Last week, fears of an upcoming recession intensified after a reliable indicator, which we’ll discuss momentarily, that signals the economy could contract appeared. This was followed by a survey that says 38% of economists are expecting the U.S. to enter into a recession by 2020, while 34% believe the country is heading for a recession by the end of 2021.
Though a recession is part of the natural economic cycle, many are beginning to wonder if this looming recession could be worse than the one that occurred in 2007. In this article, we’ll discuss the 5 things experts consider when determining the severity of the recession to answer the question: will this recession be worse than the 2007 market crash?
Signs That The U.S. Is Heading Into A Recession
Before we discuss what experts look at to see if this looming recession is going to be worse, let’s first talk about the indicators that show an inevitable recession is coming.
According to a report from Forbes, several signs and indicators point to the economy entering into a recession soon have appeared. The primary indicator of a looming recession is the inverted yield curve, where short-term interest rates of bonds are higher than that of the long-term interest rates. Based on historical precedence, it signals that the economy could experience a recession within 6 months to 2 years. And for those who may not know, a bond is simply an I.O.U. that includes the loan and payment details between a lender and a borrower. It is used by governments and corporations to help finance their projects and operations. Short-term bonds are the ones that are payable in less than 5 years, while long-term bonds are those that are payable in 5 years or longer.
An inverted yield curve is problematic because it shows investors are losing confidence in the economy. Bonds are considered safe investments, thus their interest rates are lower compared to stocks. But as the demand for bonds increases, the interest they pay when it matures goes down. This is why the inverted yield curve usually appears before a recession because it shows people losing confidence in the economy, thus they flock to safer investments than riskier ones.
Another sign of a coming recession is the slowdown of global growth. Countries with large economies like the UK and Germany are starting to contract, while the world’s second-largest economy, China is experiencing a slowdown. With global economies being interconnected, the U.S. economy is not immune to these developments.
Germany, in particular, will have a severe effect on the country because it is one of the top trading partners. The U.S.’s trade war with China is affecting Germany severely since its heavily reliant on exports. The country’s auto industry is also taking a hit due to tougher emissions requirements and technological change. These could affect Germany’s consumer confidence and slows down purchases, affecting other countries reliant on Germany buying their goods.
Forbes’ report also mentions U.S. unemployment, which came out at 3.7% in July. The figure is still low, but it was an uptick from the previous month’s 3.6%. If the trend continues and unemployment climbs as high as 4.1%, it could further support the prospect of a recession.
These are the obvious and most pressing indicators that a recession could hit the U.S. in the next 2 years. There are also other subtle signs, such as in the RV industry. RV shipments to dealers have declined by 20% this year following a 4.2% decline last year. Multiple years of the declining shipment have preceded the last 3 recessions, making this yet another indicator that the country is approaching a recession or is already in one.
How Bad Was the 2007 Great Recession?
To understand as to whether the impending recession is going to be worse than the 2007 recession, let’s quickly review just how bad the Great Recession was.
The recession that the country experienced at the end of 2007 until June of 2009 was primarily caused by a financial crisis due to the housing bubble bursting, along with the subprime mortgage crisis, and the correction of the housing market. This made the effects of the contraction worse and the recovery efforts harder and longer. The financial sector was restrained from properly spending because of the debts they accumulated, and the government’s stimulus program and bailouts limited their spending power to speed up the recovery.
During this period, the country’s GDP decreased by 4.2%, which makes it one of the worst economic contractions that the country experienced. The Department of Labor also released data that showed the country lost 8.7 million jobs between February 2008 and February 2010.
The former Chairman of the Federal Reserve, Ben Bernanke, said that the Great Recession was worse than the Great Depression. Though economists disagree with him, they noted that it was the second-worst recession in the U.S., second only to the Great Depression.
Here are 5 Considerations that Experts Look At To Determine the Severity of the Recession
It’s not uncommon for countries to experience a recession since it’s part of the natural ebb and flow of economies. Economists call this cycle expansion and contraction and it is a natural occurrence in economies. Dating back to 1854 until 2009, the U.S. grows at an average of 38.7 months, while it contracts at an average of 17.5 months. There are exceptions to this, like when the U.S. achieved the longest expansion in history last July 2019, expanding for 121 straight months. Or when the country contracted for 65 months, the longest recession recorded in the U.S., from 1873 to 1879.
What is alarming about recessions is how much of an impact they can have on a nation. As you can see from the previous point, the Great Recession had a devastating effect on the country (and the world for that matter) and the recovery period for it took longer than expected. The question now with the upcoming recession is whether it will be as severe or worse than the Great Recession, or will it be milder?
Analysts are divided when it comes to how severe the upcoming recession will be. Some say it won’t be as bad as the one experienced in 2007, while some say it could be as bad as the Great Depression. Despite the divided view, there are certain scenarios that analysts are considering that can determine if this recession is going to be milder or worse.
Global Debt – One of the primary considerations that analysts are looking at is global debt. In 2008, the worlds’ global debt stood at $177 trillion and is one of the factors that made the financial crisis worse. As mentioned earlier, debt payments were also one of the primary reasons it took the country several years before it recovered from the 2007 recession. Numerous analysts are predicting that the global debt could reach as high as $247 trillion by 2020. If the debt prediction comes true, then a recession in 2020, or even 2021 would have a harsher impact on the country and recovery would be harder as well.
The world’s debt soared to $184 trillion early this year, which is also equivalent to every person in the world having a debt of $86,000. That figure is 225% of the world GDP or 2.5 times the annual income. Approximately $63 trillion of that comes from the governments of the world and the U.S. accounting for 31.8% of it. This tells us that the majority of the global debt is driven by the private sector, which brought the world to its knees. The current amount of world debt is a record high and it already has surpassed the debt the world had when the recession began in late 2007. This is not a good sign since debt is what made the recession worse in 2007. With the way things are going, it looks like no one has learned their lesson from the last recession.
