You Heard It Here First! Recession by 2021

Bull and Bear Market Recession 2021

Real estate and economic experts are now seeing the signs of an imminent recession, predicting that such an event may happen by 2021.

Online real estate company Zillow had gathered a panel of industry experts and strategists and asked them about their views on the current state of economic affairs and its effect on the housing market.

  • 50% say they expect the next recession to begin sometime next year (in 2020).
  • 35% of the panelists feel that the recession is going to happen in 2021.
  • 9% believe the recession will happen in the third or fourth quarter of this year.
  • 4% feel that the recession will hit us in 2022
  • 1% say the recession won’t happen until 2023
  • 1% believe we won’t be seeing a recession until after 2023.

According to the panel of experts, housing won’t cause the next recession (as it had in 2007), but it will definitely feel the impact.

Panelists point to a number of factors that might trigger the next recession but cite that it would either be trade policy, a geopolitical crisis, or a stock market correction that might finally tip the economy over towards reversal.

The country has been enjoying a hot streak with, by far, the longest uninterrupted economic expansion in U.S. history, spanning 120 months between 1991 and 2001.

While experts believe that the current housing slowdown isn’t likely to cause the next recession, the conditions that may be bringing the economy down certainly won’t be helping.

73% of the panelists believe that the demand for home buying this year to be sluggish, and about the same or lower compared to last year.

And this is despite the fact that conditions are more favorable for buyers now to purchase a home than they have been in quite some time.

Is The Prospect of Recession a Certainty?

While the United States isn’t a recession right now, experts suggest that there are indicators that signal the likelihood of one, and the likelihood of an economic downturn has greatly increased over the last couple of weeks.

A recession might still be avoided, however, and we have yet to see the signs of economic bubbles that triggered the last two recessions.

The National Bureau of Economic Research has defined a recession as defined as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”.

If a nation’s economy has shrunk or contracted for two consecutive quarters, that right there is an indication of a recession.

However, it takes a perfect storm of bad things to occur before a recession can happen. Even as economic experts have predictors, such as an inverted yield curve, or a sharp change in unemployment rates and initial jobless claims, there are no known completely reliable predictors.

In fact, as far as our economy goes, “bad things happen all the time,” according to Neil Irwin, a senior economics correspondent for The Upshot over at the New York Times. “Recessions occur when those initial shocks are multiplied, in ways that reverberate worldwide.”

How Will a Geopolitical Crisis Cause an Economic Recession?

The US-China trade war is starting to get out of hand, and multiple media outlets, such as The New York Times, CNBC, and CNN, as well as financial institutions like Goldman Sachs and Morgan Stanley, all point to the escalating trade war with China as the probable cause of an imminent economic recession.

Nouriel Roubini, professor at NYU’s Stern School of Business and a former senior economist for international affairs in the Clinton White House’s Council of Economic Advisers, had drawn up a number of possible scenarios that can trigger either a US or a global recession in 2020 in his article published by The Guardian.

He says we need to take particularly close attention to the China-US trade war, as it has a good chance of derailing the world economy, especially if the conflict continues to escalate even further.

As bad things are right now in terms of trade policy, how else can things further spiral out of control? Some escalations that could happen include:

  • The Trump administration might decide to extend tariffs to the $300 billion worth of Chinese exports not yet affected
  • Huawei and other Chinese firms might be prohibited from using US components. This event might trigger a full-scale process of deglobalization, and this breakdown in business relations would see companies in a mad scramble to secure their supply chains.
  • China can retaliate by closing its market to US multinationals (such as Apple).

As things already are, tensions are at an all-time high, and the effects are starting to hurt business, consumer, and investor confidence not just in the US, but throughout the world as well.

Especially as international economic diplomacy further breaks down, the current trade wars may cause businesses all over the world to pull back.

This could then lead to markets tumbling and job losses, as well as a wave of bankruptcies due to massive loads of corporate debt.  Consumers will ever-cautiously hold on to their spending money, and central banks everywhere will find that they lack the tools and the capability to stave off the crisis. 

We’re not there yet, but it’s not going to take much to finally tip things over towards a full-blown global recession. Should the Sino-American trade and technology war further escalate, the shock to the world markets can bring on a financial crisis of global magnitude.

How Will Trade Policy Cause an Economic Recession?

Despite the looming specter of an imminent geopolitical crisis, all eyes are now on the US Federal Reserve, as the majority of the experts and strategists on the panel assembled by Zillow are now a lot more concerned about monetary policy.

What actions will the Federal Reserve take when it comes to interest rates? If rates go up, taking out a mortgage will be more costly, turning off some buyers from purchasing homes.

And if rates are raised too quickly, the actions can slow down the economy and lead to the recession everyone has been predicting.

The Federal Reserve- or The Fed- serves somehow as a lender of last resort, created in 1913 under the Federal Reserve Act.

Today, the Fed is tasked with managing U.S. monetary policy, regulating bank holding companies and other member banks, and monitoring systemic risk.

Historically, the Fed’s monetary policy has been governed by a dual mandate: first, to maintain stable prices, and second, to achieve full employment (which is actually an employment rate of around 4% to 5%).

To be sure, the U.S. economy is still growing at a solid pace. The economy expanded by 2% in the second quarter while consumer confidence remains near its highest level since 2000.

However, the signs that predict a recession are already there, like the 50-day moving average for the 10-year-3-month yield curve inverted in late June.  In the past 50 years, this has preceded a recession by an average of 10.5 months “with no false recession signals,” according to Barry Bannister, head of institutional equity strategy at Stifel.

