The Next Recession in the US: Can US Business Fend Off the Worst of It?

There cannot be growth without decline… this statement can apply to all aspects of life but is more prominently recognized within the economy. The United States economy, in particular, has experienced substantial economic growth since the Great Recession; however, economists say it’s time for another economic downturn to occur. While the next recession is evidently arriving in the near future (2020-2022), a specific cause cannot be determined, nor can one solution be guaranteed to work. High interest rates, corporate debt, and the U.

S.-China Trade Wars are just a few factors predicted to ignite the next recession. Fortunately, each one of these issues is paired with a solution.

Before evaluating the problem itself, one must first be knowledgeable on the topic at hand which, in this case, is the next recession. So, what is a recession? According to the article, “On the Competing Definitions for Recession,” “The more modest, straightforward, mechanical definition…,” being “… at least two consecutive quarters of negative change in national economic output, or ‘negative growth’…” (Gaski 118).

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While recessions are many times compared to significant economic decline, any sort of decrease in the economy lasting for a certain time period can be considered a recession, even if it was to occur mildly with little effect. Along with varied effects, the cause of a recession can also vary and be traced back to a number of factors. There are several possible causes for the next recession, including high interest rates, corporate debt, and the U.S.-China Trade Wars.

As stated by an article, written by the New York Times, one cause of the next recession could be due to high interest rates paired with an economic lift from tax cuts (Irwin 9). With the U.S. already approaching full employment and an inflation rate gradually increasing, the Federal Reserve may consider raising interest rates. However, if tax cuts were to deteriorate at the same time, the economy would be facing two factors working to slow the economy.

The article, “Inflation, Bankruptcy, Default Premia, and the Stock Market,” states “… inflation leads to the under-valuation of the stock market because investors suffer from ‘inflation illusion’….We combine this with a simple share valuation model in which inflation also depresses share prices by raising the probability of bankruptcy” (Sushil 3). In this quote, it is read that not only does inflation directly affect a major part of the United States economy, the stock market, but it also can lead to bankruptcy, which leads to another possible cause of the next recession.

According to the article, “Prepare Now for the Next Recession,” “The U.S. economy, in particular, is stronger than it has been for many years with strong GDP growth, low unemployment and low inflation” (5). With the economy growing, it seems unlikely that economic decline could be approaching in the near future. In fact, “The economy seems so strong that analysts and investors are shrugging off these issues” (“Prepare Now for the Next Recession” 6). However, low interest rates have pushed many companies into excessive debt. 

As author Grace Blakely points out, “Total global debt is three times the size of global GDP, and corporate debt, particularly in the US and the UK, has ballooned because of low interest rates” (7). Sitting in this much debt can be risky for businesses because any extra weight on the balance could tip the scale, plunging companies into bankruptcy. In the article, “How to Survive a Recession & Thrive Afterward,” “Companies with high levels of debt are especially vulnerable during a recession, studies show” (Frick 4). This vulnerability could be detrimental for businesses if and when the next recession occurs.

Along with bankruptcy, economists are also marking the Trade Wars with China as a possible cause for the next recession. According to author Neil Irwin, trade in the US only makes up about 8% of the economy, so the Trade Wars with China would have little direct effect on the U.S. economy, unless it escalated (34). However, the countries that depend more on trade might be in trouble. A decline in the global economy could cause loss in the American stock and bonds market, which could lead to a recession.

The essay, “Prepare Now for the Next Recession” reads, “The looming trade war with China, which Alibaba Chairman Jack Ma fears could last 20 years, could do more damage to the U.S. economy than analysts now predict. That could cause a recession” (12). While the likelihood that the Trade Wars will solely be the cause of the next recession is slim, it is still an issue that government leaders and economists should be aware of.

Although there are many probable causes of the next recession, with every problem there is a solution. Finding balance between interest rates and tax policy, undergoing corporate debt restructuring, and participating in joint ventures are all ways government leaders, as well as businesses, can reduce the effects of, or even avert, the next recession. To prevent high interest rates from slowing the economy while tax policies are also working to slow the economy, the Federal Reserve would have to essentially find a sweet spot, “raising rates just enough to prevent overheating but not enough to leave rates so high as to risk a recession once the impact of tax cuts fades” (Irwin 13). However, this would be a challenging feat, and it would be unlikely to yield the results that economists are looking for.

As for the issue of corporate debt, many companies experiencing excessive debt would have to undergo corporate debt restructuring in order to subside the effects of a recession. According to an article focusing on corporate debt restructuring, “The Corporate Debt Restructuring (CDR) mechanism aims to restructure debt of viable companies facing distress due to internal or external factors” (Rastogi and Mazumdar 1). There are several ways companies can reduce debt and be prepared for economic decline. 

Another article, “Approaches to Corporate Debt Restructuring in the Wake of Financial Crises,” states, “Corporate debt restructuring can take many forms directed to the debt and capital structure of a firm; it can include debt reschedulings, interest rate deductions, debt-for-equity swaps and debt forgiveness” (Laryea 10). Debt restructuring methods can be very versatile and can conform to the specific needs of a business. While it would pose a challenge, corporate debt restructuring could prevent the downfall of many companies within the U.S. in the aftermath of the next recession.

Further, the issue of the Trade Wars with China cannot go unsolved. According to the article, “China: Are Joint Ventures the Answer to Trump’s Trade Wars?” joint ventures could be the answer. A joint venture can be defined as, “… separate entities with two or more active firms as partners” (Harrigan 2). If U.S. companies can form partnerships with Chinese companies, the ongoing trade wars could fade.

 Shoesmith states, “If an American company can identify a trust- worthy partner in China, it may be possible to shift operations and output quickly so that sales to customers are not unduly interrupted” (7). This could make available more jobs and generate more relationships without having to impose strict tariffs. Overall, joint ventures could reduce the risk of global economic decline and recession in the United States.

To conclude, the next recession is coming; it is only a matter of when it will occur and how negative the effects will be on the U.S. economy. There are several possible causes for the next recession, including high interest rates, corporate debt, and the U.S.-China Trade Wars. However, each of these factors has a solution, and it is the goal of many economists around the globe to take action, in the hopes of reducing the consequences coinciding with an economic decline. With the next recession quickly approaching, the road ahead may be tough; however, there cannot be growth without decline.