Joe Wiesenthal of Bloomberg News recently compiled a list of prognostications warning that a recession was around the corner in 2020. This kind of negative market consensus on the timing of a downturn is pretty rare. While universal optimism, especially in a strong market, is pretty common, this kind of widespread fear is unusual, and it deserves close scrutiny.
Some of the fear is political in nature. Ben Bernanke, for instance, warned that Trump’s pro-cyclical stimulus is ill timed and could result in a blow up in 2020. Ray Dalio, the founder of the immensely successful hedge fund Bridgewater Associates, has said pretty much the same thing, saying the tax effects’ short-term boost will result in longer-term pain.
Other fears are more technical in nature, such as JPMorgan’s warning that a variety of economic and financial dynamics point to a slowdown in 2020. Moody’s Analytics has a similar model in place.
Are these fears worth taking seriously?
On the one hand, any prognostication should be taken on the merits of its methodology, its model, and the value of the data inputs it uses. The fact that different similar predictions happen at the same time should not, at least in theory, be used to attack the value of a model’s prediction.
On the other hand, the coincidence of these prognostications is not too surprising. Currently, this post-recession economic expansion is the second-longest in history, at 108 months versus the 120 month expansion from 1991 to 2001. The fact that that expansion ended so traumatically (and several analysts make a strong case that the 2008-2009 collapse is really a result of the 2001-2002 dot-com crash) is enough to encourage pessimism.
If anything, the prevalence of these fears right now is enough to encourage analysts to shift a bit of analytical energy away from the micro to the macro. The micro is doing fine at the moment: corporate profits rose 25% in the second quarter, the strongest quarter in recorded history. Likewise, consumer spending and wage growth is strong enough that that part of the economy can mostly be accepted as an entrenched tailwind.
And that leaves us with concerns that Wall Street is highlighting in its increasingly cautionary notes: rising interest rates on corporate debt, an inverted yield curve, and the lack of room for fiscal stimulus if a private-sector downturn begins. Since these are all serious issues, they should be probed comprehensively and objectively, without the panic that recent reports would encourage.