Hartford Business Journal

20 Hartford Business Journal • February 4, 2019 • www.HartfordBusiness.com Opinion & Commentary ECONOMIST'S PERSPECTIVE Is it time to start planning for a recession? By Fred McKinney I n Greek mythology, Apollo fell in love with Cassandra, the daughter of the King and Queen of Troy. As a present, the Greek god gave Cassandra the gift of foresight and the ability to predict the future. Soon after receiving the gift, Cassandra told Apollo to get lost. Rejection is not something Greek gods or current American presidents take well. The spurned Apollo cursed Cassan- dra by making it certain that while she could accurately forecast the future, no one who heard her prescient state- ments would believe her. This turned out to be fatal to the Trojans, because Cas- sandra warned her people the Greeks were stowed away in that giant horse, but nobody bought it. Maybe nobody will believe me, but there are reasons for us to be con- cerned about the state of the econ- omy. Here is a partial listing of the factors that could turn the current expansion into a recession in 2019: 1. The length of the current business cycle Despite some politicians' rosy out- looks, most economists long ago gave up on the notion that economic expan- sions could last forever. Like taxes and death, the business cycle is here to stay. We are now in an expansion that began during the spring of 2009 and has continued for almost 10 years. Since 1930, only the expan- sion between 1991 and the dot-com bubble of 2001 has been longer than this one. We are nearing the point — sooner rather than later — that this expansion will come to an end. There is a developing consensus among economists, this will be prior to 2020. One thing that could help por- tend an upcoming recession is the yield curve, which is the difference between the interest rate on 10-year and two-year government bonds. When it becomes negative, i.e. short- term rates get higher than long-term rates, it signals a recession. Every recession since 1976 was preceded by a negative yield curve, and never has a recession not hap- pened within 17 months when the yield curve turned negative. The yield curve now is less than 0.23 per- cent, almost in negative territory. 2. The chaos in Washington The federal government partial shutdown, which furloughed hun- dreds of thousands of workers with- out pay, not only was an inappropri- ate use of political brinkmanship, it was damaging to the health of the economy. This and other uncertainties caused by political dysfunction and the threat of impeachment are likely to exacer- bate the uncertainty that destabilizes markets and the economy. 3. The federal deficit In terms of fiscal policy, the federal deficit was $458 billion in fiscal 2008, the year before the Great Recession started in 2009. The deficit reached a historic high in fiscal 2009 of $1.4 trillion before declining to under $500 billion in fiscal 2015. The Congressional Budget office is projecting the fiscal 2019 deficit will approach $1 trillion. 4. China President Trump has drawn a line in the sand with China. If the Asian nation does not change its trade prac- tices by March 2, Trump has threat- ened to increase the current destruc- tive 10 percent tariffs to what could be catastrophic tariffs of 25 percent. This, along with the slowing of the Chinese economy, is likely to result in falling prices as the Chinese attempt to maintain market dominance. These forces are clearly damaging to the U.S. economy and can transform growth into recession. I don't know if you are listening, but like Cassandra, the signs are pointing toward an economic slow- down. Small and large businesses are beginning to take steps to prepare for the coming storm. These actions contribute to the likely slowdown. John Maynard Keynes, the great English depression-era economist, called this the "Paradox of Thrift." The very act of large numbers of con- sumers and businesses increasing their savings for a rainy day, decreas- es spending and makes the recession even more likely. Buckle up. I hope I am wrong. Fred McKinney is the Carlton Highsmith Chair for Innovation and Entrepreneurship and director of the Center for Innovation and Entrepreneurship at the Quinnipiac University School of Business. Fred McKinney EDITOR'S TAKE Lawmakers must preserve rainy day fund M ore and more economists are jumping on the recession bandwagon of late, predicting the U.S. is headed toward a significant economic slowdown by the end of 2019 or sometime in 2020. The reasons are varied — political instability in the U.S. and abroad, a slowing Chinese economy, etc. — but JPMorgan Chase & Co. says there is a 40 percent chance for a recession over the next year, while S&P Global Ratings puts it at a 14 percent to 20 percent chance, according to the Wall Street Journal. More locally, economist Fred McKinney, a business professor at Quinnipiac University, says signs also point to a recession and that businesses should start to prepare now. I'm not an economist so I won't venture to make my own prediction, but if you follow economic cycles in recent history the U.S. is overdue for a recession. It's significant for many reasons but particularly for state lawmakers and Gov. Ned Lamont, who is currently putting together his first two-year budget that will need to balance a multibillion-dollar deficit. The state budget is put together in part based on economic projections, which means budget-setters must predict growth rates over the next few years in order to determine expected revenues from key sources like income and sales taxes. If they predict too rosy an outlook, which the Malloy administration did on several occasions, budgets quickly go out of balance. More importantly, a U.S. recession will likely lead to job losses, less consumer spending and an overall contraction of the Connecticut economy, which means state policymakers will need to ensure they have strong reserves to tap when tax revenues slow. That's why it's crucial that the state not use its rainy day fund to try to balance the upcoming two-year budget. One of the positive legacies Gov. Dannel P. Malloy left behind was a $1.2 billion emergency reserve, which is expected to grow to $2.1 billion by the end of the current fiscal year. Those funds should only be used to deal with the next economic downturn, or some other calamity like a major natural disaster. However, lawmakers will be tempted to draw on that reserve to deal with present-day deficits, especially if it means they won't have to make cuts to municipal aid, social services or educa- tion, raise taxes, or ask state labor unions for more givebacks. Lamont promised during the campaign to make structural changes to the state budget that end the continuous cycle of deficits that have plagued Con- necticut for more than a decade. To make good on that pledge, he'll have to avoid using the rainy day fund, or at least keep the majority of it intact. Using one-time revenue sources is one of the oldest budget gimmicks in the book. It simply allows policymakers to postpone difficult decisions to a later date. To his credit, Lamont has been resistant to the idea of relying on budget re- serves, but he also made a lot of promises on the campaign trail — not to raise key tax rates and to restore the property tax credit — that will make balancing the budget a major challenge. He may have already hinted at one of his solutions — ending the sales-tax exemp- tion for groceries, medications and other long-exempt items, an idea floated last week that would hit lower- and middle-class residents particularly hard. His first priority should be continuing to cut government spending and forc- ing state labor unions back to the negotiating table for further givebacks. If a recession does hit, it would be poor timing for Connecticut, which just recently is starting to see more positive growth rates. But the state has little control over those larger economic forces. What it can control is how it prepares and reacts to them, and responsible budgeting is a key part of the equation. Greg Bordonaro Editor

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