(As seen on WZZM TV 13) The next recession is on its way.
Exactly when is yet to be seen, though Paul Isely, economist and professor at GVSU’s Seidman College of Business, said he predicts change in late 2019 or early 2020.
Isely said economists don’t determine when there will be a recession; rather, they watch data trends to determine how likely the economic environment will catalyze a recession.
“The probability of a recession goes way up as we move into late 2019,” he said. “At some point, it will happen.”
But, it is very unlikely the next recession will be as bad as the last.
Isely used a ripple effect metaphor to describe the two types of recession. The one coming up will look like a stone thrown into a pond — a moderate disturbance in the surface that evens out relatively easily.
The more volatile type, like the one a decade ago, is like a rock is thrown into a river and leaving a gaping hole.
Isely said the coming recession will be considerably shallower and not as broad-based as the last.
“We are expecting there are different sectors of the economy that will keep it all together,” he said.
He said West Michigan’s diversified economy also will help keep it in control.
Service industries, particularly luxury services, can be most susceptible to income changes. The automotive industry also could be hit, he said.
He’s not very worried about banks or the construction industries, however.
Considering talent shortages, Isely said businesses could use the recession to their advantage, grabbing workers in need of jobs once it hits.
He said businesses should prepare for the recession by ensuring they have some capital on hand.
There are a few factors that could cause the recession sooner or later, however.
To determine the likelihood of a recession, Isely said one of the aspects economists analyze is real GDP compared to potential GDP.
The economy currently is operating above potential GDP, and when that happens, there typically is a recession in the next 18 to 24 months.
The rise above potential GDP creates bottlenecks in the economy, such as in wages, input prices and interest rates, which work together to create a recession.
Though the common notion is wages are steady, he said they have been growing faster than productivity since the first quarter of 2015.
“We don’t care how fast wages are growing, but we care if they’re growing faster than productivity,” he said.
This means the labor force is grabbing more of the share than businesses are producing, which may not necessarily be in income, Isely said, but could also include more days off or a more relaxed work environment.
Looking at Muskegon County, he said wage growth is above 10 percent year over year, well above the rest of West Michigan.
“It’s not a surprise because what’s happened is firms are reaching into areas that have fallen behind wage-wise to find workers,” he said, adding that’s forcing local companies to increase their wages.
Isely said the top quartile of wage increases in some areas is above 14 percent.
“So, the wage growth is being hidden a little,” he said. “I think there’s more tightness in the labor market than some people might think.”
He said this is the first time since the 1980s that wages are growing faster than productivity. The last time this happened without a recession was in the 1950s.
The high wages combined with the high cost of production materials pull the recession forward, Isely said.
In 2016, the price was decreasing on a lot of goods; fewer in 2017. This past summer, nearly nothing was decreased in price.
“An increase in wages compared to productivity and an increase in input prices make it less profitable for firms to make things, so therefore, they’re less willing to make things, which ultimately leads to the next recession,” he said.
Isely said there was a hope recent federal tax cuts would cause companies to invest more.
However, growth rates in business loans from banks dropped in 2018 to around 3 percent from over 10 percent in previous years.
“That doesn’t suggest to me that firms are running out and buying things because if they were, they would be borrowing money,” he said.
It could be the tax cut was so good the businesses had no need for loans. Looking at business equipment purchases — which Isely said likely would go up if businesses were investing to increase productivity — rates decreased from up to 20 percent post-recession to less than 0 percent in 2017, with another increase in 2018.
Isely said the latest increase could either be an actual increase in investment, or it could be deferred investment that occurred because businesses knew they would get tax breaks.
If the investment truly is increasing, that could push back the recession, he said. If it’s deferred investment, that would pull the recession forward.
Another piece that will affect when the recession happens is the trade issues, Isely said.
He said the Michigan automotive and agriculture industries have been hurt the most so far in these issues.
With 10 percent of jobs relying on $60 billion in exports coming from Michigan, the state’s economy would be in danger if other countries decrease purchases.
Isely said China plays a big role in the issues, and if the Chinese believe the U.S. president will be hurt after midterm elections, the country may continue waiting.
Having any kind of deal would help, he said, and lack of resolution on these issues could pull the recession forward.
Right now, Isely said he is looking for any signs of inflation that are above expectations.
“If inflation keeps coming in above people’s expectation, then it’s a really good sign we’re on track for the next recession,” he said.
He also is looking at increases of short-term interest rates, technological changes that could supercharge productivity and workforce immigration.
There’s a damper on workers moving into Michigan and moving into the U.S. from other counties, and there are fewer babies being born.
So, an increased labor force likely will not save productivity, he said.
While the one approaching is inevitable in a dynamic economy and can be expected roughly every 10 years, he said, the volatile type is more unpredictable, though some economists theorize it occurs every 30 years.
While it can be as difficult to predict the future economy as it can be the weather, Isely said economists are looking at the late 2020s as a possibility for a big recession.
That’s when people may have more of a need to borrow more from the government, including baby boomers using entitlement programs.
This could push up interest rates and cause a lot of strain in several areas.
“We do know … the ability for the economy to react to recession is going to go down in the 2020s,” he said.