A Recession Could Come As Soon As 2020. Here’s How It Would Impact CRE

CRE.Converge 2018Bisnow interviewed Moody’s Analytics Director of Real-time Economics Ryan Sweet in advance of his session, “Views on Economic Indicators,” at CRE.Converge 2018, Oct. 15-17, in Washington, D.C. Read an excerpt of the article below and register today for commercial real estate’s premier event.

More than a decade after the housing bubble burst and the U.S. entered the worst period of economic decline since the Great Depression, the economy is still seeing significant growth. U.S. gross domestic product continues to grow at a rate of over 2% in 2018 and is expected to see continued growth at 3% or more over the next few years.

“The economy is growing above its potential growth rate, unemployment is steadily declining, spending is rock-solid and business investment is firming,” Moody’s Analytics Director of Real-time Economics Ryan Sweet said. “This bodes well for commercial real estate.”

Despite strong economic activity, the end to the positive cycle could be coming sooner than CRE professionals think, Sweet said. Tightening monetary policy, global protectionism and a fiscal policy hangover could trigger a recession as early as 2020. In a Reuters poll of 100 economists taken last month, those surveyed forecast a one in three chance of a downturn within the next two years.

Finding The Imbalances

Unlike the Great Recession of 2007, economists don’t believe that subprime housing mortgages will be the cause of the next downturn. The Federal Reserve, which raised interest rates last month for the second time this year and announced two additional raises would happen in 2018, could overshoot efforts to curb inflation, triggering a recession. Rising rates would impact the attractiveness of loans for both the residential and commercial sides of real estate.

Increased economic growth, compounded with generous fiscal stimulus occurring at a time the economy is at, or near, full employment, would raise the possibility of a recession in the near future, Sweet said. Unemployment has fallen below 4% for the first time since the early 2000s, and wage growth has seen modest increases. Tax cuts under the Trump administration have added fuel to an already strong economy, creating an environment where it could overheat.

The resulting restriction of economic activity by the Fed could lead to an inverted yield curve, where long-term debt has a lower interest rate, or yield, than short-term debt of the same quality. Inverted yield curves are often an indicator of an imminent recession. Yield spreads between three-month bills and 10-year notes fell below zero for each of the past seven economic slowdowns.

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