A survey released Wednesday showed that corporate CFOs aren’t feeling all that positive going into 2019, with almost half of all respondents anticipating a recession will start by the end of the year.
Of the 212 chief financial officers surveyed by Duke University, 48.6% believe that the next negative growth period in the U.S. is less than 12 months away. And if the country makes it through 2019 without plunging into a recession, 82% think the next recession will then come before the end of 2020.
Many of the biggest names in the financial world have been sounding the alarm bells for months that a recession is right around the corner, with most believing we’ll see a recession in 2020, and the results of this survey demonstrates that CFOs are worried as well.
“The end is near for the near-decade-long burst of global economic growth,” John Graham, a director of the survey and a finance professor at Duke’s Fuqua School of Business, said in a statement about the survey. “The U.S. outlook has declined, and moreover the outlook is even worse in many other parts of the world, which will lead to softer demand for U.S. goods.”
And the results of the survey reflect just that. Eighty-six percent of respondents see a recession in Canada by the end of next year, 66.7% for Europe, 54% for Asia, and 42% for Latin America.
Overall, corporate CFOs expect the U.S. to grow by 2.7% for the year, with the bulk of those gains seen in the first half of the year, and they believe there’s a 1-in-10 chance GDP will rise by just 0.6% in 2019. Their biggest concern is the tightening labor market, which makes hiring and, thus, continuing operations and growth, harder.
Other big worries include the rising costs of employee benefits, including health insurance, as well as changing government policies and other economic uncertainties.
Campbell Harvey, a director of the survey, added in an interview with the Wall Street Journal, “All of the ingredients are in place: a waning expansion that began in June 2009—almost a decade ago—heightened market volatility, the impact of growth-reducing protectionism, and the ominous flattening of the yield curve which has predicted recessions accurately over the past 50 years.”
These signs have spooked Wall Street, with extreme volatility and the wave of selling that has plagued the stock market in the last two months. The S&P 500 is currently on-track for its worst quarter since 2011, and several of the hottest stocks of the last few years have already plunged into bear market territory.
But while many economists are becoming more worried, there are few that believe the next recession is imminent.
“That’s a surprisingly high number, maybe even shockingly high,” Russell Price, the chief economist at Ameriprise, said to CNN Business referring to the results of the Duke survey. “I’m not worried about a recession in 2019 unless it comes about due to a man-made situation.”
Price also said that the U.S. economy is robust enough to avoid a recession next year, but it all depends on the Fed and whether or not they raise interest rates too aggressively or if the U.S.-China trade dispute “deteriorates substantially.”
Regardless of when the next recession begins, Corporate America will probably have a debt problem. With historically low interest rates, companies in the U.S. have taken on trillions of dollars in debt over the past decade, an issue that has former Fed chair Janet Yellen nervous.
Yellen said to New York Times columnist Paul Krugman on Monday at the City University of New York that levels of corporate debt are “quite high” and are “a danger.”
“Corporate indebtedness is now quite high and I think it’s a danger that if there’s something else that causes a downturn, that high levels of corporate leverage could prolong the downturn and lead to lots of bankruptcies in the non-financial corporate sector,” Yellen said.
“I think a lot of the underwriting of that debt is weak. I think investors hold it in packages like the subprime packages … the same thing has happened. It’s called CLOs, or collateralized loan obligations,” she said.
As alarming as that sounds, Yellen was quick to note that the current holders of corporate debt don’t appear to be over leveraged at this point, which should mitigate the risk of any credit ripple effect.
“I don’t see a shock in the offing that’s likely to cause that kind of financial crisis,” Yellen said, referring to the last downturn. “There’s much less leverage in the financial sector now as far as I can see relative to before the crisis. I think that most of those risky loans are owned by investors that are not leveraged. So they may suffer losses, but they’re unlikely to turn around and start selling other assets that can lead to fire sale contagion.”