Recession in 2019?

I’m really big on closure these days.  At the beginning of the year, we spoke about the prospect of a recession in 2018 with Tom Cunningham, Chief Economist at the Metro Atlanta Chamber of Commerce and a former economist at the Atlanta Fed.  It’s December and many, many people are asking the same question about 2019—including this week’s guest on CEO Exclusive, Doug Rieder, Chairman of Sterling Seacrest Partners, a risk management and insurance firm.  In this week’s article, we close the loop on 2018 and discuss the perennial question, “Are we heading into a recession?”

By all accounts, 2018 saw stellar economic performance in the macroeconomy—lots of growth, lots of jobs, modest inflation, decent consumer confidence.  But, we all know the party can’t last forever.  So, Doug has been looking very, very carefully at his portfolio of clients to see signs of weakness and whether the disco lights are going to flicker or get turned off in 2019.

I could make you read through the article to get the answer.  But, I won’t.  I’m fiercely protective of your time and attention so I’ll be nice and give you the punchline up front.  Drum roll…

Fundamentals don’t portend a recession, BUT there’s lots of risk associated with trade policy (that crazy tariff/trade war/arresting Chinese executives thing that’s happening).

Let’s Start With a Recap

RecapIn our interview, Tom made the following observation, which I believe is worth repeating: growth economies don’t die of old age. Unless something comes along to disrupt the expansion, there’s no reason why we can’t just keep growing. “Economic growth is sort of the natural course of the economy,” he said. “You add more people, you add more technology, you add knowledge, you add skills – growth over time is more or less inevitable.”

But, there’s always a catch. The fact that 70% of the US economy is personal consumption puts the US in a robust position for now, but other factors can come along to turn months of positives into a downward spiral. The biggest threats to the current economic climate are “policy shocks.” (You mean like tariffs that irritate our international trading partners?)  In previous recessions, these have typically been oil shocks.

Fundamentals Look Good

With growth as the natural course, the fundamentals indicate more of the same.  Fundamentals looked good for 2018; they look good for 2019.  Doug discusses his client portfolio which is fundamentals primarily in construction: “We don’t see 2019 being a significant downturn. For example, the construction projects have a life cycle, from start to finish, from concept to completion is a long time…and backlogs are at historic highs. Which means that 2019 is not going to be a problem.”

Doug explains that in the construction industry, projects take from 6 to 18 months to complete.  So, even if business dries up completely tomorrow, there’s still plenty of momentum to carry them through the year. “We can coast for a second, and the current work will carry our clientele through 2019. By and large, our point of view is that ‘19 is going to be strong… Any slowdown that we see is out probably further than that.”

Labor markets also point to a strong economy.  The are a record number of job openings, 7.1 million, as of the October Bureau of Labor Statistics (BLS) report.  Over the summer, we crossed the point where there are more jobs than jobseekers in the US.  As of June 2018, “There are more jobs than people out of work, something the American economy has never experienced before,” CNBC news reports on their website, based on BLS statistics.

People with jobs have money to spend.  Our economy is driven by consumer spending.  So, with lots of business for business owners and the average worker with money in her pocket, we can ride the wave for a few more months.  Things are looking pretty good for 2019.

Pay Attention to Tariffs and the Trade War

tariffsWhen the next recession will hit comes down to how much momentum is in that wave and whether anything comes along to block it.  According to the Duke University/CFO Global Business Outlook that came out yesterday, about half the CFOs in the country think that we will be in a recession by the end of this year and 82% think we will be in a recession by the end of 2020.  This runs contrary to most economist’s conclusions. As quoted from CNN business, Ameriprise chief economist Russell Price says, “I’m not worried about a recession in 2019 unless it comes about due to a man-made situation.”

This economist echoes what Tom told us at the beginning of the year—recessions are driven by shocks.  So, what kind of a “man-made situation” could cause a recession in 2019?  Economist Russ Roberts, the John and Jean De Nault Research Fellow at Stanford’s Hoover Institution asserts, “If the trade war between the U.S. and China and the U.S. and Europe intensifies, it can lead to a recession.”

In his article on the Stanford website, he moves on to give a really clear explanation of why: “It will cause consumers in the U.S. to cut back on purchases of the now more expensive domestically produced goods. The U.S. producers of those goods will expand their workforces and purchases of raw materials, but other U.S. producers will find less demand for their products from foreign buyers as well as U.S. consumers who are now poorer due to the imposition of tariffs. Those producers will lay off workers and buy fewer raw materials. The adjustment to this new pattern of demand will not be instantaneous and will be painful and costly to the workers thrown out of work.”

People without jobs don’t have money to spend.  Our economy is driven by consumer spending.  If trade war worries infest consumer confidence or starts to throw the labor markets off kilter, people will spend less.  The momentum will go out of our lovely economic growth, and our ten-year party will be over.  Will this happen in the next 12 months?  Who knows?  We all just have to pay attention to economic policy, consumer confidence, and the labor markets.

For companies in the mid-market, there’s also the argument that you make your own economy.  According to the World Bank, US GDP was $19.39 trillion 2017.   The average mid-market company isn’t even a spec in the midst of all that activity.   There’s plenty of business to be had.  So, your organization’s performance is much more a function of your leadership and sales efforts than the vagaries of Washington decision making.   As always, your future is in your hands.

By | 2018-12-13T11:47:14-04:00 December 13th, 2018|0 Comments

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