rates in July, won’t do it again. The German economy is also showing signs of slowing. Sen. Elizabeth Warren (D-MA) in July warned that she sees “serious warning signs” of an economic crash, including ballooning household debt and potential shocks to the system, such as the debt ceiling and Brexit.
And then there is the “yield curve,” a wonky concept that is often taken as a signal of what’s to come. As Robert Samuelson recently explained at the Washington Post, the yield curve refers to the relationship between short-term and long-term interest rates, generally on Treasury notes. Normally, long-term interest rates are higher than short-term rates because it’s riskier for investors to lend money for longer periods of time. When short-term rates get higher than long-term rates, the yield curve becomes “inverted,” and that’s often a bad indicator. Every US recession for the past 60 years was preceded by an inverted yield curve.
This week, the yield curve inverted.
Vox’s Matt Yglesias explained what it means and why it potentially matters but why it’s not a sign of imminent doom, either:
But while the empirical link between past inversion events and recessions is real, it’s also clear if you look at the chart that there’s a time lag involved. That means there’s nothing automatic about this process. And while the theoretical link between recessions and inversions is real, there are also other sets of future financial situations — like a sudden spike in the value of the dollar — that could produce the same result.
Former Fed Chair Janet Yellen, in an appearance on Fox Business Network on Wednesday, urged caution around the yield curve hullabaloo. “Historically, it’s been a pretty good signal of recession, and I think that’s why the markets pay attention to it, but I would really urge that on this occasion it may be a less good signal,” she said. “And the reason for that is that there are a number of factors other than the market’s expectations about the future path of interest rates that are pushing down long-term yields.”What you can do (spoiler: not much)
There’s not a whole lot you, personally, can do to prevent a recession, or to prepare for one. Obviously, it’s always good to save and have a rainy day fund in case of emergencies. But that’s not easy for everyone — only 40 percent of Americans have enough savings to cover a $1,000 unexpected expense, according to the personal finance website Bankrate.
Part of the issue with economic and market downturns is that the panic around them can result in self-fulfilling prophecies. People worry something bad is about to happen, so consumers stop spending, investors pull their money out of the markets, or businesses don’t make the investments they were going to, and then that makes things worse.
And if and when the recession hits, a lot of people stick in a holding pattern. They get nervous to change jobs and put off making big life decisions, such as buying a home.
If you do invest in the stock market, now might not be the time to panic and sell everything, and beware that trying to play the market is always tricky. As Yglesias put it:
I promise you that sophisticated money managers with access to large pools of cash and ultra-fast algorithms understand this better than either you or I do and have already assimilated this information and made trades based on sophisticated models. The prices of stocks and whatever else may or may not be in your 401(k) have already adjusted in response to those trades.
It is, of course, very possible that the smartest, richest people on Wall Street are nevertheless getting this wrong and prices will fall further in the future. But the odds are that you, reading Vox explainers on your phone, are not going to beat the professionals.
The bad news is that recessions are pretty inevitable, meaning sooner or later, one will land. The good news is that the economy eventually recovers. The same goes for the stock market. (Honestly, stock market dips are often a good time to buy.)It is, of course, very possible that the smartest, richest people on Wall Street are nevertheless getting this wrong and prices will fall further in the future. But the odds are that you, reading Vox explainers on your phone, are not going to beat the professionals.
One person who’s rooting against a recession: Trump, who has tethered his success in office to the economy and the stock market. But if one does come, he already has a plan for whom to blame — the Fed. And, basically, anyone but himself.
