The headlines are getting more panicked. “Is the junk bond crisis the start of another 2008?” reads one CNN headline. “We’re in a ’profit recession.’ Is an economic recession next?” blares another from USA Today. “Will the U.S. economy slip into recession in 2016?” asks CBS News.
These seem like kind of crazy questions to be asking. The economy, by most major current and leading indicators, seems to be doing well. Growth continues to chug along, the unemployment rate has dwindled down to just 5 percent, and inflation remains subdued. Payrolls are rising, and initial jobless claims — one of the better leading indicators — have not spiked. Still, there is all sorts of turmoil giving economists and traders and politicians a lot of pause.
First and foremost, emerging markets are falling apart, with China likely to be growing at the slowest pace since 1990 and potentially heading toward an outright recession. It has been a week of chaos emanating from Beijing: Today the Chinese stock market plunged yet again, with officials shuttering the markets and sending traders home after just 29 minutes on the clock. (The delightful response of one derelict securities analyst, as recorded by Bloomberg: “All of us are talking about getting off work early today and we are happy.”)
That hit stocks in Europe, the Middle East, and elsewhere, and pushed down the price of crude to the lowest level in more than a decade. The futures markets point to a likely free-fall in the United States this morning. And for good reason: Those problems overseas have started to hit the American manufacturing sector. This week, the Institute for Supply Management announced that manufacturing had contracted at the fastest pace in six years, since the Great Recession.
Then there is the now long-simmering “profits recession,” with American companies pulling in smaller returns. During the third quarter of the year, businesses racked up $2.1 trillion, according to the Commerce Department. That’s 1.1 percent less than they made in the second quarter, and nearly 5 percent less than they made a year ago. That’s the biggest year-on-year drop since 2009, when the Great Recession was nearing full tilt.
And there are other financial indicators giving economists the heebie-jeebies. Take the exciting world of high-yield junk bonds: They’re dropping in price and getting harder to offload, as investors balk at risky corporate debt. Last year a mutual fund called the Third Avenue Focused Credit Fund said it had suffered major losses and would liquidate. “It had very concentrated positions in especially risky and illiquid bonds,” said Janet Yellen, the chair of the Federal Reserve, reassuring reporters that Third Avenue was not a canary in a coal mine. But others think it might have been — or more broadly, that the financial economy is ailing and the real economy is going to start ailing, too.
Hence the headlines about downturns and the hand-wringing about the next Great Recession. What if high-risk corporate debt is the new housing bubble? If unemployment is so low, doesn’t it have to go up? How long do expansions last? Aren’t investors loaded up on risk? Then there are all the issues overseas! “China has a major adjustment problem,” legendary investor George Soros told an economic forum in Sri Lanka, as reported by Bloomberg. “I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.”
Perhaps overseas, but probably not here. Again, all those other statistics about the real economy — what Americans are earning at their jobs, whether their bosses are firing them, how much money they have to spend, whether they are using their unemployment insurance — continue to look just fine. A slowdown might be inevitable, given the turmoil abroad, and the pain on corporate balance sheets, and so on. But a slowdown and a return to the panic days of 2008 are, thankfully, not the same thing. Away from the market headlines, that seems a little clearer. From the economist Tyler Cowen: “The United States will chug along at 2 percent growth, and mostly ignore what could be the beginnings of a major global recession.” Or from monetary expert Tim Duy: “I think that fears of recession in 2016 are overblown … A broader perspective indicates little reason to be worried.”
But there is one big thing to be worried about, one that never really makes the headlines: the capacity for the United States to respond to the turmoil ahead. Companies might be in decent shape to weather a slowdown or a mild recession, what with the giant piles of cash they have sitting around waiting for a rainy day. (No, really.) The government — our government, and governments around the world — is another story. The Federal Reserve can only drop interest rates by the smidge that it has raised them, and its other major tool for juicing the economy, quantitative easing, has diminishing returns. In contrast, headed into the Great Recession, the federal funds rate was 5.25 percent and the Fed had trillions of dollars’ worth of room to expand its books. It gets worse thinking about Congress. Imagine today’s House passing a stimulus bill. Imagine it passing a tax-cut-only stimulus bill. Imagine it passing a stimulus bill that contains the repeal of Obamacare. Imagine it passing a stimulus bill with a balanced-budget amendment.
That’s the thing to worry about — not that there’s a Great Recession lurking around the corner in 2016, but that whatever it is, we won’t be able to fight it.
