2019 recession looms on the economic horizon

San José, CA – Casting a shadow on the stock market are the growing number of economic statistics that point to a recession in 2019. Almost all mainstream economic forecasters expect economic growth to slow down in 2019 as the impact of the 2018 tax cuts wear off; the forecast is for 2.4% growth, about the same as in 2017. But few predict a recession.

The most commonly looked at economic statistic is the official unemployment rate. Today the nationwide official unemployment rate stands at 3.7%, the lowest rate in a generation. But while the official definition of when a recession starts depends heavily on a measure of net new job creation, employment and unemployment are not useful to predict the start of another recession. But by the time employment starts to fall and the unemployment rate rises a recession has already begun.

The best predictor of a recession is a large and continuing decline in what economists call “fixed investment spending.” This is not the investments that most individuals make (stocks, bonds, mutual funds, etc.), but rather business investment in new plant and equipment, and the construction of new homes. And these sectors are looking very weak right now, despite a boost early in the year from the tax cut.

Looking at the latest report on the Gross Domestic Product (GDP) for the third quarter (July to September), fixed investment only increased by one-fifth of one percent (0.2%). More recent monthly reports on business spending on so-called “non-defense capital spending (without transportation)” showed new orders fell 0.6% in November, the third drop in the last four months.

Spending on the construction of new homes has also been weak, with the amount dropping in the July to September quarter, for the third in a row. While the declines have been small, no relief is in sight as the market is squeezed by rising mortgage interest rates and more and more unaffordable homes. Completion of new homes in October and November are running about 8% lower than in the third quarter (July to September).

Another sign of near-term economic weakness was the large buildup of unsold goods in the July to September period. The increase in inventories made up 2.33% of the total 3.4% gain in production, or GDP during this period. This meant that the increase in actual sales of American-made goods and services was an anemic 1.1%. The large buildup in inventories could lead to less production in the next three to six months.

Part of the reason for this was the big jump in imports and slump in exports. Ironically, the Trump administration tariffs seemed to hurt U.S. exports, because of retaliation from other countries, than it did to slow the growth in purchases of goods and services from other countries. Another factor is weakness in the world economy: the economies of both Japan and Germany both shrank in the third quarter, and many developing countries are having a hard time economically.

One of the reasons that mainstream economists do not see a recession coming is that they see a capitalist economy as fundamentally stable. From this point of view, only some kind of ‘shock’ coming from outside the economy, like misguided actions by the Federal Reserve (the U.S. central bank) on interest rates or mistaken policies by the government, such as shutting down or starting a trade war. This is true not only for free-market economists, but also most Keynesian economists who support more activist government economic policies.

But Marxist economics sees the boom and bust cycle coming from fundamental features of capitalism. On one hand, the exploitation of workers, that is, paying them less than the value that labor creates, limits their ability to spend and consume. On the other hand, the profits from this exploitation is reinvested in new technology, equipment, and structures that increase the ability to produce. The contradiction being the limited ability to consume and the growing ability to produce lead to what Marx called a “crisis of overproduction,” which is what we call a recession today.