Is a recession coming? Here’s how to tell
Warning bells are going off about a possible recession in America, perhaps in time for the 2020 election. The key to whether the US economy keeps growing or stalls rests largely on consumers, and whether or not they keep spending.
So far, consumer spending has held up pretty well. That’s not surprising. Unemployment is near a 50-year low, and wages are growing strong. Because consumer spending accounts for about 70% of the nation’s economic activity, that’s all good news.
“The consumer drives the economic train,” said Mark Zandi, chief economist at Moody’s Analytics. “If American households are out spending, the economy will remain intact. We’ll avoid a recession. But if American households waver in their spending, it’s game over — we’re in a recession.”
Zandi is in the school of economists who believe that consumers are not quite ready to stop spending. Unemployment is currently only 3.7%. It has been below 4% for 17 straight months. If the number of jobless starts to rise, that’s cause for worry, he said.
Lynn Franco is senior director of economic indicators at The Conference Board, one of the research firms which tracks consumer confidence. She said people still feel good about the job market, and that makes them feel better about spending. “That’s one of the pillars of consumer spending.”
But hiring by employers has already slowed by about a quarter this year compared to the same time last year. If businesses pull back on hiring more, unemployment could start to rise. Zandi said he believes there’s a better than 50% chance that could happen by spring 2020.
Despite strength so far, there are some worrisome signs in consumer spending.
The sale of cars and homes — big-ticket purchases that are good barometers of spending — are weakening. Both fell about 2% in the first half of 2019 over the same period the year earlier, even though low interest rates made it relatively cheap to borrow.
And any decline in cars and home purchases can have ripple effects.
The auto industry is a major employer, both at auto plants and car dealerships. And a slowdown in home sales can curb spending on all manner of other items, from furniture to appliances to paint and carpets.
“Housing run deep into the economy,” said Zandi. “When you move it generates a lot of other consumer spending. The fact that they’re not moving is a sign that the consumer is more cautious.”
Recent turbulence in the stock market can also rattle consumer confidence. Even people who don’t have much invested in stocks sometimes see the market as an indication of the nation’s economic health. At the very least, market plunges can cause uncertainty.
There was a sharp drop in one recent consumer confidence reading from the University of Michigan, particularly about the way consumers view what’s ahead.
And that caution itself can be a problem for continued economic growth.
“With economic uncertainty, consumers cut back first on discretionary spending and purchases of big ticket items first,” said Franco. Her group has seen a slight decline over the the first seven months of this year in the percentage of consumers planning big ticket purchases, like cars, homes and appliances.
But at the same time the number of people planning to take a vacation in the next six months is up 2 percentage points, a sign that consumers haven’t put the brakes on all discretionary spending. Air travel data also shows about 4% more people flying so far this year despite higher airfares.
Government data also shows more people eating meals out, another form of discretionary spending.
And some major retailers, such as Walmart, and Target have reported strong US sales. “Our customers’ economic health remains solid,” Walmart CFO Brett Biggs told investors last week. On Wednesday Target reported a 3% rise in US sales.
But Zandi warned some of those gains may come at the expense of smaller retailers, both mom-and-pop stores as well as other chains such as Macy’s or JCPenney. And Zandi said if retail sales start to slow, it could lead to widespread store closings and layoffs through throughout the retail sector.
“The retail sector is right on precipice of a major shakeout. That’s a lot of jobs in every community across the country,” he said.