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Housing Economists And Janet Yellen Agree A Recession Is Coming—But See No Need To Panic Yet

The most frequent question in housing economics these days centers around forecasting the exact moment in time when the tidal wave of the next recession will crash, hammering all of current prosperity to pieces. Most builders and developers aren’t holding their breath in anticipation but feverishly working while the going is good.

Robert Dietz, chief economist at NAHB, is sharing reports that the three-month moving average of single family starts is at a post-recession high. Dietz is fairly confident that there will be time before the next housing recession. He recently told Professional Builder that: Our forecast window goes through the end of 2021, and we don’t have a full-blown recession on our forecast tables right now.” 

Ali Wolf, director of economic research at Meyers Research also weighs in: “Earlier this year, indications of an imminent recession were popping up in economic data left and right. We still see reason for concern in todays’ economy, namely lower confidence and growth in trade-related sectors, but risks have subsided.”

Despite the fact that the state of the U.S. economy is excellent and we are in the midst of the longest recorded expansion in history and the strongest market since 1968, Janet Yellen, the chair of the board of governors at the Federal Reserve System, is still uncomfortable. She doesn’t believe there will be a recession in the coming year, but says that the odds are higher than normal.

So, what’s behind her thinking?

During an interview at the World Business Forum, Yellen pointed to this as a new normal with ample liquidity and rock bottom interest rates that will both be around for a long time to come. Yet, the last recession has everyone on high alert since many are still trying to rebound. Yellen remembers the strain that was on the Federal Reserve at the time, putting them in the position to make split second decisions in an environment that usually was painstaking slow at analyzing every aspect of a decision.

“It was on us to make this the great recession and not the great depression,” Yellen said. “The decision for Bernanke for when AIG failed was the single most agonizing decision, the amount of lending that the Fed took amounted to about $180 billion. We had a lot of big decisions that had to be made in less than 24 hours. We were motivated by the idea and the understanding that the federal reserve had been created to lend to banking organizations that were short of liquidity in situations where there was a run on banks. The situation we faced in 2008 wasn’t centered in banks themselves it was a run on the broader financial system. Only a central bank could stem that so that credit to the economy didn’t collapse. Once we saw it, we had to lend liberally so that they didn’t withdraw credit from households. That understanding motivated us to act quickly.”

The Federal Reserve was able to act quickly and make those big decisions because of a deeply entrenched culture and communication across team members. A culture that she encourages organizations to think about developing or focusing on to protect themselves. But it’s a slow process, these strategies have to be inculcated daily so that the people with the right ethics and talent are in place and they all can be leveraged at the right time.

Yellen referred to research done after the last recession on companies that were able to successfully survive. Although it’s difficult to protect yourself from sales loss in a downturn, there are things to do to prepare. Successful companies were able to cut costs quickly to preserve profitability, to put investments on hold, not build on debt, were prepared to shed assets to retrench and started opening cost leads to be ready to recover in new times. Some of the most successful organizations also turned their focus heavily to their best customers – never taking their sights off of them.

In order to prepare, organizations also should do their own version of stress testing that will allow them to prototype strategies to survive in a true recession. A more modular, flexible approach to business could offer the ability to put things on hold. Organizations also should have in mind where cost cuts will come from and how to execute on them in a gradual way.

At the same time, the economy is currently doing well, so housing is definitely getting built. As builders think about the various demographic groups’ wants and needs, Yellen points out that those currently saving for retirement are not in a good place at the moment.

Another consequence of today’s market impacts the companies that make promises to savers, such as pension fund and life insurance. These groups that have a set of fixed liabilities are finding it more difficult to satisfy these obligations and have to reach for yield.

“This ultimately could have adverse consequences for financial stability,” Yellen says. “Right now, are the highest ratios of debt to income that we have ever seen in the U.S. If there is a recession, we’ll see a lot of companies in trouble because of the debt that they have piled on.”

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