Recession fears are loose, and contrary to President Donald Trump’s assertions, they are not being fabricated by the media, his political enemies and Federal Reserve Chairman Jay Powell.
The inversion of the yield curve, where interest rates on short-term bonds are higher than rates on long-term ones, is a surer sign of trouble ahead than the stock market. But that’s not the only storm flag.
Germany appears to be falling into a recession, yet is stubbornly sticking to austerity. Brexit is looming, with certain pain for Britain, but also further stressing the EU. India and Pakistan are facing off over Kashmir. Huge pro-democracy protests in Hong Kong revive memories of the Tiananmen Square massacre. Even RV shipments are falling. And trade is slowing, especially thanks to Trump’s trade war.
This is also the longest expansion in U.S. history and nobody has repealed the business cycle.
It’s a truism that national recessions tend to arrive in Seattle a few months later (as opposed to regional downturns, such as the late 1960s-1970s Boeing Bust). This is a function of our high-end, diverse economy. And some luck: Dreamliner work and Amazon’s growth worked counter-cyclically in the Great Recession, for example.
Beyond that, our fortunes depend on the severity and length of a downturn.
For example, during the “Great Moderation” from the late 1980s through the early 2000s, low inflation and decent growth coincided with relatively mild recessions.
Will we return to that, or are there so many distortions, imbalances, bad bets, deadwood and hustles in the economy that the situation is worse?
And where are the Puget Sound region’s vulnerable areas? Warren Buffett says, “You only find out who is swimming naked when the tide goes out.” With that caution in mind, I’d offer a few sectors to watch:
Boeing. Recessions always bring a slowdown in airplane orders. But this would hit Boeing and its 69,800 employees in Washington state at an especially bad time.
The company is still wrestling with the grounded 737 MAX, an airliner it hoped would be among its most popular and profitable. The Federal Aviation Administration in June uncovered a new potential software flaw, causing Boeing to redesign the software. Southwest Airlines, an all-Boeing airline and largest MAX customer, might even look to the competition.
The company has also faced trouble with the new KC-46 tanker for the Air Force.
And all this has happened in the more forgiving environment of an economic expansion. Layoffs would be a near certainty in a recession.
Exporters. As I reported earlier this month, Washington merchandise exports fell by $6 billion through the first half of the year, with goods to China accounting for $2.5 billion. Much of this is the result of the Trump trade war.
A recession would see sharp declines in demand for both exports and imports, with the trouble rippling out into supply chains such as ports, warehousing, railroads, trucking, etc. Demand would also fall for services such as software and cloud computing.
Construction. Seattle has spent recent years as the crane capital of America. Recessions always slam construction as demand and financing dry up.
This would be no “good, we can catch our breath!” moment. First, a downturn in construction would affect a major source of city revenues, including those that have helped generously fund social services. Second, among those losing their jobs would be average blue-collar workers.
Retail. This sector is already under heavy pressure from online shopping, changing consumer habits and weak paychecks for many. Still, retail is a big employer. And Seattle benefits by having a downtown that never lost its retail critical mass, although many useful and beloved shops have closed in recent years.
Consumers cut discretionary spending first when storm clouds appear. Retailers on the edge are pushed over. The situation grows worse depending on the depth and length of the downturn. And this is another sector that ripples out to supply chains and sales taxes.
I certainly don’t want a recession. And a cynic might say that Trump would do anything to avoid one — except, probably, step back from his tariffs — as he faces an election next year.
But some things are out of anyone’s hands.