Question isn’t if there will be a recession, it’s when. President Donald Trump hopes it won’t happen before the next election and I hope WVU wins the Big 12. Looking doubtful for both of us. For him it’s because the economy depends more on how we think things are going to be rather than the way they are. For me, well, I’ve been a Mountaineer fan too long. Nonetheless, let’s focus on the recession. Here are my thoughts.
The gross domestic product is like total sales. It’s the value of all goods and services produced by all businesses located in the United States.
A recession is commonly defined as sales being down two consecutive quarters. In July, we learned that U.S. GDP increased at the annualized rate of 2.1 percent in the second quarter, down from the first quarter’s 3.1 percent annualized growth.
There have been 11 recessions since World War II. On average, they lasted 11.1 months, according to the National Bureau of Economic Research. The shortest was six months (1980) and is often counted with the 1981-82 recession, while the longest lasted 18 months (2007-09). The economy typically shrinks about 1.4 percent, on average, over two quarters before growth resumes.
What’s the impact? To most of us, it’s unemployment. Since World War II, unemployment peaked twice during recessions at 10.8 percent (November 1982) and 10.0 percent (October 2009). However, most recessions have had a lesser effect on unemployment, such as 6.3 percent in June 2003 and 7.8 percent in June 1992, although that’s still almost double last month’s 3.7 percent unemployment rate.
What causes a recession? Different recessions are blamed on different causes, but reduced consumer confidence always is a factor. A well-paid coal miner concerned with whether the company will be in business next year might avoid major purchases. If enough of us think that way, then the GDP goes down because we stop buying.
One financial measure of this pessimism is when the bond yield curve inverts. That’s comparing the amount of interest the Treasury must pay to attract long-term loans (10-year Treasury notes) versus short-term (three-month Treasury bills).
In optimistic times, consumers know they can pay 5 percent now (short-term) and think they can afford to pay more on a longer-term loan because they’ll be making more money in the future. So, the Treasury must pay more interest long-term to attract investors.
In pessimistic times, consumers still may be willing to pay 5 percent short-term, but will avoid long-term obligations because they’re unsure of the long-term. That allows the Treasury to reduce the interest they pay to attract enough long-term investors, sometimes to less than what they pay for short-term money.
And that’s a yield curve inversion. It’s happened before every recession since 1955, although it sometimes happens months or years before. And it happened again last week.
But that’s just one factor.
The second-quarter GDP contracted in the United Kingdom and markets are jittery because a bad Brexit breakup could depress the third quarter, throwing them into recession.
In Italy, “An economy that has not expanded over the past decade stagnated between April and June ... while investment diminished,” reported The New York Times.
Germany’s second-quarter GDP shrank, compared with the previous quarter, and has been flat for a year.
Mexico narrowly escaped a recession with minimal second-quarter growth, but weaknesses persist.
Brazil’s economy decreased in the first quarter and China’s massive economy ($12.24 trillion vs. U.S. $19.39 trillion) grew at its slowest pace (6.2 percent) since 1992 as the country wages a trade war started by Trump.
Finally, the International Monetary Fund cut its 2019 global growth forecast to 3.2 percent, citing the U.S.-China trade war, other U.S. threats of sanctions on other countries and Brexit-related uncertainties.
So, when will we see a recession? No one knows for sure, but I bet it will be before WVU wins the Big 12 football championship.