My wife and I recently met with a real estate agent who, years ago, helped us buy our first home. He’s been representing home buyers and sellers for more than a decade and, on top of a couple decades of building and general contracting experience, he has a business degree in economics from a respected Boston-area business school. The guy knows his stuff, whether he’s talking about price per square footage or the benefits of buying in up or down economies. So it was a little humbling at the end of our two-hour meeting to talk about the state of the global economy and if it made sense for me and my wife to trade up our home this year in light of the possibility that the global and or U.S. economy will soon slip into recession.
“Well, how do you think the economy is doing now?” he asked.
“Well, I think it’s doing pretty well,” I said. “The markets tapered off at the end of the year, but that’s not necessarily an indicator of a coming recession. Unemployment’s at historic lows. The so-called ‘trade war’ with China isn’t so bad, since tariff increases are being put off further. There was one recent indicator that was alarming, though — I forget exactly what it was….”
“Could it have been the [inverted] short-term yield index?” he asked.
“Yes, that sounds familiar,” I said.
It was at this point that I put my cards on the table and informed him that I am not an economist (although I do have degrees in Political Science, which technically makes me a “political scientist,” but that and $2.13 will get you a tall Pike Place coffee at Starbucks). It was also at this point that I learned about his economics degree.
“What that means is that short-term bonds were yielding more than long-term ones because the Fed was raising interest rates on long-term bonds,” he said. This is done to slow inflation and prevent a hot economy from overheating. An inverted bond index has predicted most of the last ten recessions; but it hasn’t predicted all of them, and sometimes there have been false alarms. This could be one of them.
“It bothers me when [the news media] starts talking about recession,” he said, “because it has a chilling effect on consumer confidence and home-buying.” Fair enough, I thought.
And while home buying and purchase prices have been declining (our agent characterized them as stabilizing and returning to normal), it may be a result of the real estate market overheating, especially for first-time home buyers that do not have any equity in an existing property. The flattening could simply mean that fewer people can afford to buy homes at these prices, and lending institutions, perhaps having learned their lessons from the pre-2007 sub-prime mortgage crisis, are being more cautious in lending to them.
All of this to say that the exchange had me reconsidering Ardent Partners’ prediction we made earlier this year that the global and or U.S. economies would slip into recession in the second half of 2019. Are we being alarmist? Are we reading too much into some of these indicators and taking too much stock in qualitative events? And it pushed me to turn this prediction on its head and see if there are or would be some mitigating circumstances that could keep us from another recession. After all, these two indicators — the inverted short-term bond index and the housing market cooling off — do not necessarily signal a coming recession.
So, tune in next week as I explore four reasons why we should actually be bullish on the economy.
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