The Big Short

Are You Prepared for the 2019 Recession?: A Status Check on Five Key Early Warning Signs

There have been 47 recessions in US history and the next one is surely around the corner. On average they come every four years but, since the 1980’s the expansions have steadily grown in duration and we are currently 9 years into the most recent expansion making it the 2nd longest expansion in US history.

In this article, I set out to discover common recession warning signs and asses where we currently stand on those signs. I wanted to see and touch the data myself.

LIST OF MODERN US RECESSIONS:

List of Modern US Recessions

List of Modern US Recessions http://awealthofcommonsense.com/2017/10/predicting-the-next-recession/

What Causes Recessions?

Recessions are defined by a more than two quarter (6 month) decline in the Gross Domestic Product. The Gross Domestic Product is made up of several factors with the most important being Consumer Spending (approx. 70%).

Causes of Recessions

Causes of Recessions

Recessions occur when consumers slow their spending. This often occurs as interest rates are increased, as asset prices drop (stocks, housing…), if there are shocks in oil prices or if consumer confidence falls. Think about it, if you are worried about your future, you are much less likely to buy a new car or go on a fancy vacation.

5 Common Sense Early Warning Signs of a Recession:

Note that my contribution here is analyzing these signs with current data and my perspective. I pulled these signs and ideas from several articles on the topic.

1. The Word on the Street

Warning Sign Explanation:

The earliest warning signs you will see are in your own business and amongst your peers. Are you having a tough quarter or year? Are you hearing the same from your friends and colleagues? This is certainly a warning sign.

Our Analysis:

Businesses are doing well but many property investors are starting to be more cautious in their purchases. They recognize that the economy is doing well but also think that we are near the top of the property cycle and they do not want to get left holding the bag. Cap Rates on shopping centers have increased to compensate for risk with higher interest rates, worry about a downturn in the property cycle and a feeling of risk in the category as online retailing continues to grow.

2. If the unemployment rate rises a few months in a row.

Warning Sign Explanation: 

The unemployment rate closely follows recessions.  If the unemployment rate rises for a few months in a row, it is a warning sign.

Our Analysis: 

The chart below shows a clear and continued decrease in the unemployment rate over the last six months.  We are effectively at full employment.  We are at the lowest rate of unemployment since February of 2001.  The concern is that this not likely to go lower, it is a sign that we are nearing a time when this number will increase.

Civilian Unemployment Rate

Civilian Unemployment Rate

3. Jobs report—Are new jobs being created

Warning Sign Explanation:

If jobs numbers decline for a few months in a row, that is a warning sign that recession is coming.

Our Analysis:

This is not a point of current concern.  See the chart below, in February 2018, 313,000 new jobs were created and in January 2018 239,000 new jobs were created, according to the Bureau of Labor statistics.  These are among the highest numbers since the current expansion began.

jobs report

https://data.bls.gov/timeseries/CES0000000001?output_view=net_1mth

4.  Leasure companies having very weak guidance (carnival cruises, Wynn Resorts, Hawaiian Airlines).

Warning Sign Explanation:

When consumers are concerned about the future of their jobs or the economy, one of the first areas they cut back in is travel, vacations and leasure.

Our Analysis:

Leasure companies are having record years.  Recent headlines include “Carnival Corporation Reports Record First Quarter Earnings” and “Wynn Resorts Tops Q4 Earnings, Estimates.”  Hawaiian airlines has had similar results.  Just last week it raised its guidance based on better than anticipated performance.

5.  New Car Sales

Warning Sign Explanation:

Vehicles are the 1st or 2nd largest purchase that most people will ever make, after a home.  Concern over the economy causes people to delay vehicle purchases.  With this warning sign you are looking for Total Vehicle Sales to have at least a 10% drop over the previous year.

Our Analysis:

The chart below shows that auto sales are doing very well.  In August of last year they were down 10% over the previous year but then they picked up again and have done very well in the beginning of 2018.

Total Vehicle Sales

Total Vehicle Sales

Predicting the next recession:

It is clear that the economy is at full steam right now.  We are fully recovered on unemployment and the GDP grew 2.3% in 2017.  The concern now is when will the music stop and how bad will it be.

So when will the next recession be and what will cause it?  Here are a couple likely scenarios:

Higher Interest Rates lead to recession in early 2020:  The Economist Magazine is forecasting that interest rates will be hiked three times this year and four times next year, leading to a technical recession in early 2020.

Geopolitical Crisis leads to Recession by End of 2019:

While this was a key cause of the Great Recession, a US News article from late 2017 points out that housing is rarely a cause of recession and will likely help the nation recover from our next recession.

“According to the third-quarter 2017 Zillow Home Price Expectations Survey released in August, there’s a 52 percent chance the next recession will start by the end of 2019, based on responses from 100 economists, investment strategists and housing market analysts.

Sixty-seven percent of the experts surveyed point to a geopolitical crisis as the cause of recession, a far cry from the lax lending policies and financial liquidity issues that contributed to the Great Recession.

“If a recession is to occur, it is unlikely to be caused by housing-related activity, and therefore the housing sector should be one of the leading sources to come out of the recession,” says Mark Fleming, chief economist for title insurance company First American Financial Corporation.

Recessions are inevitable and they create opportunities and distress for investors in commercial real estate and commercial property managers.  Now is the time to being recession proofing your holdings.  In our next post, we will offer strategies on how to recession proof your commercial real estate portfolio.

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