Divining a recession is difficult work, even for a trained economist, which I am not. But last month’s news of an inverted bond yield curve seems as good an indication as any, since in the last eighty years, a recession has always followed inversion. While the overall economy has been booming, there’s plenty of big cracks in the system, like the highest income inequality since the 1920’s, younger generations struggling with crushing student debt, and a high household debt to GDP ratio.
That’s why I’m betting on a recession coming in the next year or so. Even though American consumer confidence remains high and reported unemployment is low, the overall economy lacks padding if a downturn comes. When American workers start losing jobs, they won’t have much of a backstop to rely on. And while corporate profits are at an all-time high, most of that money is going to the investor class, who don’t spend at nearly the same rate as the other 99% of Americans.
Of course a recession in a presidential year has huge implications. But let’s set aside politics for the moment, and consider how our lives have come to rely on the overheated economic cycle.
First, think about the biggest cash burners of tech, Tesla, Uber, Lyft and Snap, which lost a combined $23.9 billion in just one quarter this year. While Tesla has likely changed the car industry for the better so the biggest car companies are retooling to go electric, and Snap will likely prove to be an ephemeral blip on the media landscape, Uber and Lyft have together raped our economies by decimating the taxi industry, once an affordable way for immigrants and low-skilled workers to enter the American middle class.
When discretionary income dries up, these companies will begin to tank. Rideshare will begin to disappear, and Tesla and Snap will either crash, or get bought by companies with big enough balance sheets to consume them (a rumor that VW was buying Tesla made the rounds last week).
What else is heavily subsidized? Restaurant delivery companies like Doordash, Grubhub, and the dozens of copycats they’ve inspired. Venture capital firms have poured over $6.7 billion into these startups since 2015, but none of them are thought to be profitable. Meanwhile, 24% of Americans ordered food over the internet last year, at a fast enough pace that in some cities, “ghost kitchens”, which lack seating areas and only serve delivery customers, have begun cropping up.
The delivery companies are attempting to grow market share by subsidizing their delivery costs with venture capital. Restaurants, and especially ghost kitchens, are also relying on those subsidies to reach customers that normally would not be profitable. And delivery workers, most of whom are hourly, gig-economy workers, also rely on those delivery subsidies.
All of this will come to a halt as soon as discretionary income dries up and people decide to save money by cooking at home. Those with the most at risk – low wage gig-economy workers, will be the first to lose out, co-incidentally reducing consumer spending for a now-gasping economy.
Everything linked to discretionary income will be at risk, accelerating the decline of any industry with a shaky value proposition or one dependent on making you feel good about your choices. For instance? News subscriptions and public radio memberships. While these outlets are enjoying a boomlet in revenue from readers and listeners, especially ones with a national focus, metro dailies struggling to shift advertising to subscriber-based revenue models may be running out of time. A declining economy may only accelerate the death spiral of local news organizations across the nation.
Who will benefit if the economy tanks? Companies with highly scaled businesses, that can squeeze their margins. Companies like Amazon, Walmart, Facebook, and Google. The former two will only increase their pressure on local businesses as they serve customers seeking low prices in a down economy. Meanwhile, Facebook and Google, will continue to dominate advertising and grow even bigger, wringing out more and more cash from local newspapers, television and radio with an unparallelled consumer targeting system.
How do we address a tanking economy? The last time around, in 2008, we benefited from a Fed Chair, Ben Bernanke, who had made a life-long study of the Great Depression, and an economic team under newly-elected President Barack Obama, who saw the need to act decisively to prop up failing businesses, like the rescue of General Motors, one of the best investments the federal government has ever made.
So far, President Donald Trump and his team has lacked that sort of decisiveness, and the President has not maintained a working relationship with current Fed Chair Jerome Powell. This is not enough to suggest Trump will run the economy into the ground, but it certainly looks like a pair of red flags as we head towards a likely decline in 2020.