Today you will have to bear with me as I put on my economist hat, I have tried to make my explanation as concise as possible but I think it is important for all small business owners to review these indicators and make decisions for themselves.
Last time I heard a client tell me the following was in 2010-2011 “I believe that the GSA Schedule we obtained saved our business during the recession.” I also would hear this statement in conjunction with that statement “we had to tighten our belts but we made it through!” At that point in time we had our full staff working mandatory overtime racing to process our clients GSA Schedules as for some firms it was the life or death for their business.
Times have changed – 9 years of consecutive economic expansion
Recent economic news is very good and firms generally do not explore alternative sales channels such as government sales when the private sector is preforming so well. In many cases firms are having a hard time keeping up with current demand from existing customers.
Reasons not to worry – Past 2 Recessions were caused by bubbles:
2000 – dot.com bubble
2006 – housing bubble
There do not appear to be any asset classes in the US that have economy wrecking balls built into them, which is a good thing. Additionally, recent tax cuts have provided more capital to businesses and consumers which appears to have accelerated GDP Growth.
The Devil’s Advocate:
According to studies conducted by the San Francisco Federal Reserve the economy has a 25% chance of entering a recession in any given year. This percentage is not effected by how many consecutive years in a row the economy is in a recovery it is just 25% per year.
So why if there are no bubbles does the Fed have this position? The reality is that most recessions are triggered by mistakes made by the country’s central bank. Either raising interest rates too quickly, keeping them low to long creating bubbles. Tweaking too little, too much too late, etc. The US Fed has a lot of factors pros/cons built into every move it makes.
An alternative viewpoint is the Australian economy which is in its 26th consecutive year of economic expansion, the longest of any country since WWII. Australia has a central bank similar to our Fed however their central bank only behaves inside a set of tighter parameters and then stops making moves, it never chases.
The San Francisco Fed through studies it has conducted has determined that most forward indicator as to whether the economy is about to go into a recession or not is the spread between the 10 year and 2 year Treasury note. When this percentage is positive and large it is a sign those participating in the economy see a better long-term future. When this spread goes negative it is the strongest economic bellwether for a recession. Currently this spread sits at .42% and has been in a downward trend since 2014.
Here are the Rate Increases since the last recession – these plots are marked as orange dots on the above graph.
Where is the Fed Looking to Go?
Cleveland Fed President Loretta Mester – May 14, 2018
"As the expansion continues, it could be that in order to maintain our policy goals, we may need to move the fed funds rate, for a time, a bit above the level of the funds rate that is expected to prevail over the longer run," Mester said in a speech early in the morning in Paris, France. The median forecast of Fed officials puts this longer-run, or neutral, level of the fed funds rate at 3%. Mester, who is a voting member this year, noted the Fed's most recent "dot-plot" also sees the fed funds rate rising above 3% in 2020.
The fed has great economists and they want their normal tool kit back which is to raise or lower interest rates. With that said human error or other unforeseen events can lead to missteps. With the Fed having what some would call a lofty goal over the next 2 years to increase rates by an additional +1.25% this is not without risk?
I am bullish on the US economy, but I have seen from personal experience that it is far easier to get more federal work when you are an existing contractor ‘first in the door” than when you are the one jumping in during harder economic times.