How Real is the Risk of Recession?

12/04/2019

Drew Wallachby Drew Wallach, Executive Vice President and CFO, North Shore Bank

The headlines loom large on a daily basis: predictions about a recession to come; tips on how to “recession-proof” your business; questions about whether it’s too risky a time to invest. Just type the word “recession” into the Google News search bar and you’ll find millions upon millions of results, the bulk of which could be considered any number of these negative descriptors: confusing, contradictory, click-bait. Almost invariably these articles start with the qualifier that no one can really know when the next recession will come, how long it will last and how deep it will cut.

If it’s true that the recession prediction game is a fool’s errand, it’s also true that the overall economic climate affects all aspects of business. Challenging though it may be to wade through the complexities and daily ups and downs of global geopolitical conflicts, constant election cycles, Brexit negotiations and more, some level of participation in the constant recession risk guessing game is both smart and necessary.

Fortunately, we have the ability to stop and take a deep breath. We have tools at our fingertips to help us evaluate, analyze and plan in a deliberate and informed manner. The Federal Reserve, known as the Fed, gives us guidance from their powerful point of view. We also have a wealth of data and trend information, both current and historical, to help steer us even when the seas feel stormy.

How Real is our Recession Risk?

History tells us that at least one of three major factors is generally at play when recession risk becomes reality: shock, excess and the Fed itself. Let’s take a closer look at each of these:

  1. Shock. By its very definition, a major shock to our global economic system cannot be predicted. One of the most obvious examples in recent memory of this kind of shock is 9/11. The devastating attacks to our country on that day took a swift and significant toll on just about every aspect of American life: emotional, political, financial. Yet the unexpected nature of a shock such as this doesn’t mean we cannot or should not plan for it. Every successful business needs to have thoughtful plans in place to weather unexpected events of all kinds.
  2. Excess. In the context of creating the conditions for recession, another word for excess is “bubble.” Think of the Dotcom bust around the turn of the millennium, and, more recently, the housing bubble that burst and helped usher in our last major recession in 2007. Often, the lessons learned in the wake of this type of “bubble burst” leave us with knowledge, tools and regulations designed to help us better navigate similar situations in the future.
  3. The Fed. That’s right, the very institution charged with keeping our economy humming along, with riding the many waves of a global economic system with countless interconnected and constantly moving parts, can itself usher in a recession. It has been said that “Expansions don’t die of old age; they die because the Fed murders them.” But today’s proactive Fed leadership has been acting quickly, decisively and unapologetically to try to maintain a strong and steady course.While we can’t predict a future shock, we’re not currently seeing the makings of the next big bubble. The Fed’s management of modern monetary policy has made major recessions less frequent. Other economic indicators that typically predict recession provide additional reassurance that we’re not on the brink (see below).
 

By The Numbers

Look to these measures for a realistic assessment of risk

  • GDP. Gross Domestic Product is the monetary value of all goods and services produced in our country. Despite common ebbs and flows of the percentage of growth, this key recession indicator has been running steadily in the positive column in recent years. The first and second quarters of 2019, with 3.1% and 2% GDP growth, are both indicative of a continued, moderate expansion. Third quarter preliminary report shows 1.9% growth overall, but surprising strength from consumers lifted the overall economy above expectations.
  • Unemployment. Holding steady at less than 4%, the recent jobless rate is right around the lowest it’s been in a half century. Climbing unemployment rates can be an item to add to your recession risk watchlist, but for now the numbers remain a strong positive economic indicator. Latest figures released last week also showed surprising strength.
  • Vehicle sales. Sales of recreational vehicles have proven to be a valuable benchmark for looming downturns in the past. And while orders are down so far for 2019, recent levels seem to be gaining strength. That said, it’s important to keep in mind this is just one piece of a very large puzzle.
Charting our risk for recession.

Today’s business owner has weathered enough economic ups and downs to be wary, and rightly so. At the same time, operating in constant high alert mode is both unsustainable and unproductive. We feel optimistic and confident looking ahead to 2020 and encourage you to keep yourself informed as you plan ahead.

A wealth of information can be found in so many places, including unprecedented access to data detail at websites like fred.stlouisfed.org and federalreserve.gov. We’re always here to help guide our customers, to help monitor overall economic conditions and to plan accordingly for long-term stability and success.

North Shore Bank is a relationship-based community bank, deeply invested in the communities we serve. We only succeed when our customers and communities do the same, so looking out for their best interests is ingrained in the way we do business. We’re in it together. Established in 1923 and headquartered in Brookfield, we are a mutual bank with assets of $2 billion where we
confidently serve commercial businesses throughout eastern Wisconsin.
 
This is not intended to serve as a complete analysis of every material fact regarding this topic. The opinions expressed here reflect our judgment at this date and are subject to change.
Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. This publication is prepared for general information only. This material does not constitute investment advice and does not have regard to the specific financial situation and the particular needs of any specific person who may receive this report. Member FDIC.

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