Economists are sounding the alarm for a recession, potentially happening by 2020. Possible reasons for the economic recession range from a slowdown in financial and business activities to the mounting trade war to a sluggish overall global economy. However, despite these causes, a descent into a full-blown economic recession may be overstated doom and gloom. While it is good to use a fair amount of caution, a closer look at the indicators shows that there are reasons to remain calm and optimistic. In other words (and to quote the groundbreaking ’90s rap group Public Enemy), don’t believe the hype.
In Detail: A Cycle of Expansion and Contraction and Other Indicators of Economic Recession
The US economy is in the midst of the longest period of economic expansion in history. Observers fear that an imminent economic recession may be brewing after the last economic recession a decade ago.
Recently, the U.S. Treasury Market have been experiencing inverted yield curves. Ideally, long-term bonds carry higher interest rates than short-term bonds. To illustrate, investing in a 10-year bond should pay higher returns than a 2-year bond. However, when short-term bonds deliver higher returns than long-term bonds, the yield curve inverts. For financial experts, an inverted yield curve is an ominous sign. More often, when the inverted yield curve phenomenon occurs, markets start bracing for the end of an economic cycle.
Along with an inverted yield curve, observers look for other warning signs of possible economic recession. A sluggish US manufacturing growth was noticed towards the last quarter of 2018. It is a record low not seen since September 2009. The Purchase Manager’s Index was at 49.9 in August – registering below the threshold of 50.0. Moreover, shipment index, copper prices, and business spending have also been showing signs of protracted movement.
Grounded Optimism: Reasons for Economic Recession Not Occurring
A sluggish economic growth does not always precede an economic recession, and there are a number of reasons why this is so. Slow growth in certain areas of the economy does not necessarily translate to a full-scale economic recession. While it is true that the manufacturing economy is in a slump, the sector only accounts for 11% of the US economic growth. On the other hand, consumer spending which makes up 70% of the growth in the country, is the main driver of economic expansion. The great news is consumer spending is not showing signs of slowing down. Therefore, even if business spending is low, as long as American consumers are buying and spending, expansion is seen to continuously prevail.
Historically, the inverted yield curve has been an accurate of predictor of economic downturn. However, for this occasion, the yield curve is a less good signal of economic recession. In the past, when investors think that economy is slowing down, they place their investments on long-term bonds and avoid risky short term investments. As the demand for long-term bonds increases, the return or yield decreases. Thus, economists closely monitor yield curve inversion.
But the advent of globalization, digitalization, and technology has caused a tectonic shift in the economy. There is a need to factor in the influence of government central banks in the movement of interest rates. These influences make the occurrence of inversion a less good indicator of economic health and certainly not a precise marker for economic recession.
A Word of Caution: Talks of Economic Recession and its Self-fulfilling Prophecy
Economic recession is a period of weak revenue flow, weak cash flow, and declining assets. Thus, apprehensions concerning the economic recession are okay. However, when caution becomes panic, talks of economic recession becomes one of the reasons for economic recession. The growing interest in the recession turns into a self-fulfilling prophecy.
The economy is a result of the collective decision of individuals. If enough people fear recession – the decrease in expenditure and putting off financial decisions – will eventually have an economic impact. As economies go through a cycle of periodic expansion and contraction, an economic slowdown is deemed unavoidable. For as long as businesses and consumers remain calm and optimistic, the economy will be able to bounce back.