Despite higher estimates, economic growth for Q2 2018 delivered a lackluster 2%.
That low percentile isn’t really surprising given that we’ve had economic expansion for nearly 9 years now. And you know the old saying, “Everything that goes up must come down,” But, still, analysts are seeing early warning signs of a looming recession.
What are those warning signs? The recent shift in the bond market is one sign that has captured experts’ attention. Usually, long-term Treasury bonds, 10-year Treasury bonds, pay investors higher interest rates than short term, or 2-year, Treasury notes. Such higher interest rates on long-term bonds essentially reward investors for taking a greater inflationary risk.
Now, however, the gap, also known as the “yield curve,” between the interest rates of short and long-term Treasury bonds is almost negligible or flat. This roughly, as of this writing, 0.34% points in interest rates for short and long-term Treasury bonds translates, for investors and economic experts, into a slowing economy. Couple this “slowing economy” translation with the Federal Reserve’s commitment to raising interest rates due to its responsibility to protect the economy from rising inflation and you hear experts whispering the “R” word.
Scott Simon, the former portfolio manager with the bond-trading firm PIMCO who oversaw nearly $1T in mortgage securities, is one such whispering expert. “If people think the economy is going to slow and inflation is going to go up, long-term interest rates tend to go down. That is not what’s happening now.”
The “yield curve,” the supposed gap between short and long-term interest rates, is considered to be a recession predictor especially when that yield curve becomes inverted. Still flat for the moment but increasingly becoming inverted, the yield curve has rarely been wrong sine 1951. Most recently, the recessions of 2001 and 2006-07 were predicted by an inverted yield curve.
Not only are most experts worried about the yield curve, they are also concerned about a trade war driving the economy into recession. David Kotok, chief economist with Cumberland Advisors, has already lowered his growth forecasts for Q3 and Q4 of this year because he sees businesses delaying investments amid the uncertainty of conflicting White House policy and international rancor at trade war threats. Kotok questions, ”Who wants to play a game (the game of trade war) where everybody loses?”
And who wants to play a game when business “…is trying to figure out exactly what it is the US wants, who speaks for the US and whether or not the US will have a predictable and consistent position in trade negotiations…” said Eswar Prasad, senior professor of trade policies at Cornell University and senior fellow at the Brookings Institute.
The only lukewarm good news here is that all these whispering experts are looking down the road a bit to the mid-late 2019 and 2020.
That being said, it’s more than time for you as real estate agents to look down the road and begin developing strategies for your own business to flourish if and when the “R” word becomes a recession.