“Economists Think the Next U.S. Recession Could Begin in 2020”

ADMIN NOTE: Starting this morning, Jon is reprising our Early Warning intelligence report. Those reports will be emailed out to our Intelligence subscribers each morning at 9am Central and cover breaking news from overnight as well as our outlook on the day’s events shaping the future.

According to a Wall Street Journal poll conducted last month, some fifty-nine percent of economists believe that U.S. economic growth will end sometime in the year 2020, signalling the start of the next recession. As has been quipped, economists and weathermen are the only two people who can be consistently wrong and still keep their jobs. From an intelligence perspective, I’m not so much concerned with the exact timing of the next recession as I am with how deep it will be. We know that there will be another recession, and quite possibly just as painful as the one in 2008.

Earlier this year at Davos, hedge fund founder Ray Dalio (who runs the largest and most successful hedge fun in the world) warned that he sees a lot of instability in the future. Explicitly referring to a recession starting around 2020, he warned that inequality was going to lead to social unrest during this time. Still earlier this year, CNBC published an article on the results of a JP Morgan survey that found 75 percent of its high net worth investors foresee a recession, possibly as soon as 2019.

We’ve survived past recessions, like the one in 2008, but only because of intervention by the Federal Reserve (incidentally, the same organization that causes recessions). I’ve pointed this out in previous intelligence reports, but it bears repeating here: the Federal Reserve historically has to cut interest rates by three percent to spur enough economic growth to pull us out of recession. The Federal Funds Rate as of last month stands at 1.7 percent. The Federal Reserve, then, is going to be forced to raise interest rates to reach as close to three percent as it can before a recession hits so that it can turn around and begin cutting interest rates. If this plays out like it traditionally does — with the Fed raising interest rates to prevent the economy from overheating, which hastens a recession, and then is forced to begin cutting rates again to spur spending and economic growth — then we’re looking at a monetary roller coaster in the next two years. This could have a profound effect on everything from the stock market and small business lending to the global economy and foreign trade.

To make matters worse, according to several pieces of data, Americans are increasingly on either side of a widening political gap. The Left is moving farther Left, and the Right is moving farther Right. There’s less middle ground, and only small voices are urging Americans to focus on where we agree before we focus on where we disagree. As we’ve seen from the man on the street to the man in D.C., we have a very toxic sociopolitical climate.

I hate sounding like an alarmist — I have no specific predictions other than an expectation of increased instability — but this is very alarming to me. To be sure, life will go on. The world is not ending, and we’ll have to play the hand we’re dealt. It’s impossible to foresee right now the end result of the convergence of these factors, but I do believe we should, at a minimum, be prepared for a replay of 2008 and possibly much worse because we do have a significant amount of political vitriol and what I believe amounts to a soft coup going on in Washington D.C.

So here comes the intelligence part: how do we use the intelligence framework so that we can 1) reduce uncertainty about the future and 2) make better, more informed decisions about our family safety and community security?

We start by sorting out what we know and what we don’t know. ‘What we don’t know’ in more specific terms are our intelligence gaps. This is where we need to collect more information so we can fill those gaps and have what we need to arrive at an accurate conclusion. These intelligence gaps eventually become our Intelligence Requirements: statements or questions describing the intelligence gap. Here’s an example.

Intelligence gap: “I don’t who’s at risk of being laid off in my neighborhood.”

Intelligence Requirement: Identify the individuals in the community at risk of being laid off.

Then we run into another intelligence gap: how do we know who’s at risk? Let’s start by looking at industries most deeply affected by previous recessions: construction, durable goods, retail sector, and professional services were all hammered. (Durable goods refers to automobiles, electronics and appliances, recreational products, etc.) We might start thinking about the types of employers in our community who fit into those industries. Now we have new intelligence gaps and, as a result, new Intelligence Requirements.

1. Identify the construction companies in my area most likely to be impacted by the recession.
2. Identify the retail outlets in my area most likely to be impacted by the recession.
3. Identify the professional services companies in my area most likely to be impacted by the recession.
4. Identify the durable goods outlets in my area most likely to be impacted by the recession.
5. Identify the individuals in the community at risk of being laid off.

If we start looking at the risk of unemployment in our neighborhoods, then we may start to get a really good sense of who’s going to be affected and have a much better picture of the economic health of our community. Every area won’t be affected in the same way; there were some areas that actually fared well during the 2008 recession, but there were many that didn’t. And then we add in budget cuts for emergency services, like police and firefighters, and we can see just how badly some areas may be affected.

You may be thinking that this is too much work, and I can say that if this type of thinking doesn’t interest you, then you probably wouldn’t be a good intelligence analyst. But if you see the value in it and see how this kind of thinking can begin reducing your uncertainty about the future, then I certainly encourage you to continue learning about intelligence through this blog.

If you have questions or would like me to describe how to apply intelligence collection and analysis to real world problem sets, just let me know. Comment below or use the contact form and I’ll work on answering your questions. Until tomorrow…

Always Out Front,

Samuel Culper

OR