California Recession Fears Predated the Stock Market Plunge by Months

How much should Californians worry about the possibility of a coming recession?
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Earlier this week, a rare shift in in U.S. Treasury note interest rates ignited fears of an oncoming recession and brought the Dow Jones tumbling 800 points, but indicators in California have been giving economists the jitters since as far back as May.

Wednesday’s national freak out was precipitated by an “inverted yield curve” in which two-year Treasury notes pay a higher interest rate than ten-year notes. The phenomenon indicates that investors are cynical about the long-term health of the economy, and it has preceded the last five recessions.

In California, however, the pessimism goes back much further. As Capitol Weekly reported, UCLA economist Edward Leamer wrote on June 5, “The effect of the first quarter of 2019 data is to increase the recession probabilities from near zero to 15 percent for the next year and to between 24 percent and 83 percent for the year after that. Don’t worry about the coming year; worry about the year after that.”

The California Chamber of Commerce painted a brighter picture in its May newsletter. “California defied naysayers by putting in another solid economic performance in 2018, but has gotten off to a slower start in 2019. This is not indicative of a pending recession, but rather the result of long brewing problems with labor force growth and rising housing costs, both of which require time to solve.”

Pundits are saying that Trump’s tariff war on China is behind the trouble, as former Labor Secretary and U.C. Berkley professor Robert Reich also predicted in May: “There is a slowdown, there’s no question about that. But if you add on to the slowdown, all of the direct and ancillary damage that comes from these tariffs, tariffs against China, retaliation from China, and tariffs that are threatened against Mexico, I mean you could easily find the American economy in a recession, certainly before the election.”

So how close are we to a recession? Julia Coronado, chief economist at MacroPolicy Perspectives, told the AP that she sees a 40 percent probability of a downturn within the next 12 months, up from 30 percent last month.

Eric Winograd, senior economist at AllianceBernstein, however, says the future isn’t necessarily all gloom: “I wouldn’t forecast a recession just on the yield curve. I would want to see other signals that point to that, but we’re not seeing them right now.”


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