Most people are still feeling the hangover of the last recession. But could we be in store for a new recession soon? Many people think so.
At 96 months, we are currently in the third longest expansion period since the end of World War II. There have been 11 such periods, with the longest being the lead up to the Dot-Com Bust in 2001. That alone has some people wondering how long the current growth can last.
If 1 in 3 feel like they haven’t recovered from the last recession, the next recession could be very painful for a lot of people.
Some factors on why we might be heading into a new recession include:
Debt Loads and Bankruptcy
Outstanding debt is at records never before seen. We are talking record mortgage, student loan, car, and credit card debt here. Outstanding credit card debt stands at $1 trillion. Student loans are about $1.44 trillion. Car loan debt is $1.16 trillion.
With higher debt loads and some pretty stagnant incomes, bankruptcies have begun to rise again. December 2016 and January 2017 was the first time that consumer bankruptcies rose in back to back months since 2010. In May 2017, consumer bankruptcies were up 5.4% year over year.
And it’s not just consumers. Business bankruptcies rose 4.7% year over year in May 2017. That’s 3,572 filings, up 40% from May 2015. And May has historically seen a drop from the highs of March and April in years past.
Bankruptcies mean people aren’t paying their bills. Which could very well end up with us all suffering through a new recession.
Housing Indicators for a New Recession
Typically, mortgages are not a big driver in consumer bankruptcies. When borrowers get in trouble, they can often sell or give the property back to the bank without further recourse by the bank. But foreclosures and other similar activity is a sign that consumers are overextended. It also hurts the broader economy because people will not be able to buy new homes, leading to problems in construction related industries.
One sign that there is a problem in the housing market is out of control rents. You are seeing this in a lot of markets right now – where the rents are jumping hundreds or thousands of dollars year-over-year. It seems ridiculous, even to this landlord that’s taking advantage of it.
Meanwhile, another sign that the market is weak is that mortgage origination numbers are really being propped up by refinances. In the first quarter of 2017, cash out refinances were up to 49% of refinances, up from 44% the quarter before. According to Freddie Mac, it is the highest since the fourth quarter of 2008. The peak cash-out refinance was at 89% in the third quarter of 2006. Some experts say that the high rates of cash-out refinances show consumers are overconfident about home prices and continued upward trajectory. When too many are overleveraged, it can lead to a housing downturn.
Housing Starts and Inventory Shortages
In June 2017, housing starts hit 1.22 million-unit pace. This is a reflection of how many homes and condos the industry started building. The historical average is 1.5 million units.
Even though the June pace is up 8%, the difference between the current pace and the historical pace is leading to a supply problem. At current supply, it would take about 4.3 months to clear up the housing market. But six months is considered healthy. As a result, it is typically a seller’s market – houses are on the market about 28 days which is down from 34 days a year ago.
All these factors lead to a growing demand – higher prices are good for sellers. But that also means that buyers are having a difficult time getting into the market. Particularly first-time homebuyers that can’t come to the table with all-cash offers. Long-term, this is going to be rough on the economy, particularly Baby Boomers looking to retire to sunny Florida.
Cars and Transportation
2016 was a banner year for car sales. There were more car loan originations in 2016 than in any other year of the 18 years that the Federal Reserve Bank of New York has been tracking the data. Total auto debt hit $1.16 trillion, with a $93 billion rise in 2016.
In February 2017, the New York Fed announced that car loan delinquencies were at a 8 year high. $23.27 billion in car loans were delinquent by 30 days or more. That’s the most since the third quarter of 2008 when the balance was $23.46 billion. Not a good sign if we are heading into a new recession.
Jobs and Income
Are you tired yet of seeing all the articles about unemployment being down but wage growth being zero? How many articles have you seen like this in the past month? Bloomberg: Wage Growth Is Flat. What If Workers Expected More?
While unemployment may be down to 4.4% and adding 200,000 jobs a month, wages haven’t gone up. Pre-recession, average earnings were going up at 3% plus per year. Lately, it’s been 2-2.5%. This means it is harder for the average worker to pay for the higher house mortgage or rent and higher priced cars. Consumer demand won’t go up until workers can see more money to spend.
Bernard Baumohl, chief economist of The Economic Outlook Group, doesn’t expect to see “a breakout in wage growth for at least the next two years.” That may be good for companies relying on cheaper labor. But it doesn’t help out the workers providing that labor.
What You Can Do To Prepare
Most people in a recession don’t lose their jobs. It would be about 5-10 percentage points more unemployment than now (currently sub 5%). But that does mean that some people will lose their jobs. Generally though, people won’t be getting bonuses or raises, which many rely on to make their budgets work. Hiring freezes will go into effect making it harder for people to get a new job. You’ll probably be working more hours (perhaps at no additional pay) in fear of losing your job.
Without a recession, we are already seeing proposals about cutting almost all types of safety net programs. If government revenues fall in a recession, governments will be looking at cutting benefits that can be part of your safety net. Food stamps, housing assistance, and unemployment benefits are all subject to change.
Whether or not we are headed for a recession, it would be wise to get your own financial house in order. Work on your budget to cut unnecessary expenses, save money in non-retirement accounts and pay down debt. For those that are in jobs in sensitive sectors, like construction, it is even more important for you to be ready for a possible downturn.
Even if there ends up being no new recession (although really, it’s inevitable), you have less debt and more savings, not a bad position to be in, right?
And a final reminder to pay attention and take care of your health. Debts related to medical treatment can really hurt you, recession or not.