Recession talk has been increasing over the past few weeks and many ask our opinion on this subject. While we are not economists, and certainly don’t want to add fuel to this chatter, we thought it would be a good idea to address the subject with data and some important points.
First, a recession is defined as a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. No, the economy does not stop. No, people do not stop living.
The worst aspect of the current chatter is the fear that if a recession were to come, it will be as bad as the last recession. The last recession was closer to a DEPRESSION. It was unusually harsh and most of the fundamentals that were at play then – massive subprime mortgage market and a global financial crisis – do not exist today, certainly not anywhere vaguely close to those levels. Much stricter banking regulations exist today. Humans remember that which is most recent: equating ALL recessions with the 2007-9 GREAT recession is unwise and overtly pessimistic. And even during 2007-9, GDP declined by 5.1%. In contrast, during the Great Depression, GDP declined by about 27%.
The next question is when will a recession strike? No-one knows the exact answer although some form of a recession is inevitable sooner or later. Yes, there are certain indicators now that have in the past warned of possible recession, such as the inverted yield curve: They do not necessarily apply to ALL recessions. Currently the US is experiencing outstanding employment numbers: when people are employed, they earn, spend, pay their mortgages and rent and don’t require government assistance. GDP growth is currently over 2% annualized. The trade wars are a drain on growth, but hopefully these are resolved sooner rather than later.
Here are some facts about recessions since – and including – the Great Depression:
1. 64% of recessions since 1929 lasted under 1 year
2. There have been 14 recessions total since and including the 1929 Great Depression, or one every 6.4 years. We have not had a recession in 10 years.
3. In the past 50 years the average GDP decline during a recession was just 2.2%. Currently the USA GDP is growing over 2% annually.
4. In the past 50 years, unemployment averaged 8.25% during recession.
Many buyers think waiting till a recession hits will allow them to buy ‘bargains’. This may be true for some all-cash buyers, although history has taught us that when a recession hits:
- Home prices don’t always decline.
- Interest rates may be lowered, but obtaining financing becomes tougher as banks usually tighten lending standards.
- Cash buyers are always waiting for opportune moments to buy. Competing with these buyers is tough enough during good times. It’s worse during tough times.
- So much depends on employment: 70% of the USA economy is consumption and when people are employed, they consume. Even during these crazy times, the US consumer is strong.
- Rents tend to rise during recessions as fewer people qualify for a mortgage to be able to buy.
- Even during strong economic times, economic advisors give a 20% chance of recession.
While speaking about recessions can fuel unnecessary fear, it’s important for us to be clearly aware of what they are, how often they happen, and how unreliable predicting their timing can be. Most importantly, even in the WORST recessions life goes on: people get married, divorced, die, give birth, etc. and the vast majority continue working and earning…..and living. As long as that truth continues, homes will be built, bought and sold.