Uncertainty Creates a Greater Risk of Recession

Originally published in Utah Business.

Uncertainty. It’s something economists think about a lot. And for good reason―economies rise and fall based on the confidence of consumers and producers.

I recently read an economic summary distributed by an investment banking firm that quoted analyst Nancy A. Bush. She said: “The watchword at present is “uncertainty”–uncertainty about trade, uncertainty about the strength of economic growth, uncertainty about the start date of the next recession, and political uncertainty galore.”

Uncertainty amplifies when economic conditions begin to slow, and when global and national economic conditions appear to be decelerating. With this slowing comes a “piling on” effect as housing and labor imbalances, Federal Reserve Board rate reductions, an inverted yield curve, stock market volatility, rising inventory-to-sales ratios, and falling business sentiment impact economic performance. 

I think we are getting to the point now where we can ask the question: Is the risk of a US recession in the next 12 months getting uncomfortably high?

Sure, there are still many positives: Consumers continue to be buoyant and low gas prices, housing price appreciation, rising wages, regulatory reforms, federal tax reductions, and an accommodating Federal Reserve policy stance make it so. In Utah, multi-family vacancies remain low; absorption and rents remain high. Utah’s tech sector is growing at more than three times the national average, and unemployment rates throughout the state remain below three percent.

But the line between economic optimism and pessimism can be thin, as confidence changes like lightning. When economic actors experience a collective loss of faith in the economy’s future, they enter their economic bunkers to shelter from the approaching storm. A downturn becomes a self-fulfilling prophecy.

In the months leading up to the Great Recession, Utah’s economy was riding high and I was on the leadership team of Utah’s largest business association. The prior year’s job growth reached nearly five percent. We may not have felt invincible, but we felt strong. 

We had a retreat in July 2007 with our Board of Governors, a group of 100 of Utah’s most prominent business leaders. The mood was jubilant. We even passed out tee-shirts to the business leaders with a raging bull on front. On the shirts, we printed the phrase: “Bull on Business!”

And then… a few short months later that bull didn’t ride anymore. He bucked us off to the ground and left the arena, leaving behind a finanical crisis. By December 2007, we were in a full-blown recession. The US real estate market collapsed as sub-prime loans and over-inflated assets brought down the likes of the Lehman Brothers and ultimately led to the loss of 100,000 jobs throughout the state of Utah. It was, by far, the worst economic downturn since the Great Depression.

Nobody is talking about anything that draconian right now, especially in Utah. But I agree with economic forecasting firms like Moody’s Analytics. We are clearly in the late stages of this expansion. Instead of a single event hoisting the US economy into recession, or even a modest downturn, it will likely be a combination of factors. A no-deal Brexit and an escalation in US-China trade tensions occurring at the same time could be the perfect storm. Other risks include student loans, a currency war, corporate debt, federal debt, a Federal Reserve policy error, a stock market correction, an oil price shock, or any number of other factors.

I’m familiar with the jokes about economists and their inaccuracies. They say economists have predicted 12 of the last three recessions, maybe so. But I encourage business and community leaders to stay in a “stop, look and listen” posture. The old adage that it is better to arrive two hours early to the airport than ten minutes late applies here. 

I encourage people to keep an eye out for imbalances such as overbuilt real estate markets, inventory corrections, highly leveraged loans, and overvalued asset prices. Keep an eye on the mayhem in Washington, DC, particularly over trade policies. And, most of all, keep a pulse on consumer sentiment. As long as consumers keep spending, the expansion will continue. When consumers lose faith, the slowdown begins.

Uncertainty is the watchword. The economy has entered its last phase of expansion. The next phase may be a period of slower growth, or rather a genuine recession. In either case, it is uncertainty and a lack of confidence that will lead the way.