Warning Signs of a Looming Recession

The Great Recession of 2007 to 2009 was the worst financial crisis in the United States since the Great Depression of the 1930s. Still fresh in our memories are the collapse of the housing market, major banks on the brink of failure, steep stock market losses, withered up retirement portfolios and double-digit unemployment. While the economy has regained full strength since the last recession ended in 2009, no one expects those gains to last forever. In fact a flip on the U.S. treasury bond yield curve (which you'll learn about on the next page) caused a huge drop in the stock market on August 14, 2019. The past 50 years have taught us that every heady economic high must have a soul-searching low. Nearly 10 years into steady economic growth, economists and investors are anxiously looking for signs that the party will soon be over. The global economy is heading again into recession. At least that is the fear after months of warning signs from the engine of global trade, which has spluttered this year. Here we examine some clues that the trend, after 10 years of expansion, could be backwards. Welcome to The Atlantis Report . Chances are that if you invested at any point during the Great Recession, you're sitting pretty right now, assuming you've held onto your positions. The U.S. economy is in the middle of its second-longest economic expansion in history, going back 161 years. And since the market bottomed out in March 2009, investors have witnessed all three major stock indexes at least quadruple in value at one point. It's been a truly unique ride – and chances are it's going to come to an end sooner rather than later. To be perfectly clear, trying to predict when recessions will occur is pure guesswork. Top market analysts have called for pullbacks in the market, unsuccessfully, in pretty much every year since the Great Recession ended. But the economic cycle doesn't lie: recessions are inevitable. Here are some signs of a looming recession : 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. 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 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. Another major number that could point to an imminent recession is unemployment. And counterintuitively, it’s a low rate of unemployment that often signals a slowdown. Recently, unemployment dropped to 3.7 percent ― a nearly 50-year low. Wages are also growing at the fastest rate since 2009. According to Forbes, strong job market statistics like these indicate that we’re reaching the end of the latest economic cycle rather than the beginning. In fact, an unemployment rate below 4 percent ― which is quite rare ― has often immediately proceeded past recessions. Recessions are a normal part of the economic cycle. While it’s not a very technical indicator, a long run of economic expansion can tell us something, too. We haven’t had a recession or bear market since 2008-2009. The economy has been expanding (albeit slowly) since then. So have the stock markets. For these reasons, we might actually be overdue for slowing economic growth, if not a recession.







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