Potential dangers aheadOf course, these things do not conform to a regular schedule, but it is realistic to assume we are closer to the end of this expansion than the beginning. With the economy still reeling from the last recession, the consequences could be pretty dire if another downturn occurred soon. Here are several reasons an economic slump would be especially hard to take right now:
- Over-extended consumers would be in for a shock. With consumer credit at a record high, some people's addiction to credit may be reaching a breaking point. If lenders become more cautious about extending credit during a new recession, people whose lifestyles are dependent on continued borrowing will feel the pinch most severely.
- The Federal Reserve may be short of weapons. With short-term rates already near zero and several years of bond purchases it has yet to unwind, the Fed will be hard-pressed to find new monetary policy stimulus measures that are not inflationary.
- Fiscal policy will be similarly constrained. The president and Congress will have little additional money to throw at a new recession. They will be tempted to, but with growing international grumbling about U.S. debt, pressure on the dollar may limit the government's ability to spend its way out of the next recession.
- Unemployment could get really ugly. If a recession started with unemployment at its current level of 6.7 percent, that would be the second-highest unemployment rate at the start of any recession in the post-World War II era. The only time a recession started with a higher unemployment rate (7.2 percent, in July 1981), the recession lasted 16 months (compared to an average of 11.1 months in the post-war era) and unemployment reached 10.8 percent before it was over.
- Rates on savings accounts could get even lower. You might think that savings account rates can't fall any further, but if the economy suffers a relapse, those few banks that have tried to offer higher rates might no longer see any incentive to do so.