Category Archives: Recession

Recession and Political Silly Season

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The U.S. has entered the official political silly season which is when analysts interpret monthly and quarterly economic reports and data through a highly biased political lens, writes Brian Wesbury, Chief Economist, First Trust. Unfortunately, he submits that the real unbiased analysis of economic reports and data rarely emerges.

Wesbury opined that the silly season started with politicians from the right proclaiming that the country was in a recession because real GDP declined in both of the first and second quarters of calendar year 2022. These individuals purposely overlooked that the unemployment rate has dropped 0.4 percentage points so far this year. And they fail to notice that payrolls are up an average of 471,000 per month, while industrial production is up at a 5.2% annual rate over the first six months of the year. Never mind that “real” (inflation adjusted) gross domestic income was up in the first quarter.

Although, two quarters of negative real (inflation-adjusted) gross domestic product (GDP) growth is commonly viewed as a strong sign that a recession is underway, it is not the official definition.

***Recession are foremost and always a “broad based decline in economic activity”.***

The National Bureau of Economic Research (NBER), a private non-profit research organization that focuses on understanding the U.S. economy, views a recession as a monthly concept that takes account of a number of monthly indicators—such as employment, personal income, and industrial production—as well as quarterly GDP growth. Additionally, “a recession is the period between a peak of economic activity and its subsequent trough, or lowest point,” the NBER says on its website.

Therefore, while negative GDP growth and recessions closely track each other, the consideration by the NBER of the monthly indicators, especially employment, means that the identification of a recession with two consecutive quarters of negative GDP growth does not always hold.

Thus, the economy is currently not in a recession since the NBER’s defines officially a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

“Our view is that a recession is coming, that monetary policy will have to get unusually tight for the Federal Reserve to bring inflation back down to its 2.0% target,” states Wesbury. “In turn, tighter money should induce a recession. But that takes time and the recession hasn’t started yet.”

References:

  1. https://www.ftportfolios.com/Commentary/EconomicResearch/2022/8/15/silly-season
  2. https://www.bea.gov/help/glossary/recession

Fears of a Recession

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The U.S. economy shrank for a second consecutive quarter, which is a common definition of recession. Additionally, the U.S. economy is enduring a rocky transition from an exceptionally strong post-pandemic recovery to a steep Federal Reserve caused slowdown.

The Commerce Department reported that Gross Domestic Product (GDP) contracted at a 0.9% annual rate in the second quarter of calendar year 2022. With the 1.6% annual rate decline in the first quarter, this means the U.S. economy has declined for two consecutive quarters, a commonly used, but not official definition, of recession. GDP is a broad measure of the goods and services produced across the economy.

Inventories, specifically the pace of restocking, accounted for much of the economic output decline experienced in the second quarter. As an example, Walmart announced that it was cutting prices in its Sam’s Club stores to reduce merchandise levels.

However, the official arbiter of U.S. recessions, the National Bureau of Economic Research (NBER), has not announced that a downturn has begun because an array of other indicators, such as employment and corporate earnings, do not look as dire. NBER defines a recession as a significant decline in economic activity, spread across the economy for more than a few months. It usually doesn’t make a recession determination until long after the fact.

In fact, within the broader economy, the job market remains strong and if employment stays strong, consumer’s will to spend should remain intact.

Consumer spending continues to grow, but at a slower pace. The housing market has cooled down under rising interest rates and high inflation has taken the steam out of business and consumer spending v

Corporate earnings haven’t been as bad as investors had feared, suggesting that soaring inflation and signs of declining economic growth aren’t weighing too heavily on the economy.

The Federal Reserve raised interest rates from near zero to a range between 2.25% and 2.5%, so far this year, and Chairman Powell hinted that the pace of rate increases would eventually flow.

The economy is slowing down as the Federal Reserve acts to bring down inflation. The challenges facing the economy are high inflation, weakening consumer sentiment and supply chain volatility. Consumer spending accounts for about two-thirds of risk U.S. economic output.

References:

  1. https://www.wsj.com/articles/if-this-is-a-recession-we-might-not-know-for-months-11659173402?mod=mhp

Recession and the U.S. Economy

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There is always a recession in the future. The reality is that the U.S. economy could be in a recession now.

Inflation is too high and interest rate adjustments are required, says Esther George, Kansas City Federal Reserve President. She sees consumers taking actions to combat inflation and those actions, such as not buying appetizers while dining out, are apparent to the Federal Reserve. Thus, the economic data shows that there are already signs of a pullback in consumer spending…just look at Walmart, Target and Dollar Tree sales and earnings.

