Part 1 from ITR Economists about today’s recession and their forecast for a 2030 Depression.
The US economy is on track to grow in the third quarter of the year. However, the growth is uneven. The industries and companies that excelled because of the stimulus and/or social restrictions stemming from COVID are doing poorly at present as demand wanes and inventories catch up with or exceed supply, and this is creating pockets of recession. There is a more widespread recession lurking in our future than what is being felt now, based on the retail sales, employment, and industrial production trends.
ITR Economics’ long-term forecast for a severe business decline beginning in the early 2030s is not being pulled forward, even though today’s inflation, national debt, deficit spending, higher interest rates, and weakness in the stock market seem to fit the criteria regarding the variables that will tie in to the 2030s. Regarding those inputs:
Inflation
Much of the current inflation stems from the economic “cures” for COVID, supply chain disruptions, and more recently the Ukraine war. Inflation has not yet become systematically pervasive enough and has not yet compounded sufficiently to be causal to the magnitude of decline that we are envisioning for the 2030s.
National Debt
The debt continues to rise, and deficit spending continues unabated, which we think is certainly integral to the circumstances leading up to the 2030s fall-off. However, because interest rates are still relatively low, the budgetary imbalances and fiscal pressures we think will be present come the 2030s do not yet exist. The status of the trend in the US Government 10-year Bond Yield, which has bounced back from COVID but is now stalled, supports this view.
Interest Rates
Interest rates are likely moving higher, compliments of the Federal Reserve, despite the signs of waning inflation. Rates have not yet reached levels that would be debilitating for consumers or businesses to the degree we are projecting will occur come the early 2030s
We are forecasting that the fiscal and monetary negatives cited above will be causal to a mid-decade recession in the US. Although the mid-decade recession will be relatively severe, it will not be as severe as the Great Recession of 2008−2009. There are no structural imbalances evident that would make us think the mid-decade decline is the 2030s come early.
Several of our cornerstones regarding the 2030s decline are not yet in place. They include:
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- We are looking for a demographic imbalance that is not likely to take shape for another 7–10 years, with incumbent stresses on Social Security, Medicare, and private health care costs.
- The size of the US national debt causing either inexorable pressure to raise taxes or a much higher premium extracted by the bond market to compensate for higher and higher risks.
- Interest rates on the 10-year government bond above 5%.
If they assume that the mid-decade recession is the decline anticipated for the 2030s, some companies and investors might:
- Hesitate to build the teams, talent, and technology needed to capitalize on opportunities that exist now and will be there on the other side of the mid-decade recession.
- Fail to “see” or believe that a recovery is taking shape mid-decade after a normal period of decline (the 2030s decline will be much longer) and thereby lose market share as others move aggressively into the recovery.
- Shift from creating wealth in hard assets and in equities and move too soon into a strictly defensive position using the sovereign bonds that are recommend for the 2030s.
Understanding the timeline and relative degree of the coming cycles are important to making the most of the upside potential over the next eight years. Understanding that the mid-decade debacle is a normal business cycle means that leadership can employ normal business cycle strategies to prosper through the cycle or at least cognitively decide between the top line and the bottom line within markets. We are not likely to have as many options come the 2030s.
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