The current economic expansion shows no obvious signs of stalling. Economists in general expect 2020 will see another year of growth, even if not quite so robust as in 2019. That should usher in a decent year for the stock market, especially as presidential election years tend to be upbeat.
But while a recession appears to be at least a year away, things could unravel quickly.
“In spite of record-low unemployment and continued steady, if unspectacular growth, the economy seems fragile,” Lee McPheters, an economics professor at Arizona State University, said.
Here are some contrarian, negative signs — perhaps even bubbles — to beware amid what is still broadly considered to be a generally upbeat backdrop.
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Maxed-out consumers
Consumer spending drives more than two-thirds of the economy, so if average Americans are buoyant, that’s a good sign. That describes the current situation, with continuing high consumer-sentiment readings and solid holiday-seasons sales.
But there are pockets of weakness. “Personal debt is where the heart of my concern lies,” Jonathan Smoke, chief economist for Cox Enterprises in Atlanta, said.
Many low-income individuals, those with poor credit and younger adults are grappling to make ends meet even after a decade of economic growth. Renters are getting squeezed by higher rents, and auto-loan delinquencies and defaults are ticking higher — which partly explains sluggish new vehicle-sales.
Auto-loan delinquencies for subprime borrowers already are at a higher level than at any point leading up to and including the Great Recession, Smoke said. Rising delinquencies and defaults could lead to more personal bankruptcies, he added.
Smoke also sees a lot of Americans going overboard on holiday spending this season. Many will require income-tax refunds early next year to dig out of their holes, he said.
Foreign trade and a global slowdown
The threat of disruptive trade disputes has eased in recent weeks, with the U.S. House of Representatives passage of a new trade agreement with Mexico and Canada, and with word that the White House and China have agreed to ease tariffs.
Still, in a survey released in December by the Blue Chip Economic Indicators newsletter, member economists ranked trade disputes with China as easily the most worrisome peril, ahead of weaker corporate profits, a general global slowdown and other threats.
Though exports and imports are less vital to the U.S. than they are to China, Europe and most other nations, trade friction and slower global growth pose risks here too. That’s partly owning to broadening of the global supply chain, McPheters said.
Energy prices, especially for oil, are another background threat, even if not all that apparent at the moment.
“Global geopolitical conflicts or even a natural disaster such as a Middle East earthquake could raise the price of energy and trigger recession,” McPheters said. “There are no signs of spiking oil prices, but external shocks are always a risk.”
General business uncertainty
Business investment has been soft lately, and unease among top executives could be a factor. Indicators that gauge CEO confidence and sentiment among business leaders have been declining. McPheters considers uncertainty as to the likely cause of that.
Sources of uncertainty include the 2020 presidential election, Brexit and possible tax hikes if the election yields a change in the White House or Congress, he said. Leading Democrat presidential contenders have called for an array of higher taxes, including on corporate income — a scenario that could spook investors and executives.
“Anything that contributes to even more uncertainty about policy, politics or geopolitical conditions would tend to dampen spending and growth,” McPheters said. He also sees the potential for external shocks from natural disasters such as droughts, fires, hurricanes, earthquakes and major storms.
Smoke cited weak auto and aircraft sales as signs of business sluggishness, though he considers recent strong construction numbers and buoyant sentiment among homebuilders as favorable.
“As long as housing is positive, it’s very difficult to envision the U.S. going into recession,” he said.
Threat of higher interest rates
Interest rates have been subdued for a long time, but any spike could pressure economic growth, both for businesses and consumers.
Jack Ablin, chief investment officer at Cresset Capital Management in Chicago, worries about a possible interest-rate impact on what he considers bloated corporate debt levels. Excluding IOUs issued by banks and insurance companies in the normal course of their operations, corporate debt as a percentage of GDP is near an all-time high, he said.
Also worrisome, a large percentage of that corporate debt carries adjustable rather than fixed interest rates. That could translate to higher borrowing costs for businesses if rates were to spike.
“We are highly levered, and a lot of that leverage is floating rate,” Ablin said. He considers current lofty levels of corporate debt to be a “distortion” that could hurt profits, undermine the stock market and slow the economy.
Rising rates also could pressure many consumers, including those with growing balances on high-interest credit cards, Smoke noted.
Growth still probable, though
To reiterate, the consensus among economists, including those quoted above, is that 2020 will be a decent if slowing year for the economy.
In November, 53 forecasters surveyed by the National Association for Business Economics predicted growth of 1.8% in 2020, down from an expected 2.3% in 2019, with recession odds rising from 5% currently to 43% by the end of 2020.
Against this backdrop of slowing growth, negative developments could be enough to tip the scales — and they’re often difficult to foresee. In 2007, for example, Federal Reserve officials were forecasting a solid year of economic growth, but the economy then spiraled into recession.
“The moral is that even top economists with the full resources of the Federal Reserve System can be wrong,” said McPheters.
Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.
