On Oct. 26, 2018, third-quarter economic results were strong, but 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 Gross Domestic Product (GDP) shrank from 4.2 percent the previous quarter to 3.5 percent, but overall 2018 GDP growth superseded the average post-Recession recovery of 2 percent.
Some believe this slowdown signals the beginning of the next recession, especially since the United States 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). Recovery (expansion) then follows recession until the next peak, after which the cycle repeats. We are currently in recovery and are either reaching- or are at- peak, and as indexes begin slowing, so begs the question: When and how will the next recession occur?
One theory is international trade will 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 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, both of which typically signal recessions. 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 began. Perhaps, then, history is repeating.
Some propose that the next downturn will be due to millennials’ debt. Millennials’ have an average of $42,000 in debt from student loans, credit card debt and other loans. This 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, which is 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. Millennial surveys reveal that most of this hampered home buying is due to them being denied for mortgages via 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, millennial 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.Still, we can be sure that we will hit a trough, butwe will come back to recovery and peak another year.
Christine Savino is a campus correspondent for The Daily Campus. She can be reached via email at firstname.lastname@example.org.