Don’t Believe the Hype: An Economic Storm is Brewing
By Ryan Smith
Everywhere you turn the constant refrain on the economy is everything is looking up. Last night Donald Trump crowed from his State of the Union pulpit about how his policies have ushered in the greatest prosperity the United States has ever seen.
JP Morgan Chase’s analysis of the health of the economy and business is quite optimistic arguing, in spite of several serious concerns, the economy of 2018 was very healthy and, “With few signs of trouble on the horizon, 2019 is starting on a note of steady growth and favorable business conditions.” The international asset management firm Schroeder’s came to similar, though less sunny, conclusions stating in spite of trade wars and stock market uncertainties 2018 was a solid year, economically speaking – while they expect a slowdown in economic activity, they don’t predict serious downturn in 2019. Deloitte argues in their analysis that trade pushed on in spite of barriers and while there is some risk going into 2019 that 2018 was a solid, prosperous year with strong momentum going into the future.
If such optimism, hedged with recognition of growing economic problems, was enough then we wouldn’t have anything to worry about on the economic front. Unfortunately the risks each of these analyses discuss, specifically questions of growing debt, uncertainty in international trade and problems in the political sphere, are not the only problems facing the economy or are they as surmountable as these learned institutions would imply. If anything, a careful examination of past economic crises shows, most famously in the case of the Crash of 1929 that unleashed the Great Depression, mainstream economic institutions are prone to overstating the health of the economy while downplaying or even dismissing dissenting views.
A more critical look reveals that 2019, far from being a year of decreasing yet still sustainable growth, shows many worrying signs that a serious downturn is quite likely and deeper systematic problems will transform the coming recession into something much worse.
Without a doubt, the iceberg floating in the path of our economic Titanic is debt. In September of 2017, privately held debt blew past the prior record set on the eve of the 2008 crash. According to the Bank for International Settlements, also known as the central bankers’ bank, the total amount of privately held debt reached a whopping $244 trillion with a t as of January of this year. To give a sense of how colossal this figure is, the estimated size of the entire world’s economy weighs in at approximately $88 trillion, putting the total quantity of known private debt, ranging from student loans to mortgages and credit cards, at close to three times the size of all economic activity on Earth. In their September 2017 report, the BIS warned this debt is held up by increasingly risky economic activities mirroring those that dominated global finance in 2008.
There are signs these debts are already exacting a growing toll on the economy. Credit card defaults were on the rise throughout 2018, reaching their highest level since 2012 by March. While these defaults are currently declining and haven’t reached their 2008 peak there are worrying signs that consumer debt is continuing to increase at alarming rates. The credit situation facing the retail sector is even worse. Retailers are already taking on growing quantities of increasingly leveraged loans just to keep the lights on. In April of 2018 retail debt defaults and missed payments hit an unprecedented record high. These growing rates of default suggest substantial segments of the economy, far from resting on solid ground, are depending on highly shaky foundations. If too many consumers default on their debts, then retailers who depend on consumer spending will probably be the next to go.
What makes this prospect increasingly likely in the coming year are worrying reports from the end of the 2018 holiday season. According to the National Retail Federation, businesses who specialize in consumer goods make up to 30 percent of their yearly revenue from Black Friday to New Year’s Day. This means any serious downturn in holiday revenues could be a sign of much worse things to come. Less money made by these businesses means people losing hours or even jobs, a situation that fuels further reductions in how much money retailers can expect to make. Seen in this light, in spite of optimistic predictions, some more recent news should be inspiring greater cause for concern than JP Morgan Chase, Schroeder’s or Deloitte are willing to admit.
On Jan. 10, Macy’s suffered their worst single-day stock price drop ever. The main cause of the dive was Macy’s falling well short of their expected holiday season profit projections. Apple’s end of year report was even worse – iPhone holiday sales were at their lowest point since 2008 and Apple’s share prices took a similar hit to Macy’s. Similar losses were reported across all retail as early as December 2018. A key debate point in economic circles is whether or not the current share prices of retailers are taking into account these losses, an assumption that implies the recent dip was a blip or market correction rather than a sign of things to come.
All of these worrying signs of retail retreat, debt defaults and overleveraging would be alarming on their own. Unfortunately, they have even more disturbing company. Ever since 2008, growing numbers of workers, worldwide, are employed in increasingly precarious environments working multiple part time jobs to make ends meet. This phenomenon, known as underemployment, has forced countless people into increasingly uncertain and low-wage positions. Many are working multiple jobs in everything from retail to traditionally secure positions, including university professors, just to stay afloat. For all the news of declining unemployment, most of these numbers obscure that much of this work is lower quality with lower pay and offers far less security than traditional full-time work. One serious downturn would be enough to push countless precarious workers off payrolls and onto the streets, a development that would escalate into a vicious cycle of cutbacks, shrinking revenue and more layoffs.
Such a whirlwind would not stay confined to jobs or retail. As workers lose their jobs and businesses go under, the Jenga of international finance will lose the regular payments needed to stay up. Once the first blocks go, the rest will be depending on fewer and fewer supports. Eventually, the foundation will become unstable and just like we witnessed in 2008, the entire system will come crashing down.
Even more worrying is the ample quantity of potential triggers for disaster. Stock markets rose and fell at the whims of Donald Trump’s Twitter tantrums throughout 2018. Brexit, the great and increasingly messy and uncertain debate over the United Kingdom’s departure from the European Union, hangs by a thread over the European economy, threatening a regional recession if no effective framework is in place by March 29. The Italian economy, as a harbinger of things to come across Europe, just entered a period of recession while the rest of the Eurozone’s growth flatlines.
Just like 2008 and 1929, a downfall in 2019 would be the result of multiple deep-seated problems adding up to a perfect storm waiting for the right conditions to strike. Whatever happens in 2019 will be a product of multiple mistakes, short-sighted decisions and accumulated problems piling up since 2008, especially those that benefited the few at the expense of everyone else. If we are to truly recover from or prepare for impending disaster, then we need to ask hard questions about why the public sphere became dominated by the super rich, what we can do to take it back and how we can prevent these repeated crises from ever happening again.
Although Trump focused on the shinier aspects of today’s economy during the State of the Union address Tuesday, we should not be so blind as to believe we’re being given the whole story or being prepared for the storm that may be coming.