A Bankruptcy Lawyer's Perspective on Why a Recession Is Probable

As one who has practiced bankruptcy and creditors’ rights law for 53 years, experience and history have taught that there are certain indicators, not usually focused upon by the general media, which predict that a recession or a significant financial slowdown may be forthcoming. Although the housing bubble was listed as the cause of the great recession a decade ago, it was only a significant contributing factor, with a number of others that “broke the camel’s back.” This author believes that a number of factors are present now that portend for an upcoming worldwide financial problem.

Some of the more significant factors include the following:

• Student loans neared $1.5 trillion in the second quarter of 2019, a more than fivefold increase since the beginning of 2003, according to a recent New York Fed analysis. The rapid growth was fueled by increases in both the number of borrowers—there are approximately 43 million borrowers in 2019, compared with only 19 million in 2003—as well as a near tripling of the average balance per borrower, a rise to $33,500 in 2019 from $13,300 in 2003. The amount of this debt is greater than the subprime and marginal mortgage debt that existed in 2008. Those burdened with this debt are unable to purchase homes, which has led to the slowdown in home sales. Also, this debt burden is now forcing the obligors, mostly young people, to curtail consumer spending, which also creates its own domino effect.
• Bloomberg News has reported that subprime auto loan defaults are at a level not seen since 2008. This means that a large group of consumers have totally exhausted their financial resources leaving them in jeopardy to have vehicles repossessed. The significant increase in subprime auto loan defaults has been a traditional recession indicator.
• Newly released data from the Federal Reserve shows that despite a 50-basis-point decline in the U.S. 10-year note yield since late July, the average interest rate on credit cards continues to hover close to record levels, Bloomberg News reported. Fed data show a growing gap between delinquency rates for the 100 largest banks compared with all others. Delinquent accounts for the largest banks were at 2.44% in the second quarter, while other banks saw the rate spike to 6.34% from 5.73% the prior quarter. This is another indicator of a slowdown in consumer spending that also triggers defaults and consumer loans that then eliminates the use of credit cards for an increasing larger part of the U.S. population.
• Public and private companies have utilized the availability of low interest rates and the hunger for lenders to place and increase outstanding commercial debt that is almost at a record level. With any financial or economical hiccup, these borrowers, who have leveraged to the extent that that they have no additional ability to borrow to solve problems, have no margin of error, and can easily fall into default. In the past, one of the Federal Reserve’s solutions for an economic slowdown was to lower interest rates to stimulate borrowing. Since many businesses have borrowed to the hilt, even lower interest rates cannot solve the problem.
• The failure of WeWork to be able to put forth its initial public offering and the revelation of its need for extensive new borrowings in order to stay afloat could have a significant impact on the commercial real estate markets in major metropolitan areas. Even if WeWork curtails all of its planned expansion, its financial model is such that unless it is sustained with more and more debt, it will fail. If that occurs, commercial landlords that have entered into long-term leases for significant amounts of commercial real estate will be left without a significant tenant, which will then trigger mortgage defaults and a cascading economic catastrophe.
• Unless the General Motors strike is ended shortly, the domino effect felt by suppliers, employees, retailers and those involved with the industry could be pervasively disastrous, further curtailing the ability of businesses and consumers to spend and operate profitably.
• Many state, local and municipal governments have significant underfunded pension obligations that cannot be made up by tolerable tax increases. Cities as large as Chicago and many counties, school districts, hospital districts, as well as large and small municipalities are scrambling to avoid default in their pension obligations. If they do fail, this would have a significant impact upon the municipalities going forward, and further impact those planning to utilize their retirement benefits/savings for living expenses.
• The inversion of the yield curve, which has been an accurate predictor or every financial recession, has been sufficiently long in duration so that it reaches the level of being a recession predictor.
• There are numerous other less significant factors that further contribute to a recession or financial slowdown. None of the above take into consideration the impact of international trade wars, tariffs and the extreme financial difficulties being encountered by a number of European Union (EU) countries. These problems could exponentially magnify those that are existing in the United States.