The Great Recession has receded in the rearview mirror, and pretty much every American would like to keep it that way, thank you very much. But we’re still all too aware that the whole financial disaster was precipitated by a deluge of bad mortgages. Sure, we’ve had nearly a decade of booming home sales and prices. But now that they’re slowing their roll, the whispers are starting to mount: Is another recession around the corner?
About 39% of Americans think the economy is slowing down, while 17% think we’re already in a recession or depression, according to a recent Gallup poll.
Yes, we might see a recession soon, economists say—but there’s no need to panic. That’s because the financial factors that helped cause last decade’s crash don’t exist this time around.
“We’re just scared because of what happened last time. And that’s not what’s going to happen [again],” says Lisa Sturtevant, a housing consultant and chief economist at Virginia Realtors, the state’s real estate association.
If there is another recession, she says, “most people are not going to lose their house. Most people are not going to lose their jobs.”
That’s a relief to hear—but then again, few experts predicted the last housing bust.
If a downturn does hit, probably toward the end of this year or the beginning of next year, most economists believe it will be brief and not nearly as painful as the last one. They anticipate that unemployment, currently at an extremely low 4%, will tick up slightly and there will be fewer new jobs created. But they don’t envision widespread layoffs resulting in scores of foreclosures and plunging home prices, as we saw in 2008–09.
“We’re at a record-low level of unemployment. The economy can’t stay here,” says Chief Economist Danielle Hale of realtor.com®. She forecasts a recession beginning within the next two years. “This one will be mild.”
Why it looks like we’re due for a recession
Although a recession can be precipitated by a housing bust, trade war, or global event, this time the U.S. economy may simply become a victim of its own success.
With national unemployment so low, employers have to compete hard for talent by offering higher wages. Those increased costs are often passed onto consumers. This in turn causes inflation as goods and services become more expensive. If inflation rises much higher than wages, then the country has a problem.
Enter the U.S. Federal Reserve. It battles inflation by notching up interest rates. The downside is that makes it more expensive for businesses to borrow money to expand or bring on more workers. And that can effectively slow down the economy.
It’s like someone blowing too much air into a balloon—eventually a little needs to be let out or it’ll pop. Similarly, the Fed needs to siphon off a little of the economy’s helium. It hiked rates four times last year, when the economy was hurtling along, but this year it may do it only once, if at all.
Actually, economic cycles in which the economy is growing and more jobs are being created historically don’t last more than a few years. The longest stretched from 1991 to 2001. This summer will mark the longest economic expansion in U.S. history from the trough of the crisis in June 2009.
So the good times eventually must come to an end.
This slowdown, coming on the heels of a wild run-up in home prices, may feel like déjà vu. But the main culprit behind the previous housing market bust was the torrent of subprime mortgages doled…