Forecasts to watch: Investors and corporate executives say recession is likely in next two years

Corporate leaders and the investors often succeed because they are quick to identify changing conditions, to see farther ahead than their competitors, and to adjust accordingly. Forecasts are not an exact science, as Neils Bohr famously said,

Prediction is very difficult, especially about the future!”

But budgeting is all about the future, about expectations, commitments and sustainability. So, after looking at the recent collections report and in anticipation of the March 20 official forecasts and subsequent legislative budgets, we wondered what others saw ahead. Current conditions, as we know, are pretty good, particularly in our state. But as we and the Association of Washington Business have noted, there’s a lot economic uncertainty and signs of headwinds. (For more on this, see yesterday’s newsletter.)

Here’s some of what we found.

In January, the Wall Street Journal reported that a global recession is the top concern of corporate CEOs heading into 2019.

That is a dramatic reversal from a year ago, when executives were sanguine about the risk of recession, ranking it their 19th concern overall out of 28 issues, below issues like outdated infrastructure, workforce diversity and income inequality.

The survey of more than 800 CEOs from around the world was conducted in the fall, before a sharp decline in stock prices amplified worries that economic growth is stalling.

Chief financial officers, too, are worried, with nearly half seeing a recession likely before the end of the year.

Nearly half (48.6 percent) of U.S. CFOs believe that the U.S. will be in recession by the end of 2019, and 82 percent believe that a recession will have begun by the end of 2020.

“The end is near for the near-decade-long burst of global economic growth,” said John Graham, a finance professor at Duke’s Fuqua School of Business and director of the survey. “The U.S. outlook has declined, and moreover the outlook is even worse in many other parts of the world, which will lead to softer demand for U.S. goods.”

Investors believe that a recession is increasingly imminent. According to BCG’s tenth annual investor survey, conducted in October 2018, their 12-month outlook is considerably more negative than it was just a year ago. And many investors said that they are responding to the looming economic downturn by taking a more defensive, value-oriented approach to their investment decisions.
A top investment manager sees a “50-50 chance of recession in 2020.”
he U.S. Federal Reserve could hike interest rates once more by June despite a growing, near 50-50 chance of a 2020 recession, Vanguard Group Inc Chief Investment Officer Greg Davis said on Monday [February 11]…

“You just know there’s risks, and with risk comes uncertainty, and with uncertainty businesses tend to be more cautious,” Davis told reporters at the Inside ETFs conference in Hollywood, Florida.

Growth in the United States will likely slow to 2 percent over the next year, with China’s rate at 6 percent and Europe’s at an anemic 1 percent, he said.

One more, the Federal Reserve Bank of St. Louis eyes the housing market for recession clues.

Housing downturns have preceded every U.S. recession since World War II…

To gauge whether the housing market is now at a stage that, in earlier decades, presaged housing downturns and recessions, I compare recent readings on four housing indicators with their trajectories near each of the three previous recessions. In particular, I examine:

  • 30-year fixed mortgage rates
  • Existing home sales
  • Real house prices
  • Contribution of residential investment to GDP growth

Each of these indicators is in a range that, in previous cycles, preceded a recession by a year or two…

This is no guarantee that a recession will begin within the next year or two, but evidence suggests that housing-related indicators warrant careful monitoring.

No guarantees, agreed, and no one wants to see growth stall, let alone experience the hardships imposed by recession. But this is clearly a time for fiscal caution, building reserves, and making long-term commitments that are sustainable under conditions of slower revenue growth.