Tom Smith watches each Sunday morning for signs of recession at Panera Bread.
It’s telling: The size of the crowd, the attitude of the families – are they enjoying the chance to relax and spend a little money on themselves, the way people do when they have a few dollars extra, or are they anxious about keeping their jobs and paying their bills?
“That is my informal economic indicator,” said Smith, an economist and professor at Emory University’s Goizueta School of Business. “People coming in, all dressed up – that is a sign that the economy humming along. When that stops, there is something wrong. That is when I start to worry.”
If the economy starts slowing, the first signs of trouble could be in the behavior of ordinary consumers, Smith said. “People losing confidence, trying to save money, cutting the cord to their cable TV, you can’t see that right away in the data. But we can see whether people are getting bagels or not.”
Expansions don’t die of old age, though. There’s always a killer – something that chills the confidence of consumers and businesses. And the culprit could come from many different places. The most often discussed risks include a sudden spike in energy prices, accelerating interest rates, a plunging stock market – which many experts think is overvalued.
And it could be “a black swan,” something unexpected.
Triggered by the housing bubble’s collapse, the 2007-09 recession hurt metro Atlanta worse than most places because of the area’s reliance on housing for jobs and borrowing.
Now, the worst scenario for metro Atlanta and the state would probably be a recession caused by a trade war that disrupts the global flow of commerce, said Jeffrey Humphreys, director of the Selig Center for Growth at the University of Georgia.
But like a game of Clue, this expansion offers a number of potential villains lurking in the shadows – “imbalances,” Humphreys said.
[Odds of a trade war increased last week as the United States announced tariffs and China quickly said it was retaliating.]
Housing prices have risen faster than incomes. The stock market has climbed far faster than the economy has grown. The unemployment rate’s drop, which could lead to higher wages, has stoked the Federal Reserve’s fears of inflation because higher wages could lead to higher price.
So, the Fed has been lifting interest rates – slowly, so far – as a way to make borrowing more expensive and keep prices under control.
There’s danger they may raise rates too far and kill the expansion, Humphreys said. “A tight labor market is a good thing if you are looking for a job, but it is a bad thing if you get an inflationary shock. That increases the chance of a monetary policy mistake.”
Despite all the hazards, Humphreys isn’t predicting a downturn. “The risks are rising, but there is no guarantee that there will be a recession in 2020 or even in 2021.”
And he doesn’t have a favorite indicator that he’s sure will signal a coming recession because each downturn is different.
“I don’t look any one thing,” he said. “You have to look at it all. We won’t know the indicator that really matters until we know what the trigger for recession is.”
Once the prevailing mood turns from optimism to fear, it can quickly turn into a stampede.
The collapse of Lehman Brothers in 2008 turned a mild economic slowdown into a near-Depression experience. The 9/11 terror attacks threatened to make a mild recession much worse by virtually halting the nation’s air transportation for several weeks.
One of the most visible imbalances now is a stock market that many say is over-valued – its prices unjustified by the real economy. But said stocks can float above their true value for a long time, Samuel Fraundorf, chief investment officer at Diversified Trust in Atlanta, which manages nearly $7 billion in investments.
“Valuation is a really good long-term predictor,” he said. “It is a really bad short-term predictor.”
The Fed’s rate-hikes could eventually take the air out of the expansion, without necessarily solving all the underlying problems, Fraundorf said. “There are too many items that the Fed can’t control.
One is the federal budget. Economists generally say recessions, when the economy needs more spending, are a good time to run deficits, but the government should be reducing debt when the economy is growing.
The larger the deficit, the more likely government will crowd out other spending and push interest rates much higher.
“We are running significant deficits and they are going to get much worse,” Fraundorf said. “You are raising the cost of debt.”
The peril is not immediate, but the economic trajectory is pretty clear, he said. “The next recession is already being written, and the writing is on the wall. We are probably about one year away.”