Monday, April 29, 2019

No Recession...Yet?

There’s a biblical saying that building your house on rock is better than building it on sand. It’s meant to have you check your beliefs for soundness and reliability. We’ve all probably built sand castles on the beach out of reach of the current wave action, only to watch the tide increase and the waves wash those things we carefully built away. If we think the tide’s not going to rise ever, we are fooling ourselves. When is the economic tide of recession coming?

Many economists are saying a recession is not coming...yet. This is based on current economic indicators. However, using an example from N.N. Taleb’s The Black Swan, is this a lot like the analogous turkey on an American farm on November 15 thinking life is just going to continue as it always has...not realizing that Thanksgiving Day is within the next two weeks and that life as it knows it is going to ‘change’? America, since the Great Recession of 2008, has had 10 years of continuing economic growth. The current President has promised more of the same. Our sand castle is currently out of reach of the waves.

But will it continue? Are there signs that the tide is coming in?

Consumer expenditures on durable goods has decreased; 3 of the 4 categories show reduction. Half of the non durable good sectors show a drop as well. Residential investments has decreased continuously for the last year. Exports were about the same as a year ago just before the tariffs hit. (One of the reasons exports were strong in 2018 was because of an exceptional loading in 2nd quarter as tariffs were announced and put in place; likewise imports were also exceptionally strong one quarter later.) Commercial real estate investment has decreased for the past 4 quarters. Capital equipment investments have been softening for the last 2 years; companies are not spending their increased profits on expansion.

Agriculture is being hit, buoyed a bit by government assistance in response to China’s closing markets for many cattle and crops. Construction is down the last 3 quarters ( though not as deep as the 3 consecutive quarters in 2015). Motor vehicles had their biggest drop in 4 years on top of an atypical 3rd quarter slump. Job postings are greater than the number of unemployed, meaning this will hinder business growth and survival rates. Only 22 states had year-over-year nonfarm employment growth, which means a majority of states did not (28, of course).

Stock market investments in technology companies are made 84% of the time in unprofitable companies—a level not seen since the dot-com bubble popped when 86% of the companies didn’t make a profit. If people’s market value crashes, how will they retrench? And more worrying, it’s not just individuals who will reduce their spending because they think they need to save more since the market’s doing worse...pension funds and other institutional investors can’t provide a solid monetary foundation for their clients. University endowments shrink, tuition goes up and student debt climbs past its record-setting trillion dollar level...maybe affecting a generation or more opportunity for post-secondary education.

Just as its foolish to think that a policy or procedural change in one part of a business won’t affect another—optimization in one area might actually create inefficiencies in another—economic changes in one sector affect the others positively and negatively. It seems there are more ripples beginning in the recession pond than in the boom pond. When ripples ‘here’ join ripples ‘over there’ then the real waves start and pretty soon your sand castle is being washed out to sea.

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