There is always a chance of a recession in the future, no matter what the current economic data look like or current consumer spending is doing. The question of whether the economy slips into a recession is basically a “not if, but when“ proposition.

It’s become obvious that a recession will come to the United States economy in the future, but the essential question is when. It is important to keep in mind that recessions are a normal and unavoidable part of the economic business cycle.

A recession is a significant decline in economic activity that lasts for months or even years, according to Forbes. Experts declare a recession when a nation’s economy experiences negative gross domestic product (GDP), rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.

The National Bureau of Economic Research (NBER) generally defines the starting and ending dates of U.S. economic recessions. NBER’s definition of a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

The reality is that the U.S. economy could be in a recession now.

The definition of a recession is two consecutive quarters of negative gross domestic product growth. First-quarter GDP decreased at an annual rate of 1.4%. Should that happen in the second quarter, that would technically place the economy in recession.

Recessions usually come from demand weakness, but supply problems can also trigger a downturn.

Consumer demand for goods and services continues to be strong, according to the Federal Reserve. Consumers have plenty of money, thanks to past earnings, fiscal stimulus payments and extra unemployment insurance. They have paid down their credit card balances. Even though they also increased their car loans outstanding as they upgraded their rides, their general condition is good. Employment will increase thanks to the spending, reinforcing the income gains that enable expenditures. Supply restraints are fueling current accelerating inflation.

The economy reacts with a time lag of about one year, plus or minus.

The greatest recession risk in the near term is that the Federal Reserve realizes that much of the recent decades high inflation is long-lasting rather than transitory. They will then ‘hit the brakes’ to control inflation by raising interest rates. Because of the time lag, the Fed may decide to raise interest rates faster, triggering a recession.

“Inflation is worst than a recession, and inflation will take us into a recession,” states Liz Young, SoFi Head of Investment Strategy.

References:

  1. https://www.forbes.com/sites/billconerly/2021/11/02/no-recession-in-2022-but-watch-out-in-2023/https://www.forbes.com/sites/billconerly/2021/11/02/no-recession-in-2022-but-watch-out-in-2023/
  2. https://247wallst.com/investing/2022/05/19/goldman-sachs-has-6-strong-buy-dividend-stocks-that-can-weather-a-certain-coming-recession/
  3. https://www.forbes.com/advisor/investing/what-is-a-recession/

U.S. GDP Contracted for the First Time since 2020Q2

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A recession is typically considered two consecutive quarters of negative GDP growth.

U.S. economic activity contracted for the first time since mid-2020, with lingering supply chain constraints, inflation at its hottest rate since the early 1980s, expected interest rate increases announced by the Fed, and disruptions amid Russia’s war in Ukraine weighing on economic growth.

The Bureau of Economic Analysis (BEA) released its initial estimate of first-quarter U.S. gross domestic product (GDP).

The main metrics from the report, compared to consensus data compiled by Bloomberg, are:

  • GDP annualized, quarter-over-quarter: -1.4% vs. 1.0% expected, 6.9% in Q4
  • Personal Consumption: 2.7% vs. 3.5% expected, 2.5% in Q4
  • Core Personal Consumption Expenditures, quarter-over-quarter: 5.2% vs. 5.5% expected, 5.0% in Q4

What does the metrics all mean?

The economic metrics are important indicators of the state of the U.S. economy at the start of this calendar year — especially now as the U.S. braces for interest rate hikes to cool inflation and for the possibility of a recession in the near to medium term. A recession is typically considered two consecutive quarters of negative GDP growth.

“It is unfortunate that this GDP rate did not meet expectations, but unsurprising as the U.S. economy remains very volatile with geopolitical turbulence from the war in Ukraine, a global supply chain crisis, increasing inflation and the ongoing COVID-19 pandemic,” Steve Rick, chief economist at CUNA Mutual Group, said in an email. “All of these factors have shrunk GDP growth rates around the globe.”

References:

  1. https://finance.yahoo.com/news/q1-us-gdp-gross-domestic-product-economic-activity-190926750.html

Don’t Fight the Fed

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“We continue to believe that the S&P will see a correction of at least 20% over the next one to two years as the Fed is more aggressive than expected to deal with inflation running higher than expected and easy money begins to decrease.” Dan Niles

“The markets are in a volatile and dangerous place as of now,” writes Dan Niles, founder and portfolio manager for the Satori Fund.

In his article entitled “Market Thoughts Following Q1”, Niles contends that investors heed the warning: “Don’t Fight the Fed”.

