Recession patterns show that the market will hit a trough, but rest assured that it will recover and peak another year. (Tracy O/Flickr Creative Commons)
On October 26, 2018, third quarter economic results were strong, albeit that some major indexes slowed. Gross Domestic Product (GDP) shrank from 4.2 percent the previous quarter to 3.5 percent, but overall 2018 GDP growth superseded the average post-Recession recovery rate of 2 percent. Some believe that this slowdown signals the beginning of the next recession, especially since the U.S. is at the end of the business cycle. The business cycle is a phenomenon that, regardless of major, all students should be aware of. It is a historical recurrence in which recessions (contractions) begin at economic peaks and end in troughs (nadirs). Following is recovery (expansion) until the next peak, after which the cycle repeats. We are in recovery and reaching peak, and as indexes begin slowing, it begs the question, when and how will the next recession occur?
One theory is international trade decline. This year, President Trump imposed $250 billion in tariffs on Chinese imports and plans to continue protectionist trade policies. This has incited threats of levies as well as other regulatory fees from Canada, the European Union and Mexico. Recent tariff wars have increased expenses for businesses, particularly in billions to farmers. Thereby, the potential for trade wars and dampened globalization that could incite a peak is at its highest since 2008.
Another theory is corporate debt. Non-financial corporate debt is at a historic high compared to economic output, and credit spreads (the difference between short- and long-term treasury yields) are slimming, which typically signals recessions. This is what people are referring to by “the yield curves are inverting.” Much of this company leverage or debt consists of subprime (junk) loans. Similarly, the 2008 Recession was the result of subprime loans that allowed risky clients to buy housing and collateralized debt obligations that allowed the public to buy clusters of the risky debt in secondary markets. The defaults eventually peaked, and the Recession of 2008 as well as the housing and stock market crashes began. Perhaps, then, history is repeating itself.
Some propose that the next downturn will be due to millennials’ debt. Millennials’ average $42,000 debt from student loans, credit card debt and other loans will continue to slow the economy. Student loans are the second highest form of household debt, totaling $1.4 trillion, and such debt hampers spending ability, the very driver of the economy. Since the Recession of 2008, homeowner rates of those under 30 have declined before stagnating at 25 percent in 2015, and house prices overall are dampening. Millennial surveys reveal that most of this hampered home-buying is due to banks denying them for mortgages because of high debt-to-income ratios or not having enough money for down payments. Likewise, late payments due to overburdening debt depress credit scores, which decrease the likelihood of being approved for major purchases and credit overall. According to Pennsylvania State University, millennials’ debt is also degrading their ability to form small businesses and purchase necessary as well as auxiliary consumer goods.
Predicting recessions is at best strategic guessing, and the next downturn can be due to any combination of reasons. It is more likely than not that it will occur in the next few years, however nothing is guaranteed. We can be sure that the market will hit a trough, but rest assured that it will recover and peak another year.
Christine Savino is a campus correspondent for The Daily Campus. She can be reached via email at christine.savino@uconn.edu.