If you were wondering about an approaching recession and wanted to hear from an expert about the possibilities of a global slowdown, then the bomb that Tim Cook, the CEO of Apple, dropped on Jan. 2 will give you pause.
In an interview, Cook commented about Apple’s cell phone business when he said, “China’s economy began to slow in the second half of 2018. The government reported GDP growth during the September quarter was the second lowest in the last 25 years. We (Apple) believe the economic environment in China has been further impacted by rising trade tensions with the United States.”
I can’t sugar coat this, what Apple was telling investors is that the global economy is in trouble and it appears that we are on a path to a trade-induced recession.
Many economists believe we are in the early stages of a global slowdown and while no one likes to hear the R word mentioned in an article like this, it is crucial to be prepared for what is a likely scenario.
The news is disquieting as two-thirds of the economists who were polled recently said that they expect a recession to begin in the next two years. Ten percent see it beginning in 2019, 56 percent are convinced it will occur in early 2020 and 33 percent said it wouldn’t happen until 2021. This was a poll taken by the National Association for Business Economics among 51 forecasters and they have been very accurate in their predictions over the last 25 years.
The three biggest issues that were cited in a looming slowdown were: trade policies and tariffs; the rapid rise in interest rates; and the current and substantial decline in the stock market. Also noted was the level of uncertainty that has been created by the disjointed and sometimes incoherent communications in our dealings with China on tariffs.
There are several other indicators that occurred in prior to recessions, like we witnessed in 2008, which foretell of a coming downturn. Here are four historical warning signs of an economic slowdown.
First, in 2005, 2006 and 2007 we saw automobile sales decline in each of those years until completely collapsing in 2008. Fast forward and the past two years have also seen declining in auto sales. This is a signal that was overlooked in the run-up to the last recession.
Second, Recessions often times follow a substantial increase in the use of credit as consumers run out of money. American consumers reached record levels of debt in 2008, owing more than $13 trillion on their credit cards. Lending Tree, the largest online loan company, found in its research that consumer debt was expected to pass the $14 trillion dollar mark by the end of 2018. This is a harbinger of recession as each downturn has been preceded by the overuse of credit in America.
Third, recessions are usually ushered in by a global retraction. This year, as the result of a trade war and tariffs, we have seen a pullback in China and Japan even though our trade deficits are increasing. The Eurozone, America’s largest trading partner, slowed in late November to the weakest level in more than four years.
Fourth, the yield curve on the two-year bond and the five-year bond inverted on Dec. 11, 2018. Even more hair raising, the difference between the two-year bond and the ten-year bond as of Jan. 10, 2019, is now only 14 basis points. A number of different models are predicting an inversion in Q2 of this year. This is a stark warning about the future of the economy and not just for economists, it affects all of us. A hedge fund manager from Goldman called an inverted yield curve a “harbinger of doom.” This indicator has accurately forecast the past four recessions anywhere from six months to two years after an inversion.
I would ask my readers to take this as a warning about an eventual downturn. Keep in mind that the U.S. economy is still in good shape as we start 2019. Consumer confidence, while it dropped eight points in December, has improved every year since 2009 and is currently at 128.1 on the index. This number usually predicts positive consumer spending and I can report that retail had one of its best holiday shopping seasons in six years.
Overall, retail sales were up 5.3 percent in November and December last year, according to Visa, and online sales were up 19.1 percent. The good news for appliance, furniture and electronics stores is that sales in home improvement were up 9.1 percent for the same period.
Unemployment moved up from 3.7 to 3.9 percent as more people came back into the job market in December because of 312,000 newly created jobs, significantly beating economists’ estimates for the month. In 2018 the economy added 2.6 million jobs, which is this best year for job creation year since 2015, when we added 2.7 million.
As I write this piece, the U.S. and China will resume trade talks in Beijing beginning in the second week of January. Global chaos has ensued with corporations, supply chains, farmers, independent businesses and consumers having been impacted by tariffs. BrandSource members have heard the stories from their suppliers. I am very hopeful that the world’s two largest economies will work to resolve this bitter trade dispute and put together a framework that will get business flowing again.
So to conclude this somewhat somber message, the economy is still strong going into 2019, corporate profits are up, Americans are employed and wages are rising. I think GDP will come in at 2.9 percent at the end of 2018 and consumers will remain upbeat and continue to spend money in the economy. If there is a recession, it will not be anywhere near what we lived through in 2008 and 2009.
What actions should a business take now?
The advice I would give the BrandSource dealers is pretty basic: It’s time to look at expenses and spending. Being ahead of a recession is the best way to protect your business and employees.
Work on selling up and increasing margins in the store, make sure your sales teams know what products are your profit winners and volume champions.
Don’t back off of advertising, marketing and promoting. Oftentimes a cutback in this area can create its own headwind that hurts sales and further exacerbates an economic downturn.
Finally, drive the highest levels of customer satisfaction in your marketplace, because that will create consumer loyalty.
Follow the advice of your BrandSource team — they are the experts and will help prepare you if we do have a recession.
While predicting bad times is never a welcome task, it is important to be aware of the leading economic indicators that seem to point to more difficult days ahead. Watch for this column next quarter for an update on our growth prospects.
Joe Higgins began his career with General Electric, eventually becoming responsible for the Appliance Division’s largest customer: Goodyear. In 1977, Higgins moved on to The Whirlpool Corporation, where he reached the position of National Director of Sales and coordinated staffing after Whirlpool acquired Maytag in 2006. After retiring from Whirlpool in 2012, he put his 35 years of experience into a new career as a speaker and business consultant.