Will the Next US Recession Hit in 2020?

Business Economists Predict U.S. Could Face Recession in 2020

The next recession to hit the U.S. economy may arrive in 2020, according to a survey of experts released by online real estate database company Zillow.

Zillow, in collaboration with research firm Pulsenomics LLC, polled 100 economists and real estate experts, where almost 50% of the experts claimed they expected a recession to begin in 2020, with many speculating that the decline will come first quarter of the year.

And as far as the 2020 recession is concerned, economists are apparently in agreement.

The most recent quarterly outlook by the National Association for Business Economists (NABE) states that its panel of 45 business economists believe that while the nation’s gross domestic product may grow by 2.8% starting this year, the growth can be cut short by an impending recession. Two-thirds of NABE’s top economists predict that a recession will start by the end of 2020, while 18% believe that a dip may begin at the tail end of 2019.

Experts point to three most plausible reasons for the decline.

New Policies

Economists say that while Trump’s major tax cuts may serve as a boon to the U.S. economy in 2018 and 2019, the president’s other policies may trigger the new recession in 2020. Experts cite tariffs Trump imposed on aluminum and steel imports from Mexico, Canada, and the European Union, as well as tariffs on Chinese imports, as major causes of the recession. These new policies, they say, can trigger a global trade war,as nations will retaliate.

Miscalibration

There may also be a risk of the Federal Reserve miscalibrating interest rate policy, which may, in turn, cause a slowdown. The U.S is almost at full employment rate, but inflation is already at almost 2%. Krishna Guha, head of global policy and central bank strategy of Evercore ISI, says that with growth still strong, the Fed may soon need to be more aggressive in raising interest rates to keep inflation under control.

At the same time, the mainstream macroeconomic models will cause the economic lift from the tax cuts to fade sometime between 2020 and 2022. This suggests that the Fed’s move to raise interest rates to slow the economy might coincide with the tax policy’s toll on the economy.

Popping Debt Bubbles

For years, businesses have enjoyed a sweet spot, where profits rise gradually and interest rates remain low by historical measures. Data from the McKinsey Global Institute show that corporations took advantage of the low interest rates and the high probability to improve returns for shareholders, and loaded up on debt. In fact, the value of the nation’s corporate bonds outstanding spiked to $2.6 trillion between 2007 and 2017.

However, data also showed that the rise in debt loads overseas have become more prominent in emerging markets, suggesting a shift toward riskier borrowers owing more debt. This means that if the trend in profits and interest rates were to change, paying the bills may come as a struggle for many companies with higher debt burdens, which can put them at risk of bankruptcy.

More than anything, all the talk on a recession in 2020 should serve as a warning to both recession watchers and policymakers to constantly be on their toes. While it’s impossible to predict exactly if and when the next recession is coming, it pays to have a contingency plan.