As we begin 2020, are we going into a recession? There are three indicators we look at to answer that question: the GDP, unemployment and wages, and interest rates.
GDP stands for “gross domestic product,” and it represents the total monetary value of all goods and services produced and sold on the market in a certain country, typically in a one-year time frame. GDP is the most commonly used measure of economic activity, and we’re in year 11 of the longest expansion in American history. President Trump and many analysts are optimistic that our country will continue to be healthy, and we can continue to hit these record-breaking marks if our politicians reach a trade agreement.
I’m sure you’ve heard about the trade war that keeps dragging on, and these pullbacks in corporate investment remain a risk in terms of our economic outlook. A short-term partial agreement could possibly encourage businesses to resume spending, allowing the economy to muddle along at a slower growth rate of about 2% through next year, according to Michael Skordeles, head of U.S. macro strategy at Centrist Private Wealth Management. About 90% of the world’s economy grew slower in 2019 than it did in 2018.
In 2019, the U.S. was the world’s leading economy in terms of GDP, followed by China, Japan, and Germany—the same ranking as 2018. These economies are an engine of growth, in addition to commanding the majority of the global wealth. Since 1980, 17 of the top 20 economies remained in the top 20.
Unemployment is a lagging indicator, meaning it’s an untimely but still reliable source. When the unemployment rate rises quickly, a recession is almost certainly on its way (or has already arrived). As of now, our unemployment rate is trending downward and is just over 3%, which is a 50-year low. Fortunately, wages are rising because people have options.
When interest rates increase, the government tends to want to slow the economy down. When they decrease, the government tries to accelerate the economy. In October 2019, Federal Reserve Chairman Jerome Powell said that officials believed the monetary policy was in a safe place. They also signaled that the central bank would hold off on any further interest rate cuts unless the economic outlook changed materially. After lowering borrowing costs three times last year, the central bank has very limited means to stimulate the economy if things were to worsen.
Ahead of the Great Recession, interest rates hovered around 5%, which left ample room for them to be reduced. There’s been a lot of fear since 2008, and understandably so. Back then, we experienced a very consumer-driven recession. However, mortgage loans aren’t handed out like candy anymore. We’ve seen a significant increase of millennials entering the market, which has increased market activity significantly.
If a recession does occur, it could reduce home prices. However, this recession would be a mild one because our economy is doing well right now.
If you’re thinking of buying or selling in our 2020 market or have any questions for us, don’t hesitate to call or email anytime. We’d love to help you.