He states that “Investors are forgetting that it [Don’t Fight the Fed] works on the way down as well as the way up. The Federal Reserve (The Fed) expanded their balance sheet by $4.8 trillion since the start of the pandemic while the US government added ~$5.5 trillion in stimulus. Combined stimulus of roughly half of US GDP of $20.5 trillion is the major driver of why the prices of stocks (along with homes, cars, boats, crypto, art, NFTs, etc) all went up over the past two years during a global pandemic. Now, the Fed dot plot shows 10 rate hikes in less than two years and they will be cutting trillions off the balance sheet probably starting on May 4th along with a 50 bps rate hike.”

“The #1 concern for investors in 2022 should continue to be that the Fed is so far behind the curve on dealing with inflation that they will have to be much more aggressive than in prior tightening cycles despite high inflation & geopolitical risk.” Dan Niles

“We [Satori Fund] continue to believe that the S&P will see a correction of at least 20% over the next one to two years as the Fed is more aggressive than expected to deal with inflation running higher than expected and easy money begins to decrease. Since World War II,

  1. Every time Inflation (CPI) is over 5% a recession has occurred
  2. Every time oil prices have doubled relative to the prior 2-year average ($54 in this case) a recession has occurred
  3. 10 of the 13 prior recessions have been preceded by a tightening cycle by the Fed
  4. 10 of the last 13 recessions have been preceded by the 10-year yield going below the 2-year yield”

For retail investors, Niles recommends “cash until inflation, Fed tightening and economic slowing run their course over the next one to two years. He writes that “most of the time, cash is a terrible investment especially in a high inflationary environment, but it is better to lose 6-7% to inflation this year than 20%+ in a stock market drop. With the Fed being this far behind the curve on inflation, we will find out how much froth is in valuations as the Fed starts tightening as growth continues to slow.”

Satori Fund likes companies that

  1. Benefit from economic reopening (not pandemic beneficiaries);
  2. Are profitable with good cash flow;
  3. Have growth but at a reasonable price;
  4. Benefit from higher-than-average inflation;
  5. Benefit from multi-year secular tailwinds. 

They foresee investing tailwinds in:

  • Datacenter, office enterprise, and 5G infrastructure.
  • Reopening plays such as airlines, cruise lines, travel, rideshare, and dating services as people adjust to covid becoming endemic.
  • Banks which should benefit from higher interest rates.
  • Alternative energy as geopolitics and fallout from the Russia-Ukraine War drives investment in the space.

References:

  1. https://www.danniles.com/articles

Nearly 22 Million Americans are Millionaires

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There are nearly 22 million individuals in the U.S. with financial and real assets to fit the definition of being a millionaire, according to a 2021 Credit Suisse Global Wealth Report. Overall in 2020, total global wealth grew by 7.4% and wealth per adult rose by 6% to reach another record high of USD 79,952, according to the report.

Net worth, or “wealth,” is defined as the value of financial assets plus real assets (principally housing) owned by households, minus their debts.

The core reasons for asset price increases which have led to major gains in household wealth are a result of significant monetary and fiscal intervention by governments and central banks, like the U.S. Federal Reserve. Many governments and central banks in more advanced economies have taken pre-emptive action to prevent an economic recession in two primary ways: first, by organizing massive income transfer programs to support the individuals and businesses most adversely affected by the pandemic, and second, by lowering interest rates – often to levels close to zero – and making it clear that interest rates will stay low for some time.

There is little doubt that these interventions have been highly successful in meeting their immediate objectives of countering the economic impact of the pandemic. However, they have come at a cost. Public debt relative to GDP has risen in the U.S. and throughout the world by 20 percentage points or more, according to a 2021 Credit Suisse Global Wealth Report.

In essence, there has been a huge transfer from the government coffers to household net worth, which is one of the reasons why household wealth has been so resilient. In one respect, these transfers generously compensated households.

Generous payments have meant that disposable household income has been relatively stable and has even risen. In combination with restricted consumption opportunities, this has led to a surge in household saving, which has inflated household financial assets and caused household debts to be lower than they would be otherwise. This increase in savings was an important source of household wealth growth last year.

The lowering of interest rates by central banks has probably had the greatest impact on the growth in household wealth. It is a major reason why share prices and house prices have flourished, and these translate directly into our valuations of household wealth.

However, there are inflation implications in the long term from lowering the interest rates and also increased equity market volatility linked to expected future rises in interest rates. However, these were deemed relatively unimportant at the time compared to the more immediate economic challenges caused by the pandemic.

Household wealth appears to have simply continued to grow, paying little or no attention to the economic turmoil that should have hampered progress. Effectively, financial assets accounted for most of the gain in total household wealth accumulation.

The wealth of those with a higher share of equities among their assets, e.g. wealthier households in general. And, home owners in most markets, on the other hand, have seen capital gains due to rising house prices.

