Things seem to be going pretty well for the U.S. economy at the moment. Real gross domestic product increased by 3.2 percent in the first quarter of 2019 and unemployment is hovering around a historically low 3.8 percent.
Not only does the economy show signs of good health, but the public is more optimistic about it than ever. The American Institute of CPAs reported last week that Americans’ personal financial satisfaction soared to a record high in the first quarter of 2019.
With all the optimism surrounding the economy right now, it may seem like a buzzkill to talk about a possible recession. However, 77% of economists expect one to hit by the end of 2021. With this in mind, let’s talk about the possibility of a recession occurring.
Does a recession loom?
There are a few indicators that a recession is imminent, with perhaps the most disconcerting evidence arising in March when the three-month Treasury bill paid higher interest than the 10-year note (referred to as an inverted yield curve) for five days. This results from investors buying up long-term Treasury bonds to hedge against low-interest rates and stock returns in the future. The high demand for the long-term bonds make their “price” go up, and their future payouts drop to below short-term bonds. In this way it’s often an indicator that a recession is just around the corner.
Some potential causes of a future recession include subprime auto lending and student loan debt. With 22 percent of auto loans qualifying as subprime and millions of Americans struggling to pay back their loans, many analysts (remembering the subprime loans at the root of the last recession) are worried about the record $222.8 billion in auto loan asset-backed securities on Wall Street. Similarly, with $1.47 trillion in student loan debt, 44.7 million Americans owe more for their educations than for credit cards or car loans. Over 10 percent of those who started repayment in 2015 defaulted (when the total student loan debt was significantly lower).
A recession is not an immediate certainty
However, other experts argue that our economic recovery from the last recession has been relatively slow and our growth is more “normalized” compared to the ‘80s and ‘90s. Because of this, they caution that indicators of bull markets don’t necessarily mean a recession is imminent in this day and age. For example, while the inverted yield curve has happened before each of the past nine recessions, it has also led to false alarms in the past so it’s not a fool-proof sign of a recession. Also, the Federal Reserve has slowed its rate-hike schedule, giving the economy some relief. Finally, less hawkish trade discussions between the U.S., China, and Europe mean there’s reason to be more optimistic about trade.
Be ready
While there’s no way of knowing if a recession will happen next month or even next year, we do know the market will not go up forever. That’s why it’s important stay prepared and have a plan in place. That means always considering the big picture and not trying too hard to time the markets. Diversifying your assets is the first step to making sure you don’t have too many eggs in the basket that falls.
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http://fortune.com/longform/next-recession-by-the-numbers/
https://www.nbcnews.com/news/us-news/student-loan-statistics-2019-n997836
