A Recession in 2019
There’s continuing talk in financial circles that a recession is inevitable in 2019. The concern is that economic growth is slowing, and with the reduced impact of corporate tax cuts, companies will be left to deal with the slowing global economy. It is hard to dispute that challenges are growing against strong economic growth.
What is an economic recession? Here’s a quick definition from Investopedia:
“What is a Recession
A recession is a significant decline in economic activity that goes on for more than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP), although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession.”
Because we now live in a global economy, global economics significantly impact US company earnings and results. There is no way to avoid the impact of a slowdown in China GDP growth as we have seen from earnings reports for companies that do business in China. Additionally, economic challenges in Europe and Latin America continue to weigh on company earnings and profits.
Adding to the concern, just this week the economic department released data showing that retail sales fell this last month, suggesting that consumers were spending less than many had expected during the holiday season. Remember that the United States economy is significantly focused on internal consumption and any slowdown in retail sales can have a significant overall economic impact on GDP growth
A recent article on CNBC.com highlighted this recent development and we believe gives good context for why retail sales can be a barometer or future economic activity. An excerpt from that article said the following:
“Retail sales were so bad, it's either suspect data or a recession warning”
Patti Domm | @pattidomm
The sudden and unexpected plunge in December's retail sales data raised new concerns about a recession, but economists also say the biggest drop in nine years clashes with other data and may be suspect.
But nonetheless, Wall Street still took the data seriously and economists slashed fourth quarter GDP forecasts. JP Morgan cut its growth estimate to 2 percent from 2.6 percent.
"This literally came from out of left field… I thought January would have been bad," said Chris Rupkey, chief financial economist at MUFG Union Bank. "All our reports earlier were that holiday sales were sparkling."
The Commerce Department said retail sales for December fell 1.2 percent, the largest decline since September 2009 when the economy was exiting recession and shaking off the financial crisis. The report was delayed due to the government shutdown, and there is no release date for January sales data.”
Source: February 14, 2019, CNBC article by Patti Domm
Despite this gloomy news, it is our view the odds of a recession in 2019 are still less than 50%. While the economy certainly is encountering challenges, we believe fundamentals are intact to avoid a recession this year. This is not to say there is not a chance of recession; there is. But we believe that the odds are less than 50% based. However, we further believe that the odds of a recession are greater in 2020. So, a slowdown is likely coming.
Our investment philosophies are fundamentally driven and, for that reason, factor in our view about the economy and future economic prospects. We’ve positioned portfolios based on our assumptions for growth in 2019 as well as interest rate levels. We will continue to make adjustments accordingly.
If you have any questions about this information, please let us know. Always happy to help. Remember that financial planning is available anytime you need it. And I am personally happy to answer any questions you might have about our firm’s view on the economy and investment strategy. Simply reply here and I will answer!