Wealth is a key component of the economic system. It is used as a store of resources for future consumption, particularly during retirement. Wealth also enhances opportunities when used either directly or as collateral for loans. But, most of all, wealth is valued for its capacity to reduce vulnerability to shocks such as unemployment, ill health, natural disasters or indeed a pandemic.

The contrast between those who have access to an emergency buffer and those who do not is evident at the best of times. Household wealth has played a crucial role in determining the resilience of both nations and individuals

Roughly 1% of adults in the world are USD millionaires.

Global household wealth may well have fallen. But aggressive governments and central banks to intervene help mitigate the economic impact of the pandemic. These have led to rapid share price and house price rises that have benefited those in the upper wealth echelons. In contrast, those in the lower wealth bands have tended to stand still, or, in many cases, regressed. The net result has been a marked rise in inequality

In many countries, the overall level of wealth remains below levels recorded before 2016. Some of the underlying factors may self-correct over time. For example, interest rates will begin to rise again at some point, and this will dampen asset prices.

References:

  1. https://www.cnbc.com/2021/12/22/heres-how-22-million-americans-became-millionaires.html
  2. https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/global-wealth-report-2021-en.pdf
  3. https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html

The Debt Ceiling and Congressional Brinkmanship

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“I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.” Warren Buffett, Chairman and CEO, Berkshire Hathaway

Around October 18, Treasury Secretary Janet Yellen and the U.S. Treasury Department have warned Congress that the government will no longer be able to pay all its bills unless the $28.5 trillion statutory debt ceiling is increased or suspended.

Source: Congressional Research Service, Congressional Budget Office, and the Treasury Department. Data as of 05/01/2021.

Moreover, Secretary Yellen believes the economy would fall into a recession if Congress fails to address the borrowing limit before an unprecedented default on the U.S. debt.

While the U.S. has never failed to pay its bills, economists say a default would tarnished faith in Washington’s ability to honor its future obligations on time and potentially delay Social Security checks to some 50 million seniors and delay pay to members of the U.S. armed services.

“If you ask the question of Americans, should we pay our bills? One hundred percent would say yes. There’s a significant misunderstanding on the debt ceiling. People think it’s authorizing new spending. The debt ceiling doesn’t authorize new spending; it allows us to pay obligations already incurred.” Peter Welch (D-VT), U.S. House of Representatives Democratic Caucus Chief Deputy Whip

Increases to the debt ceiling aren’t new. They’ve occurred dozens of times over the last century, mostly matter-of-factly, a tacit acknowledgement that the bills in question are for spending that Congress has already approved.

One thing separating today’s debt debate from those of the past is the larger-than-ever national debt, according to Fidelity. Publicly held US debt topped 100% of GDP in 2020 and is expected to reach 102% by the end of 2021.

And the debt is projected to increase significantly in the future. The Congressional Budget Office (CBO) projects a federal budget deficit of $2.3 trillion in 2021—the second largest deficit since 1945.

Source: Congressional Budget Office, as of February 11, 2021.

Failure to address the current challenge could shake global markets even before the Treasury has exhausted its available measures to pay bills. A U.S. debt default, whether through delayed payments on interest owed on U.S. Treasuries or on other obligations, would be unprecedented.

The effect would be one of perception. And, perception can be tied to the reality that someone isn’t going to be paid on time, whether it be government contractors, individuals who receive entitlement payments, or someone else. The damage to U.S. credibility would be irreversible.

Even if a default were only technical—if payments other than interest on debt were delayed—the United States could no longer fully reap the benefits bestowed on the most reliable debtors.

Interest rates would likely rise, as would financing costs for businesses and individuals. Debt ratings would be at risk. The government’s own financing costs, borne by taxpayers, would increase. Stock markets would likely be pressured as higher rates made companies’ future cash flows less predictable. Such developments occurring while economic recovery from the COVID-19 pandemic remains incomplete makes the potential scenario all the more important to avoid.

Let it be said that no one doubts the ability of the United States to pay for its obligations, according to Vanguard. There is a minimal credit risk posed by the United States is supported by its strong economic fundamentals, excellent market access and financing flexibility, favorable long-term prospects, and the dollar’s status as a global reserve currency.

The House has passed a measure that would suspend the debt ceiling through mid-December of 2022, and the bill now goes to the Senate. Republicans in the Senate oppose any effort to raise the borrowing limit and appears intent on making Democrats address it as part of their sprawling investment in social programs and climate policy under reconciliation.

