87% of American CFOs Predict a Recession Within 2 Years

Recession

In the latest poll of American Chief Financial Officers, while the overall pessimism regarding the economy is improving a bit, most still feel that a recession will be coming.

When economic growth drops to around 2%, it is natural that a lot of people will be more concerned about things deteriorating further, especially if we are in a downward growth trend.

This is happening now, and we’ve moved from a healthy GDP growth rate of 2.9% in 2018 to our current projections of 1.9% for 2019 and this remaining in the 2% area for the years 2020 and 2021, which still don’t look too bad at all and are actually quite acceptable should this all come to pass.

The first thing that we need to realize when we throw around these numbers and look at the trends and ponder the future is that this is not a black and white thing, either being above the line with growth in the positive, or dipping below for a while into a recession.

That’s the way we tend to think about these things, including discussions about it in the media, but in reality, it’s all just movements on a continuum, toward more expansionary or recessionary times.

When we move from 2.9% to 1.9%, that’s a recessionary move in of itself, even though the level of concern surrounding it will be tempered by the actual GDP growth percentage. We can therefore expect things to slow down economically whenever growth slows down, and we’re seeing this already from this current recessionary trend.

1.9% is certainly better than 0.9%, which is in turn better than –0.1%, and as this number shrinks, the contractionary effect of the economy becomes larger. Production decreases and employment numbers shrink, and this is where the real rubber meets the road in the real world and not just the impact of this upon the musings of the forward-looking stock market.

A lot of people misunderstand the significance of stock markets in our economy, and while stocks dropping a lot in price does have some real effects, like affecting people’s ability to borrow against their stock market positions, this is actually all pretty minimal in a real sense anyway. The psychological effects of this are real enough though, and many people get upset during these times.

This stress is not due to the stock market itself though, it results from our ultimately not managing our stock market positions in accordance with our risk appetite, given that the symptoms here are a result of our being exposed to too much risk than we would have liked. This is always a matter of poor decision making though, even though we love to blame the economy and the market for our predicaments.

Positive Growth and Low Unemployment Do Bode Well Though

Even though economic growth may be contracting, as long as it is positive, while business conditions may be going downhill, and the prices of our stocks may be affected, if business is still growing, that can’t be too bad of a thing, and it really isn’t.

For that matter, even dipping below the line a bit for the two quarters that is required to qualify as an official recession may not be that bad either, especially if we finish the year in the positive. The Great Recession wasn’t so great actually, although the financial sector did take a big hit as would be expected during a financial crisis.

We can’t just look at GDP growth to get a true idea of what is going on, as this does not account for net growth. If the economy grows by 3% and inflation rises by 3%, there is no net growth, and therefore growth or contraction after inflation is accounted for is what really matters here.

When we add up these numbers during the Great Recession, we had a 1.8% growth rate in 2007, but inflation came in at 4.1%, and that was the real problem as it left us with a negative net growth of 2.3%. 2008 actually wasn’t as bad even though growth turned negative at –0.1%, because inflation was only 0.1%.

In 2009, negative GDP growth peaked at –2.5% while inflation climbed to 2.7%, producing a net loss of 5.2%. We got back on track in 2010 though, where growth turned back to a positive 2.6% with inflation at 1.5% and we enjoyed real growth again. This demonstrates how we really need to look at net growth to get a good picture of what is going on, although we usually just focus on GDP.

We gained 1% net growth in 2018, which is a good number, but 2019 looks more even, with both growth and inflation coming in around 2%. We therefore look like we’ll be treading water for a while, but these things are subject to change of course.

The unemployment rate also matters here, representing the end result of these economic forces, and it rose to 9.9% in 2009 at the height of this crisis. It’s been going down every year since though and now sits at 3.9%. As long as this remains low, there won’t be much to worry about overall.

It Can Help to Look Ahead, But What is In Front of Us Matters the Most

While things actually do look pretty stable right now, it is not unreasonable that we would have concerns about this contractionary trend continuing, perhaps having us revise our predictions for the coming 3 years more and more downward. This is a real risk because we just cannot predict the future that well, and may not properly account for the downward momentum increasing over time.

What has caused things to drop 1% from 2018 to 2019 may persist and increase in magnitude, and once demand starts to decline, this has real effects upon other areas of the economy. People buy less, companies produce less, they pay people less, they can now afford to buy less, and we can see this all continue to cycle for a while as things continue to go downhill.

The money supply dictates a lot of this and this is the reason why the Fed watches and manages this so closely, because as the money supply decreases, this will decrease demand first and then supply and will in itself tend to produce further reductions in money supply if no action is taken.

We can and do take action though, although sometimes the trend can be greater than what can be managed, for instance when the Fed does what it can to stimulate the economy yet this is not enough to overcome the contractionary forces at work.

It isn’t that clear why we would pay much attention to what company CFOs believe as far as the risk of a recession is concerned, as this really isn’t their area of expertise. This is difficult enough for the best economists we have to project this far out, as there are a lot of things that can happen in the intervening periods that can change things, which is why these numbers get revised so much at times.

In any case, it has come out that 84% of CFOs think that a recession is coming by 2021. The consensus view last quarter was even more negative though, as far as when they believe we will be hit by this, which has now been pushed ahead further in this latest poll.

CFOs do play a role in all of this within their sphere of influence, which is company spending, and they still are willing to spend more, and expect to raise this by 3% on average in 2019. That’s a real positive, because if they are backing off on this, this in itself will contract growth.

That’s the important part of this polling, the meat and potatoes of it, and it’s fine if these people are expecting a recession in a year or two but aren’t really acting upon these beliefs too much. This is the case now generally, so this poll actually provides us with some good news, some facts to go along with the opinions expressed about the future, but it is the now that really matters.

The current pattern of economic growth is well worth monitoring, but we need to realize that our powers of prediction here are quite limited at best. The most we can say about ones that don’t bode that well is that we need to be on guard should they come true, but otherwise keep our eyes on the road and not put more weight on these predictions than they deserve, which is less than we may think.