Bannister says the Fed could cause a recession unless it significantly cuts rates, adding that the fed funds rate is too high relative to the neutral rate, a theoretical level at which the Fed is neither restrictive nor accommodative.

Monetary policy that is too tight could hinder U.S. economic growth and even spark a recession.

“Rates signal a bear market, and Fed hesitations risk a repeat of Custer’s last stand at Little Big Horn,” warned Bannister, referring to the 1876 battle between U.S. forces led by Gen. George Custer and several Native American tribes.

“The Fed should quickly go below neutral, since crises occur at progressively lower ‘spreads’ to neutral.”

How Will a Stock Market Correction Cause an Economic Recession?

According to industry experts and strategists, among the top three causes of an economic recession that might happen in 2020– aside from trade policy or a geopolitical crisis– is a stock market correction.

A stock market correction is not the same as a stock market crash. A stock market crash, while definitely more catastrophic, has been defined as a drop of 10% or more in just one day of trading. Usually, high unemployment rates can follow, and can even lead to a bear market– a scenario where we see a drop of more than 20% from its most recent high.

In comparison, a market correction is a gradual decline that can occur over days, weeks, or months, where there is a fall of at least 10% before share prices start recovering.

In most cases, a stock market correction is a good thing, as this is seen as a natural progression that prevents markets from being overpriced. As opposed to a bear market, a stock market correction is just a short-term trend, usually riding out in less than two months.

In an interview with CNBC, Ian Harnett, chief investment strategist at Absolute Strategy Research, says a “really sharp correction” is brewing for the next 18 months, as global recession risks are on the rise.

Harnett brings up his observations on the price-to-earnings (P/E) ratios, which is an important metric used by traders to ascertain the value of stocks, and how they currently point towards a substantial downturn.

“You’ve got the Shiller P/E (ratio) back over 30 times, last seen in the tech bubble, last seen just prior to the 1930s depression,” he explained. The Shiller P/E is a valuation measure usually applied to the U.S. S&P 500 equity market.

“This is a huge recipe for a really sharp correction in global equity markets at some stage in the next 18 months,” he pointed out. “And I mean really large, because we are looking at these recession risk models rising, credit impulse numbers in the states are weak, that tends to bring unemployment up and tends to bring equity markets down.”

Housing Slowdown Unlikely to Cause the Next Recession

The last two recessions were the dot-com bubble in 2000, and the subprime mortgage crisis in 2009.

The subprime mortgage crisis was triggered by a huge drop in home prices after the collapse of a housing bubble. As a result, the housing market was awash in mortgage delinquencies and foreclosures, and a cascading series of unfortunate events caused the market to break down across all regions at once.

The U.S. housing market has bounced back remarkably well from that financial crisis, as home prices have already exceeded the pre-collapse valuation in many areas.

However, despite conditions that are a lot more favorable now for potential home buyers, sales have already been observed to be sluggish this year. Signs of weakening demand, coupled with the possibility of the impending US or global recession, are likely to slow down overall home value growth in the more immediate future.

According to Zillow senior economist Aaron Terrazas, “While much remains unknown about the precise path of the U.S. economy in the years ahead, another housing market crisis is unlikely to be a central protagonist in the next nationwide downturn.”

Zillow has reported that U.S. median home values are growing at a 6.1% annual pace, which is strong by historic standards but well below annual appreciation rates of 8.1%. Furthermore, annual home value growth has slowed in each of the past four months compared to the month prior, and panelists said they expect this slowdown to continue.

The Zillow Home Price Expectations Survey

Sponsored by Zillow and conducted quarterly by Pulsenomics, the Zillow Home Price Expectations survey asked more than 100 real estate experts, economists, and strategists for their views on the timing of the next recession and the evolution of home buying demand this year and next.

For more details and findings on the latest Zillow Home Price Expectations survey, visit the Pulsenomics website.

Sources

  1. https://www.zillow.com/research/when-is-the-next-recession-2020-24389/
  2. https://pulsenomics.com/surveys/
  3. https://www.nber.org/cycles/jan08bcdc_memo.html
  4. https://www.nytimes.com/2019/08/17/upshot/how-the-recession-of-2020-could-happen.html
  5. https://www.investopedia.com/investing/next-housing-recession-2020-predicts-zillow/
  6. https://www.theguardian.com/business/2019/jun/14/the-risk-of-a-2020-recession-and-crisis-is-growing
  7. https://www.thebalance.com/could-a-stock-market-crash-cause-a-recession-3306175
  8. https://fairmontequities.com/the-difference-between-a-stock-market-correction-and-stock-market-crash/
  9. https://www.cnbc.com/2019/07/11/sharp-correction-brewing-for-next-18-months-strategist-says.html
  10. https://edition.cnn.com/2019/08/14/economy/recession-risk-economies/index.html
  11. https://www.cfr.org/backgrounder/role-us-federal-reserve
  12. https://www.cnbc.com/2019/08/29/bannister-fed-could-cause-recession-unless-it-cuts-rates-quickly.html

ratetake

Martin - Head of Real Estate and Finance at RateTake
Martin is Head of Real Estate and Finance division at RateTake. He creates content that helps people understand and make the right decisions for their financial future.
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ratetake

Martin is Head of Real Estate and Finance division at RateTake. He creates content that helps people understand and make the right decisions for their financial future.