An Eye Out for the Next Recession

We often hear that the U.S. economy’s expansion is now one of the longest on record, though probably not one of the most vigorous.  Does that mean that a recession is just around the corner?

The economics team at Guggenheim Investments recently updated their Recession Dashboard, which now projects February 2020 as the likeliest time frame for the economy to turn down.  That may be pretty close to the current consensus among economists, and it sounds like a comforting stretch of remaining runway for an expansion that dates back to early 2009.

Then again, that’s merely the mid-point of a date range that says an economic pullback could start as early as the latter part of 2019.  We rarely know when a recession has started until well after the fact.

Leading suspects that could conspire to trip up the economy include an overheating labor market, tighter monetary policy, and a flattening yield curve.  None of these developments is pre-ordained, but the unemployment rate has declined to an 18-year low, and many businesses report difficulty finding qualified candidates to fill positions.

Indications are that the Federal Reserve will continue to raise the floor under interest rates, and new mortgages are reflecting that.  It also looks like the bond market will have to digest a little richer diet of federal debt in the coming months.

On the other hand (recalling Harry Truman’s plea for a “one-handed economist”), the jobs report for May produced a robust headline number – 223,000 net jobs added – and also showed a continuing uptick in the percentage of working age Americans participating in the labor force.  For much of the past decade a relatively weak participation rate and an aging demographic profile have been cited as limiting factors for the U.S. economy’s potential growth rate.

As for concerns over more federal borrowing, there is a flipside.  The tax reform package and recent budget deal are expected to provide economic stimulus, at least in the near term.  Whether they turn out to be the right mix longer term – i.e., supportive of economic growth and sustainable both fiscally and politically – is always an open question.  The phrase “permanent tax cuts” is clearly an oxymoron.

There’s an old adage that the stock market has predicted eight of the last three recessions, or something like that.  Whether any given group of economists can claim a better record is questionable.  Cautious investors might consider upgrading the quality of their portfolio holdings and reviewing their diversification, given our perpetually cloudy view of future events.

 

Dean Eisenbraun, Financial Advisor
Lion Financial Advisors


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