The most recent Duke CFO Global Business Outlook has created a lot of headlines about a recession in the next 12 months. The global CFO study has been conducted for 91 consecutive quarters and includes more than 500 CFOs, with 226 from North America. The headline in the most recent study is CFO recession concerns, defined as two consecutive quarters of negative gross domestic product growth.
Nearly half of the US CFOs (48.6%) believe the country will enter a recession in 2019, with 82% believing the nation will enter a recession by the end of 2020. On the bright side, when looking at the global results, the US recession prediction is the second lowest forecast for 2019, behind only Latin America at 42%.
Two aspects of the study worth noting are the tight labor market and the Optimism Index. Hiring and retaining qualified employees is still the top concern of CFOs, off slightly from the 20 year high it hit last quarter. The study’s Optimism Index for the US economy, which has been a good predictor of future hiring as well as GDP growth, was down to 66 from a record high of 71 last quarter.
Not everyone is as pessimistic as the CFOs in the study. Liz Ann Sonders of Charles Schwab sees the risk increasing, “I don’t think that earnings growth will persist next year. Unless there is a reversal back up in oil or a big drop in the dollar, the consensus earnings growth estimates for 6% to 8% for 2019 seem too high. There is not an insignificant risk that we move into an earnings recession, like we saw in late 2015 and early 2016. That didn’t turn into an economic recession because it was concentrated in energy. There’s a cushion in energy so that it won’t be as deep as we had in 2015-16, but exports and capital expenditure-tied industries could take a significant haircut from mid-single- digit earnings growth to negative territory. And that’s not in stock prices.”
Morgan Stanley pegs the risk of recession at 15% in 2019 and 30% in 2020 primarily due to accelerating growth and inflation, as “The Fed is caught playing catch-up to an overheating economy.” They believe the “biggest threat to the economy currently” is non-financial corporate leverage.
A recent article in Bloomberg mentions being vigilant but no impending doom, “The Fed’s Survey of Professional Forecasters, shows that they’re starting to sour on the economy’s prospects four quarters from now. But their pessimism might be too remote to mean much. The Survey puts the odds that economy will be shrinking in a year’s time at 23 percent. That’s the highest level since 2008 — but it still implies a recession probability of less than 20 percent, according to a Goldman Sachs analysis based on the Survey’s track record.”
According to the article, “That supports our view that a 2019 recession is unlikely,” economists Daan Struyven and David Mericle conclude. The wisdom of crowds can work, they say, “but primarily at relatively short horizons.” In the end, markets and hard data are sending different signals right now. And most economists are sticking with the latter — along with survey numbers — until a more decisive shift becomes obvious.”