You’re a gloomy bunch. But are you on to something?
Over half of first tuesday readers responding to our recent poll said they expect the next serious economic recession by 2018. Another 40% say recession will return by 2023. The remaining one in ten readers isn’t worried about a recession any time in the next two decades. All told, 90% of respondents foresee economic turmoil heading our way sometime in the next decade.
When we asked the same question in Fall of 2013, reader predictions were much darker: four out of five respondents expected a recession by 2018, with the remainder pushing recessive conditions out of the forecast for 10 or even 20 years.
The improving sentiment falls in line with current conditions. The state’s economy has demonstrated substantial improvement in real terms over the past two years. However, first tuesday estimates California won’t face a recession until around 2020.
California employment numbers, the income bedrock of any economy, posted year-over-year increases of 425,000 for 2014. The persistent decline of mortgage rates and flattening home prices (at a time they were expected to drop) contribute to a sense we are past the recovery stage and into a nearly unstoppable business expansion. Right?
Reading the tea leaves
The current indicators convey mixed signals about the timing of the next recession. Some indicators give the impression of great strength:
- mortgage interest rates have demonstrated a constant declining trend for nearly a year, resulting in increased buyer purchasing power — greater amounts borrowed on the same income;
- California home prices, despite greatly reduced increases entering 2015, have remained up year-over-year thanks in large part to low fixed rate mortgage (FRM) rates and job growth; and
- California employment and gross domestic product (GDP) growth continues at an impressive and sustainable fast pace.
On the other hand, some measures of economic health seem to defy the current clear-skies thinking:
- home sales volume continues to slip, stabilizing in February 2015 following a near 10% drop in 2014 below 2013 numbers;
- recent near-zero short term interest rates wrapping up a 30-year half-cycle of falling mortgage rates and paving the way for three-decade half-cycle of generally rising mortgage rates;
- wages and income growth have about four years — or more — to go to catch up with GDP growth and core inflation we enjoyed before the 2008 Great Recession;
- mortgage lending standards, particularly in regards to punitive FICO credit scores for the 1.1 million families who lost homes to foreclosures or short sales in the housing bust, remain stringent;
- California’s homeownership rate remains flat at around 53% with pressure to move downward as both the preference and ability to own decline — compounded by an excessively high rent-to-income ratio and related inability to save for a down payment;
- an aggressively strong U.S. dollar is slowing U.S. exports and production (and jobs growth) as weak foreign currencies are causing massive sums of global investment to pour into U.S. Treasuries and other government-related bonds, which are in turn artificially lowering mortgage rates and buoying real estate prices; and
- end-user homebuyer demand remains weak despite pockets of activity, particularly in the high-tier coastal markets, though a demand ripple effect will eventually be felt in the inland mid- to low-tier markets.
These interrelated factors, apparently contractionary as they may be, certainly don’t portend a housing crash — but neither do they rule out a slowdown in home sales volume.
Global conditions affect California
The yield spread, a strong predictor of economic vigor or languor 12 months hence, remains positive, pointing toward a middle-of-the-road prognosis for the economy one year forward. All this is due to the U.S. being essentially the only functioning major economy, despite having yet to get fully up to speed. Meanwhile other major global economies are decelerating, suffering from distortions of either deflation (in the Eurozone) or inflation (as in South America).
Sooner or later, however, the Fed will raise today’s job-boosting short-term rates to cool down economic growth and stave off excessive consumer inflation – which is nowhere in sight for 10 years. This will induce a routine, moderate business recession — something not likely for several years into 2020.
The Fed is expected to move on short-term interest rates (directly affecting adjustable rate mortage (ARM) rates) sometime in late 2015 or early 2016, yielding a mild business slowdown about a year later (as took place in 1984-1985 and 1994-1995).
Thus, most readers’ predictions are right on the money, if a bit pessimistic. But this will not be the more serious 2007-style balance sheet recession they seem to still have in mind where consumer spending grinds to a halt and broad turmoil ensues.
Of course, wild cards still exist — dramatic increases in the price of oil; the prospect of a deepening or prolonged slump in foreign economies; the continued lack of investment opportunities around the world; a further strengthening of the U.S. dollar — which can change this picture dramatically. But, for now, it doesn’t appear that anything quite like the Great Recession is foreseeable for a couple of decades or more, possibly another 60 or so years.