By many accounts, the U.S. economy has been doing well in recent years. Can we stay at this level of economic strength, or is a recession lurking in the shadows?

Tim Halverson, president and chief executive officer of CoBank, talked about the next recession during his presentation at the Dairy Farmers of America (DFA) annual meeting in Kansas City, Mo., last month.

Halverson indicated that the U.S. economy showed robust growth in the 2018 calendar year, according to numbers released by the government. Some statistics that illustrate this strength include 2.9 percent economic growth in 2018, which was higher than the 10-year average of 2.2 percent annual growth.

The national unemployment rate is just 3.8 percent, which Halverson said is very low by historical standards. Wages are also increasing at a faster rate than inflation, which puts more purchasing power into the hands of the consumers. In addition, Halverson shared that housing values are holding quite firm, inflation is subdued, and consumer spending and confidence are very solid.

“It sounds like everything is great, so why worry?” he asked the audience. “Why look around corners wondering what might lurk there?”

Approaching a record
According to Halverson, one big reason for concern is the length of the most recent economic recovery.

Current economic expansion has been going on 116 months, since the middle of 2009. Only one other economic expansion since the end of World War II has been longer — the 10-year recovery from March 1991 to March 2001. Right now, we are on track to surpass that mark this summer.

“The average length of an economic expansion in the post-WWII period is 63 months. We are more than 80 percent longer than that right now,” Halverson said.

“I can’t tell you when the next recession is going to occur. I can’t tell you how bad or how deep that economic recession will be. I can’t tell you what catalyst or series of catalysts will push us into an economic recession,” Halverson said. “What I can tell you is all expansions eventually come to an end and we will have another recession.”

The impact on agriculture
How would a recession affect American agriculture?

Halverson explained that the U.S. farm economy is driven by a large number of variables, including weather, crop yields, currency evaluations, input costs, and commodity prices. “All differ in their degree of exposure to consumer spending,” he said.

“Also, recessions have offsetting effects that are both good and bad for agriculture,” he said. For example, agriculture relies heavily on credit, so the industry benefits from periods of low interest rates in recessionary periods.

Because recessions vary greatly in cause, severity, and how long they last, Halverson said, “There is no one simple answer to cause and effect between recessions and business performance in the agriculture economy.”

Since 1960, there has clearly been a positive correlation between GDP (gross domestic product) and agricultural income. From 1960 to 1995, there was a very strong correlation between economic growth and farm income, but since 1995, that correlation has declined somewhat.

One primary reason, according to Halverson, is that export markets for agricultural products have grown around the world. “American agriculture today is less heavily dependent on purely domestic demand. We export a lot more, which has been terrific for us,” he said.

Halverson said it is the hope of their financial institution that the effect of the next recession, whenever it arrives, is mild for agriculture. “We hope that producers and agribusinesses benefit from the increased globalization of their customer base,” he said.

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(c) Hoard's Dairyman Intel 2019
April 22, 2019
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