What Governments and Central Banks Can Do – Another consideration to look at are the solutions, policies, and financial tools that governments and central banks have at their disposal if a recession were to happen. In 2007, central banks were quick to lower interest rates and enter into quantitative easing to try and lessen the effects of the financial crisis. Governments also bailed out financial companies that were considered too big to fail. The move didn’t stop the world from entering into a recession, but it helped it recover slowly. The downside of the slow recovery is that governments and central banks now have limited financial tools available to them in case another financial crisis breaks out.
With interest rates still low for a lot of countries, central banks have little room to operate when it comes to lowering interest rates to try and lessen the impact of a financial crisis. World leaders are also not united, which makes it harder to have stronger government spending fiscal response during a recession. (World Economic Forum)
Central banks are also limited when it comes to stimulus spending. With government debts at an all-time high and deficits are larger, there’s not enough wiggle room to spend money to try and jumpstart the economy. Quantitative Easing (QE) is another tool that central banks won’t be able to use since their balance sheets are still full from the previous rounds of QE they did to recover from the 2007 crisis. Bailing out the financial sector will also be harder, not only because of limited funding but also because many people weren’t happy when it was first executed. A report said that research showed the government spent actually closer to $29 trillion to help the banks. Not only was that a lot of money, but it didn’t prevent the loss of 9 million jobs, 4 million foreclosures, and a reduction in wealth among the poor and middle class. Simply put, the bailout didn’t help the majority of the American population but it did help the ultra-wealthy. Another bailout of big companies is likely going to be unpopular.
U.S. – China Trade War – A lot of analysts are closely watching how the trade war between the two countries with the largest economies is progressing. S&P Global Ratings believe that the direct effects of the trade war between the two countries are minimal. But if business and household confidence continue to plummet, the direct effects could be devastating. The trade war’s indirect effects on the macroeconomic level (overall economic factors like national productivity, interest rates, and so on) are also numerous and severe. One indirect impact it could cause is further interest rate cuts from the Federal Reserve due to the decrease of domestic demand because of higher prices. Should a recession occur, how the trade war progresses between the two countries will contribute greatly in determining how severe the contraction could be.
The effects of the trade war could be felt on the world’s GDP, as media outlets stated that a Bloomberg Economic report showed a 0.6% decline by 2021 could happen to the world GDP due to the trade war. That is equivalent to a $585 billion loss from the IMF’s 2021 world GDP projection. The report added that even if central banks were to do something about the slowdown in demand, the world GDP will still experience a 0.3 % loss. (Business Today)
Another impact of the trade war could be a currency war, according to Fair Observer. When the U.S. threatened another 10% Tariff on $300 billion of imports from China, the country responded by devaluing the yuan against the dollar. If China were to continue devaluing its currency, a repeat of the Asian financial crisis in 1997 and could further accelerate the impending world recession.
The U.S. Bubble – The trigger for the financial crisis in 2007 was the housing and subprime mortgage bubble in the U.S. that burst. More than a decade later, several assets are again in a bubble and could plunge the country into another financial crisis should they burst. One of the asset bubbles that many analysts have identified is bonds, particularly the sovereign debt of governments. This puts bonds, which are supposed to be risk-free assets, at a price that won’t make investors any money. Reuters also adds that Deutsche Bank calculated that there are more than $15.9 trillion of negative-yielding bonds worldwide, due to trade tensions, slowing global growth, and continued monetary policy easing. As I mentioned earlier, the global debt is at an all-time high and a chunk of that is due to government debt. The U.S. alone reached a debt of $22 trillion early this year, a record high.
Bonds are not the only asset bubble that economists are looking at, as consumer spending is another bubble. An economist said that the increase in retail sales in July is not a good indicator of healthy consumer spending since it was financed mostly by credit. The economist also mentioned that weekly earnings have been flat or declining for the past 8 months, showing that people are not getting their spending power from the wages they get from jobs.
Some analysts also consider the U.S. Stock Market as a bubble. According to a report from Forbes, the S&P 500 has already soared to 300% in the past decade, which is faster than the earnings that companies achieved in the same period. This makes the index overvalued and a correction could soon follow.
The Budget Deficit – The Congressional Budget Office (CBO) recently came out with a report that shows the U.S. budget deficit will be close to $1 trillion in 2019 and this will make things worse for the country unless changes are made. This is another consideration that analysts are looking at in determining how severe a looming recession could be. It’s already bad enough that the nation’s debt continues to reach record levels, but it’s even worse that the budget deficit is also widening.
The Financial Times said that the CBO director is calling for changes in tax and spending policies. The government should adopt laws and policies that would increase revenue and reduce spending below the projected amounts.
According to a Time article report, the downside of a large budget deficit is that it further limits the government’s ability to provide stimulus in the event of a financial crisis or recession. This suggests that the federal government is further restraining itself from providing a solution or a cushion to an impending recession, which is problematic since the central bank’s swift action in the last crisis lessened the negative impact.
The probability of a recession happening in the U.S. in the next 2 years is high and no one knows how severe it could be. But there are considerations that analysts are looking at that suggest this upcoming recession might be more devastating than the Great Recession in 2007. You must be aware of these signs and considerations so you can prepare yourself and avoid the negative impact of a recession or financial crisis.
This article is not meant to raise fear or concern, as my goal here is to provide information to help you become aware of what could possibly happen. As a prepper, we must keep ourselves well informed of what’s happening so we can be prepared for it and act before it is already too late.
I’d like to know your thoughts and feedback on this matter in the comments section below. Are you concerned about a possible recession? Do you think this one will be worse than before and if our government is prepared to handle it?
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