Recessions happen. 5 warning signs to watch for.
While our economy is at full steam right now, lately I’ve been hearing the question “Is a recession coming?” from clients and colleagues. A decade after the global financial crisis, the United States is expanding at its fastest pace in more than two years. We’ve experienced growth at the rate of 3% or more for two consecutive quarters. Even with all that good news on the economy, some experts warn that four planned interest rate hikes in 2019, along with this year’s rate hikes, could lead to a technical recession in early 2020.
Causes of Recessions
When the Gross Domestic Product declines for more than two quarters (6 months), we’re heading for a recession. There are several factors that make up the Gross Domestic Product: approximately 70% being Consumer Spending. A recession hits when consumer spending slows. Most of the time, this occurs after interest rates increase and prices on assets like stocks and housing drop.
What the Experts Say
“A recession is always pending and will certainly happen again at some point,” says the host of the Money Matters investment and personal finance radio show, Wes Moss. “It’s not likely in 2019.”
His predictions are agreed upon by the international economist and professor of finance at Emory University’s Goizueta Business School, Dr. Jeffrey Rosensweig. “I don’t think a recession is imminent. It is true that if we go another year, it’ll be the longest period without a recession in our history. But some recent studies show that the length of time we’ve been in a growth period doesn’t really affect the probability that we’ll fall into a recession in the next year. It all depends on the conditions at the moment.”
“If a recession is to occur, it is unlikely to be caused by housing-related activity,” says Mark Fleming, chief economist for title insurance company First American Financial Corporation.
“And therefore the housing sector should be one of the leading sources to come out of the recession.”
All this talk about a recession coming began with a third-quarter 2017 Zillow Home Price Expectations Survey that was released last August. It shows a 52% chance of a recession starting at the end of 2019. This intel is based on responses from 100 economists, investment strategists and housing market analysts. Of the experts surveyed, 67% warn that a geopolitical crisis will be the cause of the next recession. On the contrary, the causes of the Great Recession of 2007 were lax lending policies and financial liquidity issues. The good news is those same experts say the next recession is not likely to be very severe.
Here are 5 early warning signs that a recession is on the horizon:
- Everyone’s talking about it
A good way to tell that we are headed to a recession is when your peers start to worry about the topic. You’ll also feel early warning signs in your own business. Are you having a tough quarter or year? If the answer is yes, that’s a definite warning sign.
Businesses are thriving today. However, property investors are beginning to be more cautious. These are the people who must keep apprised of what the economy is doing in order to make a profit. They don’t want to increase their investment risks. Many report that we are near the top of the current property cycle.
- The unemployment rate rises several months in a row
We can learn a lot by tracking the unemployment rate. That number closely follows a recession. Look for the unemployment rate rising for a few months in a row. That’s a big warning sign.
The unemployment rate has been excellent over the last six months. The United States is essentially at full employment right now: the lowest unemployment rate since February of 2001. Experts fear we are approaching a time when this number will increase because unemployment can’t get much lower.
- Is the U.S creating new jobs?
This is an excellent question. A decline in jobs numbers over a few months in a row is a big recession warning sign.
No concern here right now. In fact, we’ve experienced some of the highest numbers since our current expansion began. The Bureau of Labor Statistics reports that last January 239,000 new jobs were created, followed by another 313,000 new jobs in February 2018.
- Weak guidance for travel, vacation, and leisure
Travel, vacation, and leisure are among the first areas Americans cut back on when a recession hits. That’s not a problem right now as we’re seeing high numbers of American’s traveling.
Take in these recent headlines: “Carnival Corporation Reports Record First Quarter Earnings” and “Wynn Resorts Tops Q4 Earnings Estimates,” and you’ll see that Americans are traveling and vacationing like there’s no tomorrow. Which may, in fact, be the case if the recession does hit by 2020.
- New Car Sales
Look for a 10% drop in total vehicle sales over the previous year. After a home, cars are one of the largest purchases that most people will ever make. When individuals are concerned about the economy, they delay vehicle purchases.
Right now, auto sales are excellent. However, in August of 2018, they were down 10% over the previous year. However, sales picked up again and have been doing well throughout 2018.
Is a recession coming? Recessions are inevitable. Don’t despair. They create opportunities for investors in real estate. Recession or not, the most important thing to do is work with a seasoned, knowledgeable, understanding and caring real estate professional like me who keeps abreast of what’s happening in the economy. If you’re looking to sell a property in Montecito, Hope Ranch or any of Santa Barbara’s upscale communities, give me a call at 805.886.9378 or email me at Cristal@montecito-estate.com. I’ll happily work with investors and add your listing to my portfolio of fine homes in the area. I’ll make sure you get the best return on your investment, whether a recession is on the horizon in 2020 or not.