Over the past few months, I have seen many articles predicting a recession. Some speak of it as an inevitability in the short term. I disagree for many reasons and believe it is dangerous to follow a recession-promoting drumbeat because doing so could become a self-fulfilling prophecy.
First, let’s talk about what’s being reported. If you haven’t yet heard about a phenomenon known as the “inverted yield curve,” then get ready, because it is a key phrase being bandied about by economists, reporters and laypeople alike. An inverted yield curve occurs when short-term bond interest rates are higher than long-term bond rates. This can indicate investors are more worried about the short-term economy than the long-term economy. When the economy is healthy, bondholders want to receive a higher yield for long-term bonds, because their money is being locked up for a longer period. Right now, investors are pouring their money into long-term bonds, which are often viewed as safer, even though their money will be held for a longer period and at lower rates. In recent months, the yield curve has inverted.
Similar yield curves have preceded every U.S. recession since 1955, but even those who are predicting a recession generally admit that it might be months or even years before one starts. So, if you believe in this phenomenon, the country will have a recession at some point in the future, but naturally, the timing is unknown.
The problem with hinging predictions about the future of the economy on the current inverted yield curve is that other issues that were the primary drivers of prior recessions are not present in the current economy. An analysis by economists with First Trust Advisors explains these differences. For example, the Great Recession was caused by a bubble in home prices where national home values were more than $6 trillion over fair value, coupled with low capital ratios among U.S. banks. Today’s housing market is nowhere near the grossly overvalued days of the 2008 downturn, nor are lenders undercapitalized. Some people suggest that the stock market is overvalued, but key indicators, such as the price-to-earnings ratio, suggest it is nothing like the internet bubble that drove the 2001 recession. And the 1980-81 recession was characterized by high unemployment and high inflation, two issues of much less concern today.
Echoing concern about using the yield curve to predict the future, Sonal Desai, chief investment officer for Franklin Templeton, recently wrote that “the economic data show no evidence that either the United States or the global economy is approaching a recession.” She counters that the unemployment rate is at a 50-year low and also cites wage and salary growth and a healthy household savings rate. While she acknowledges trade concerns, she notes that the nation has been dealing with trade uncertainty for the past three years.
Weekly and monthly economic indicators continue to be positive. Consumer spending, which drives about 70% of growth, increased earlier this year at the fastest rate in more than four years.
I have been advising small-business owners for decades, and my recommendation is to look at the health of your individual market before drifting into a debate about the health of the economy. Look at your own bottom line before you let recession fears impact your decision making.
The stock market is healthy. Unemployment is low. Interest rates are low (nearly historically low for some SBA loan programs). Personal incomes are growing, and inflation is in check. Of course, no economy is perfect. The residential housing market appears to be softening in some markets. Rental rates could be lower, and wages and savings rates could always be higher. Yet none of the negative factors present today — even the inverted yield curve — are surefire signals that the U.S. is headed for a recession.
In my experience, perception is reality. If entrepreneurs let unfounded speculation about the economy seep into their thinking, they might make decisions regarding their businesses that slow growth or curtail plans. I believe that if America’s business owners start behaving like the nation is in a recession, that could very well spur a recession. The small-business economy is robust, but one of the few things that could derail it is an unfounded fear that could lead to the first “self-fulfilling prophecy” recession.
My advice: Run your business according to what you see, and don’t buy into the hype.
