To say opinions about a possible recession are mixed is putting it mildly. On the one hand, JP Morgan research economist, Jesse Edgerton, observes profit margins of non-financial companies have fallen from almost twenty percent in the second quarter of 2013 to just about seventeen percent in the last quarter of 2015.
On nine of the last eleven occasions when profit margins dropped this severely, a recession was either imminent or looming close on the horizon. Shrinking profit margins, according to Edgerton, make firms less apt to spend money on hiring or capital equipment.
Paul Ashworth of Capital Economics disagrees, although he puts it rather oddly: “Companies are going to get a slightly smaller share of an expanding pie, but that’s no reason why you have to have a recession.” Sort of makes it sound like if we’d just straighten up and fly right we could will ourselves out of impending doom. If only it were that simple.
At any rate, it’s difficult to elicit a consensus from economists. As Scottish author James Buchan once wrote, “Economists, like royal children, are not punished for their errors.” Corporate leaders, on the other hand, while they may not entirely agree on an issue, will generally act in a more unified and self-protective fashion. They uncannily seem to forge tacit agreements about the right times to hire and invest.
That’s why it’s alarming to learn that according to a Thomson Reuters survey, the number of CEOs professing concern about an impending recession has jumped by a third over a year ago; the first increase since 2009. What’s more, reports from about ninety-two companies have mentioned recession concerns in their earnings projections.
The difference in outlook between economists and business executives is no idle intellectual game. While economists make guesses and predictions, albeit ones informed by historical data, business executives tend to shoot from the hip, with opinions forged in the trenches. To them, recession isn’t a theory, it’s a threat.
Chances are if a CEO thinks businesses in general will do less hiring, their business will do less hiring. If another CEO thinks businesses in general will spend less for capital equipment, their business will spend less for capital equipment. So ask yourself which scenario has a greater influence on the economy at large: A thousand economists who predict we’re due for a recession, or a thousand CEOs who trim payrolls and investments in preparation for that recession?
If nothing else, CEOs know how their sales have been affected by recent economic events. Worldwide, companies making semiconductors, autos, consumer durables, technology hardware and capital goods are all feeling the global drop in commodities demand – particularly those that do business with China.
As for economists, even the Queen of England chided them for not predicting the Great Recession. Finance professor, Noah Smith, put it sagely last year in a Bloomberg article:
“Economists didn’t just fail to see that monster recession; they routinely fail to see economic events coming. The best models we have – the ones central banks use, which take graduate-level training in order to handle – have about as much forecasting power as simple, naïve mathematical techniques that any undergraduate statistics major could whip up in a few minutes.”
For those of you concerned about how the economy could affect your own portfolio, my advice is to disregard the theoreticians and pay careful mind to the business landscape around you. Who’s hiring? Who’s firing? Which businesses are expanding; and which are barely treading water?
Then take a hard look at your portfolio, including your retirement investments. Decide how much you can afford to leave in market-vulnerable paper, and how much you want secured in hard assets like real estate and precious metals – investments that retain inherent value regardless of a seesawing market.
The fact is, if you err on the side of caution you can’t lose. If recession does hit, you’ve protected your current savings, not to mention your future security. If, though it’s looking increasingly unlikely, there’s no recession, the worst you have is a lot of secured wealth. Hard to be sad about that.