What Will Cause the Next Recession?

Everyone is talking about it, and more and more investors are predicting it: the next recession. Most agree that it won’t look anything like the ruin of the 2008 financial crisis, rather that it will be a mild correction. But, what will catalyze the next economic event? There is less consensus in this category, but James McDonald, CEO and CIO of Hercules Investments, believes geo-political events will play a role.

“I think we’re most vulnerable to geo-political instability. There is a need for a trade deal with China, but we need to watch the protests in Hong Kong closely,” McDonald tells GlobeSt.com. “Political destabilization in Hong Kong could lead to an economic backlash that would potentially hit our bond and equity markets hard. Here in the states, if Trump lost the office due to scandal before the November 3, 2020 US Presidential election; or lost the election to a Candidate the market didn’t know or like, we could see a major stock market correction.”

In terms of timing, McDonald doesn’t expect any significant economic moves prior to the next presidential election. This is especially true given the recent reduction in interest rates. “If we’re defining a recession as consecutive quarters of contraction in GDP, real income, employment, industrial production and retail sales, then I don’t think it will happen before the 2020 presidential election,” he says. “The 2008 financial crisis scared the hell out of this country and its leaders, and the fed has shown how vigilant it will be to prevent that from happening again as a result of economic deterioration.”

While we aren’t in a recession yet, economic growth is slowing, increasing the risk of a downturn. “It’s important to understand that economic growth is still happening; albeit it’s happening at a slower pace,” McDonald says. “For example, if an NFL team wins back to back super bowls, but doesn’t make it to the championship game in year 3, but wins again in year 4, one could say its success had “slowed’ in year 3, but then they’d be missing the point that the team is still a winner.  That’s the story of this winning economy.”

McDonald adds that there is a lot to account for: nonfarm payroll employment, hourly earnings for all employees, real consumer expenditures, real residential investment, new and existing single family homes, building permit issuance, residential construction, industrial production, and total real government purchases all showed third quarter growth. For that reason, he isn’t concerned about slowing economic growth. “The growth was simply slower than in previous quarters where growth was very strong,” says McDonald. “I do not believe the slowdown of growth portends recession. I believe two things will happen before yearend. Trump will get a deal done with China, and the Fed will give the market what it wants: another 25 basis point cut by year-end.  Both will make the probability of a recession, or a protracted stock market decline highly unlikely in the short term.”