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Are We About to Repeat 2015-2016?

Last update on: Jun 16 2020

The big question for investors hasn’t changed. Will 2019-2020 be similar to 2015-2016, or will we slide into a recession?

In 2015, the U.S. economy was so slow that several historically reliable indicators of an imminent recession were waiving red flags. The global economy was even weaker.

By early 2016, global stock markets were falling hard. Negative economic reports from China caused panic selling. Interest rates fell sharply, and there were widespread warnings of deflation and depression.

Global central banks stepped in with a coordinated increase in the global money supply. The markets and economy recovered without a recession in the United States. The last year has strong similarities, though it hasn’t been the same.

Economic growth is lower and manufacturing is in a recession, partly because the Fed tightened too much in 2017 and 2018. Growth is very slow outside the United States. Plus, global stock markets sank sharply in the last quarter of 2018. Corporate earnings fell in 2015 and 2016 in what some called an earnings recession. Likewise, corporate earnings on average are less than they were a year ago.

Several of the imminent recession indicators now are waving yellow or red flags.

Fortunately, the Fed stopped tightening the money supply in late 2018 and now is coordinating an easy money policy with other central banks.

There are signs that, as in 2015-2016, the economy is stabilizing. The odds are we’ll avoid a recession, but it’s not a sure thing.

The service sector and households are doing well.

Household confidence is supported by rising prices for homes and stocks and a strong labor market. In 2019, wage growth accelerated above the average for this economic recovery.

Yet, the job market can’t become much better than it is, and wage growth seems to have peaked early in 2019. The good news in wages is that the lowest-earning workers recently have had the highest wage growth. For much of the economic recovery, that group was left behind.

Housing stalled for most of 2019 but improved following the plummet of interest rates in August.

Yet, housing now is a minor contributor to overall economic growth. Tighter lending standards and a shortage of homes for sale mean that many people who want to buy homes are not able to do so. Home sales remain well below the average for the pre-financial crisis period.

I continue to have two major concerns.

Business investment has been declining, and there are only a few signs it might turn around. Economic growth is unlikely to continue if businesses don’t invest for expansion. Many business leaders say their investment plans are on hold because of uncertainty created by trade conflicts, political division and slow global growth. Profit margins also are a concern.

Several factors spurred margins to record levels over the last 20 years or so. Most of those factors are fading.

The tight labor market forces businesses to pay higher wages. Productivity is lower than it used to be. Globalization is in retreat. Major technology companies, which have the highest profit margins, are under attack from governments around the world.

These and other factors all add up to rising costs that businesses can’t pass on through higher prices.

In Europe, there is a weak economy coupled with deep political divisions that make it difficult to enact needed policies.

China’s growth is slower, but that’s been intentional. Even so, slower growth in the world’s second-largest economy affects every other economy, and there’s always the risk of policy mistakes that slow growth too much.

Despite the worries and risks, the economy could sustain its modest economic growth indefinitely if businesses increase capital spending and we avoid any new policy mistakes.


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