The Recession Indicator Everyone’s Ignoring Will Blow the Lid on the ‘Next 2008’

The spread of coronavirus could blow the lid on the next financial crisis and push the U.S. economy into recession. That’s according to an analysis of corporate debt relative to GDP, one of the most reliable indicators of recession. The U.S. economy is sitting on a mountain of corporate debt that could set off the next major financial crisis as coronavirus reaches pandemic proportions.

In 2001 and 2009, corporate debt relative to GDP hit 45%. It now exceeds 46%. That’s equivalent to more than $10 trillion. While the U.S. economy has staved off recession under President Trump, growth has waned since the administration’s tax cuts were implemented in 2018. The U.S. economy has expanded more than 2% in each of the last four quarters, but has only exceeded 3% annual growth once over that period (and that followed an abnormally weak Q4 2018).

President Trump has promised an emergency fiscal response to revive plunging stock markets and a cooling business climate hit hard by coronavirus. This includes the possibility of payroll tax cuts and medical leave for hourly employees. So far, the only immediate response from government has been an emergency interest-rate cut by the Federal Reserve. One of the many downsides of ultra-loose monetary policy is it encourages the same reckless behavior that allowed corporations to sell record amounts of bonds at historically low interest rates.

With the number of confirmed coronavirus infections surging past 116,000, many economists expect global GDP to flat-line this year. The Institute for International Finance said last week global GDP growth could be as low as 1% in 2020. Meanwhile, Rabobank said Tuesday that a “global recession is now all but certain.” If debt continues to grow as the economy slows, a new cycle of spending cuts and layoffs could ensue. Credit downgrades could lead to higher borrowing costs even in a favorable interest-rate environment.

Even if the Fed lowers interest rates (and it will), the corporate debt bomb could still explode as the economy grinds to a halt. Coronavirus may render the Fed’s conventional policy tools obsolete, if record consumer and business debt haven’t done so already.

The Recession Indicator Everyone’s Ignoring Will Blow the Lid on the ‘Next 2008’, CNBC, Mar 11