Senate Democrats could lift the debt ceiling without the GOP votes through reconciliation, although that would come with downsides. Under reconciliation, a simple majority of senators can pass a very small number of budget bills each year. The process is sufficiently complex that it would probably take a couple of weeks and distract Democrats from their negotiations over Biden’s “Build Back Bette” agenda.

Thus, the Democrats resist raising the debt ceiling through reconciliation if it means potentially sacrificing other policy goals. And, the rules for reconciliation would require Democrats to specify a new limit for the national debt which would expose them to potentially uncomfortable GOP political attack ads.

Republicans insist that since Democrats control both the executive and the legislative branches and are in a socialistic tax-and-spend binge, they should bear sole responsibility for dealing with the debt limit, which is rearing its ugly head again because the suspension included in a two-year 2019 budget deal expired on July 31.

Democrats argue that Republicans should share the burden of this unpopular chore, since (a) much of the debt involved was run up under Republican presidents and (b) Democrats accommodated Republicans on debt-limit relief during the Trump presidency.

For long term investors, it’s clearly in the best interest of the country to resolve any debt-ceiling issues, according to Fidelity. And, it’s important to understand that there will always be times of uncertainty. It’s important to take a long-term view of your investments and review them regularly to make sure they line up with your time frame for investing, risk tolerance, and financial situation.

References:

  1. https://investornews.vanguard/potential-u-s-debt-default-why-to-stay-the-course/
  2. https://www.cnbc.com/2021/10/05/debt-ceiling-us-faces-recession-if-congress-doesnt-act.html
  3. https://nymag.com/intelligencer/2021/10/democrats-can-raise-debt-ceiling-via-reconciliation-bill.html
  4. https://www.fidelity.com/learning-center/trading-investing/2021-debt-ceiling

COVID-19 Fatigue Feeds Market’s Rise | Forbes

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Managing risk should remain a key in life and in investing.

There is very little that is typical about Thanksgiving 2020. The CDC and other U.S. public health experts requested that Americans avoid traveling, opening your home to people outside of your immediate family and hosting large gatherings on Thanksgiving.  

Dr. Henry Walke, the Centers for Disease Control and Prevention (CDC) Covid-19 incident manager, said during the press briefing, “Right now, especially as we’re seeing this sort of exponential growth in cases, and the opportunity to translocate disease or infection from one part of the country to another, it leads to our recommendation to avoid travel at this time.”   

Yet, a lot of Americans aren’t heeding the warnings and recommendations of public health experts. In Florida, for example, popular restaurants and bars were packed with customers and had wait times for a table exceeding thirty minutes. Moreover, AAA projects that 50 million Americans will be traveling for Thanksgiving.

https://twitter.com/i/events/1330235471012667392?s=21

The surge of COVID-19 infections, hospitalizations and projected rise in related deaths combined with adverse economy effects is just the “right” condition for creating a double dip recession and bear market.

Additionally, the dips could be fast and outsized because the surge is widespread and exponential. Moreover, it is occurring at a time of pervasive disregard for COVID-19 and stock market risks.

COVID-19 resurgence

During this COVID-19 pandemic and stock market runup, many people have been blaming “COVID-19 fatigue” for the reason they refuse to stand safely on the sidelines in safer assets and watch others ignore risks of a double dip recession and bear market, and ignoring warnings of exponential Coronavirus resurgence.

There are “a confluence of troubling issues, challenging uncertainties and destructive possibilities that descend on the economy and financial markets”, according to Forbes.

Focus on reality and risk

The incoming economic data in the US suggests that the US may be in jeopardy of experiencing a double dip recession because of the latest Covid-19 resurgence. Moreover, the data also indicates that there is no healthcare – economy trade-off.

Unemployment

Recessions produce outsized unemployment with many unable to find work for over over six months – a reality that is apparenty present now.

Consumer sentiment and spending

Consumer spending is equivalent to about two-thirds of the GDP. It is especially dependent on both consumer income and consumer sentiment. Increased unemployment naturally reduces both items.

Consumer spending, like GDP rebounded partially, but could stagnate or even fall due to higher unemployment and lower income, reflected by the decline in sentiment.

Hope for best, prepare for worst

Widely expected new government stimulus and broadly administered vaccinations are the current rationales for hope.

But risks remain. With the prevailing risk to the economy and markets, coupled with COVID-19 resurgence and uncertainty, it may be a wise move to play it safe.

References:

  1. https://www.forbes.com/sites/johntobey/2020/11/23/covid-19s-fatigue-feeds-stock-markets-rise–both-are-unhealthy/?sh=5b0d20301518
  2. https://newsroom.aaa.com/2020/11/fewer-americans-traveling-this-thanksgiving-amid-pandemic/