Don’t expect the economy to crash in 2019, but be prepared for a possible recession.
Plenty of people are asking about the chance of a crash, which I interpret as a pretty severe recession, like 2009-10. The primary trigger of a full-blown crash would be a financial crisis when many companies, consumers and other entities have borrowed short to fund long-term assets which start looking dodgy. I don’t think that’s in the cards.
GDP decline in recessions DR. BILL CONERLY BASED ON DATA FROM NATIONAL BUREAU OF ECONOMIC RESEARCH AND BUREAU OF ECONOMIC ANALYSIS
Household finances are improving. Over the last four quarters, their real estate equity is up 10.0%, financial assets up 8.0%, debt up only 3.4%, for a gain in net worth of 8.2%, based on Federal Reserve data.
On the corporate side, cash holdings at non-financial corporations are high relative to the overall economy.
America’s banks hold more capital relative to assets than before the last recession. They have also undergone stress tests to determine how they would fare in a recession. Even though the exercise is imperfect, it goes a long way toward helping a bank survive.
The stock market has risen for the last three years, sparking some worries. Most of the time, stock prices are a response to changes in the economy, though occasionally stock prices can influence the overall economy. The market is not so overblown now that it will drag an other-wise healthy economy into a crash, though it would certainly fall if some other cause triggered a recession.
As for housing, but we are not at all overbuilding relative to underlying needs driven by population growth and obsolescence of older properties. A recession could push prices down in the regions that are hardest hit, but a housing collapse will not be an independent cause of recession.
If not a crash, why is recession a possibility? The most common cause of recession in the past century has been Federal Reserve error when they tighten too much and too long. A key point is that it’s hard to see the error in real time. They may be making a mistake right now. I doubt it, and the Fed doubts it, but we won’t be sure for another year or two. Making me nervous is that I expect the Fed to keep pushing interest rates up.
