DURHAM – Presidential candidates in 2020 are likely to head into November 2020 campaigning during a recession, two thirds of corporate chief financial officers believe, according to a new survey from Duke University. And regardless of who emerges victorious, even more execs believe the winner will be dealing with an economic slowdown when a new presidential term begins in January 2021.
The good news is that the beginning of a recession has been pushed back a few months from expectations set in the previous quarterly findings from the Duke University/CFO Global Business Outlook.
“A majority of CFOs believe that the U.S. will be in recession within about 16 months,” John Graham, a finance professor at Duke’s Fuqua School of Business and director of the survey, says. “While the start date of the recession has been pushed back relative to what we heard last quarter, there is consensus that a downturn is approaching.”
While Graham declined to answer questions about politics and their impact on the economy, he did explain to WRAL TechWire what the some of the warning signs would be that a recession is going to hit.
The indicators to watch
First is gross domestic product, or GDP
“GDP growth less than 1.5 percent would be of concern,” Graham explained.
“GDP growth of 3 percent or greater for a couple quarters would indicate a resilient economy.”
The Trump Administration has pledged 3 percent or better GDP and has blamed the Federal Reserve for slowing the economy below that target in recent months by raising interest rates.
Which brings up the next point to watch: What the Fed does.
“Fed increasing interest rates would put downward pressure on an already somewhat weaker economy,” Graham noted.
The Fed recently has backed off plans for further increasing rates.
And talk of a recession is growing among CFOs even though the US employment rate remains at 4 percent or below. In North Carolina, the jobless rate remains under 4 percent with one sector of the economy, information technology, reporting more than 31,000 open jobs across the state, according to a new survey from the NC Technology Association.
“Employment growth has been strong, which is consistent with a strong economy,” Graham acknowledged.
However, he added a note of caution:
“Looking forward, employment expected to grow more slowly, consistent with a somewhat weaker economy. If [or] when when we enter [a recession], employment growth will get much weaker.”
Another survey finds optimism remains strong
Worries about an economic slowdown are not unanimous, however. The most recent quarterly American Institute of Certified Public Accountants [AICPA] survey found, for example:
“The percentage of CPA executives who are optimistic about the U.S. economy remained constant with the fourth quarter with 57% of respondents continuing to be optimistic in the first quarter of 2019. However, the number of pessimists declined slightly from 16% to 13%.”
Inside the survey: Conclusions
“CFOs in the United States tell us that they expect moderate economic growth to continue for the rest of this year, with capital spending expected to grow 5% and employment by 2%,” the survey says.
“However, with each passing quarter, the probability increases that an economic recession will have begun.
“By the first quarter of 2020, 38% of CFOs believe a recession will have begun, and by the beginning of the year after that, 84% believe that a recession will have begun.
“So, it appears that we may be in the final stages of this long period of economic growth.”
A revival in growth in China and reported progress in trade talks between the US and China has taken some pressure off economic concerns but ” analysts forecasting first-quarter results for S&P 500 companies overall will be the weakest in nearly three years,” according to the Associated Press.
Survey key points
In reading the economic tea leaves, the CFOs told Duke:
- Two thirds expect a recession by the third quarter of 2020
- Almost 40 percent expect a recession to begin in the first quarter of next year.
- Even more – 84 percent – expect a recession will be underway by the first quarter of 2021
- Yet despite recession worries, CFOs expect capital spending to grow
- Many also believe hiring will continue
- Wages will grow by 3 percent
- And they also expect revenue to grow “moderately”
In addition to factors cited by Graham as indicators of where the economy is going, CFOs stressed consumer spending and commodity prices will bear watching as signs of economic stress.
The search for workers to fill the several million open jobs in the US is keeping up the pressure of compensation, the survey found.
“Wage inflation has picked up due to the tight labor market with 3.8 percent unemployment,” Campbell Harvey, who teaches at Duke, noted.
““However, beware of over-interpreting wage inflation and low unemployment. Employment is a lagging indicator of the business cycle. In addition to the 84 percent of CFOs who believe a recession is near, there are other leading indicators that point to a downturn, including the inversion of the yield curve.”
The yield curve is a curve showing several yields or interest rates across different contract lengths for a similar debt contract. The curve shows the relation between the interest rate and the time to maturity, known as the “term”, of the debt for a given borrower in a given currency, according to Wikipedia.
Overall optimism about the economy among CFOs remains higher than the average in the survey found over the years at 65 on a 100-point scale. That’s down one point from the previous survey.
