What are the odds of an imminent recession for the U.S. economy? By some measures, they’re as high as 90%. According to megabank JPMorgan, severely poor earnings for U.S. companies of the kind now being seen are a harbinger of an oncoming recession: 90% of time profits fall this much, a recession has happened within three years. As a result, JPMorgan is predicting a 50-50 chance of a recession over the next two years.
This is not the only indicator pointing in the wrong direction. Before diving into the other warning signs of a recession, it’s worth taking a look at some of the red flags that are already present due to external factors.
Across most of the European Union as well as in the world’s third-largest economy, Japan, central banks have resorted to interest rates that are not just low—they’re subzero, way below freezing, as it were! The Bank of Japan (BOJ), European Central Bank (ECB), and the Swiss National Bank (SNB) are just three prominent examples of central monetary authorities implementing negative interest-rate policy (NIRP).
For all of economic history up until last year, the notion of nominal interest rates below zero were unthinkable. In fact, Japan’s long-standing love affair with near-zero rates was seen as a testament to the idea of the “zero lower bound,” wherein rates could approach closer and closer to zero but were limited by this boundary line. For at least the past two decades, the once-thriving Japanese economy has been in a state of stagnation thanks to the aggressive use of these ultra-low interest rates. (In many circles, this problem with low growth in Japan has been known as the “Lost Decade,” which has now dragged into a second and likely third Lost Decade.
Not deterred by the dismal results, the BOJ turned toward even more extreme policy measures by allowing interest rates to fall below the zero lower bound. They were following the model laid out by the ECB about a year prior. Though these policies are in place overseas, they still have a profound effect on export profits for the U.S. economy.
Besides NIRP, another development abroad having a negative impact on the U.S. has been the “slowing pains” (sometimes called a “hard landing”) of the Chinese economy. For the past 25 years, China has enjoyed fantastic growth of almost unimaginably high levels. However, as the second-largest economy in the world now shifts from predominantly manufacturing to a more mature service- and investment-based model, the days of 7%-plus growth are likely over.
China has been the engine on the other side of the world economy (and the other side of the world, appropriately enough) that has driven the continued dominance of the United States. As this engine loses fuel and horsepower, it leaves a big question mark as to who is going to fill the void.
IMF, BIS Issue Dire Warnings
Both of these major international organizations have started to raise alarm bells about a recession on the horizon. The Bank for International Settlements (BIS), essentially a central bank for other central banks, is criticizing the uncoordinated and seemingly reckless use of monetary policy around the world. Between NIRP and the plunge in global oil prices, central banks are finding profits hard to come by. They are also running out of tools to combat the problem now that NIRP has been unleashed.
Meanwhile, the International Monetary Fund (IMF) has been downgrading its forecast for global economic growth amid China’s slowdown and dwindling international trade. The organization has characterized the current risk for crisis as a “delicate juncture,” which is scarcely a vote of confidence. In no uncertain terms, the IMF is warning of an “economic derailment” from which the world (including the U.S.) would sink into a recession—or worse.
It’s unusual to hear such pessimism and general doom and gloom from the BIS and IMF, considering these are two of the supranational bodies tasked with overseeing and managing the highest levels of the global economic framework. When they’re the ones that start making the warnings, things are undeniably getting bad for the economic outlook. The same is true for a financial institution as big as JPMorgan. Prepare yourselves for the recession we seem to be on the brink of before it’s too late!
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.