Where is This Supposed Recession?

Apple Podcast Spotify Google Podcast

Where is This Supposed Recession?

Where is this long anticipated recession? We are going to answer that question, but here is the preview: it’s not here…yet. I’m an optimist. I’m a TN Vols fan, and until the last couple of years, you had to be an optimist to persist as a UT vols fan. But in order to win, not just in football, but in finances, one also has to be a realist. Jim Collins captures this well in his book “Good to Great” by referring to the Stockdale paradox. The Stockdale paradox was named after a POW from World War II named Admiral Jim Stockdale. Admiral Stockdale observed during his lengthy captivity that blind optimists were the first to die in captivity. They assumed they would be delivered by Christmas, and they weren’t. Then they assumed they would be set free by Easter, and they weren’t. The continued disappointment eventually left them heartbroken and eventually they gave up. The ones who made it, including himself, were ones who believed there was something better on the horizon – who never gave up hope that one day they would eventually be set free. But these same people confronted the reality that this wasn’t going to happen by Christmas. Actually, the brutal reality was that Admiral Stockdale’s deliverance was not going to come for another eight Christmases, but eventually it did. I believe this paradox highlights how successful money managers live – with a realistic grasp of the present reality in one hand and a dauntless hopefulness of the future’s possibilities in the other. So today I am going to look at some of the current financial realities we find ourselves in – the good, the bad, and the ugly. This may sound like a schizophrenic report, because you’ll hear good news about where we are, and then bad news, and back and forth. After I share this info I’ll give you my best guesses, based on what we know today of where we are going.

Here is today’s reality.

The Goods sector of the economy continues to weaken. The ISM Manufacturing Index is a leading indicator of recession. For eight straight months the index has shown contraction in the manufacturing side of the economy. According to Kiplinger.com, demand for cardboard boxes has fallen to levels consistent with previous recessions. An analyst for Charles Schwab recently referred to this as the cardboard box recession – one that has already hit the manufacturing side of the economy, but one that hasn’t spread to the rest of the economy.

The Services sector continues to stay strong and expand. The ISM Non-Manufacturing Index that measures services and it is solidly in expansion territory. People are still spending money on experiences.

Disney’s crowds appear lower this summer. According to a recent Wall Street Journal article crowds and wait times around the 4th of July were lower than in years past. The article also points to some uncommon discounts, indicating those spending big money are having to be lured to Disney instead of opting for Europe or Hawaii.

There is still tons of extra savings in the system. Kiplinger.com estimates over $500 billion in excess pandemic savings remains in the system. That is a lot of fuel that is continuing to keep some consumers spending. It’s going to take some significant time for that savings to burn off.

Credit availability is tightening. The Federal Reserve Board’s recent survey of senior loan officers indicates that banks are tightening their lending standards, making credit less available than it has been in recent years. Credit availability is a really important factor to continuing economic expansion.

Housing starts rebounded last month. Because many homeowners are staying in their homes (so they don’t lose their low mortgage rate) the inventory of houses available for sale is incredibly low. Builders are optimistic enough to get some more projects going. Granted, some of these may have been in the pipeline for years, but they are moving forward on these projects, nonetheless.

The yield curve is still inverted. The inversion of the yield curve is a phenomenon where you actually make more money in short term fixed income investments than long term. If you go to your local bank, you’ll make more money on a 1-year CD than a 5-year CD. This seems backwards. If you’re going to lock up your money for a longer period of time, you should get a higher rate of return. That’s why we say the yield curve is inverted – it is backwards compared to how it should be in normal times. Since 1960, every single recession has been preceded by the inversion of the yield curve.

Inflation is still an issue. It is true that inflation has cooled dramatically, but it is often the last mile of inflation that is the hardest to get past. In the 70’s, Fed Chair Arthur Burns raised interest rates to fight inflation but eased off when unemployment started going up dramatically. This led to a second wave of inflation that was almost as bad as the first. Paul Volker came along not long thereafter and raised interest rates to levels never seen before, and he didn’t let up until inflation was dead. Will Jerome Powell and the current Fed have the fortitude to keep rates at current levels or even higher until inflation comes back down to its 2% target? Time will tell. But for now, inflation is not gone.

Given all this current information, where are we headed?

Toward a recession – but one that may be further down the road than many anticipated. The stock market is pricing in a soft landing. In other words, higher interest rates will cool inflation, slow the economy enough, and we’ll move on to the next phase of growth. But the bond market is sending the opposite message. It has been my experience that the bond market is a more accurate forecaster than stocks – particularly when a smaller number of stocks are pushing up the indices.

This may be the most telegraphed recession ever – one that seemed like it would never get here, but eventually it will. I continue to preach preparation. That is the watch word in this environment. The truth is that we cannot consistently predict, but we can consistently prepare. Reduce your debt. Grow your savings. Be picky about the risks that you take. Those are the three primary takeaways.

So if I think recession is coming, if I think that is the brutal reality, where is the optimism I mentioned that should be held in the other hand? There are opportunities in the midst of recessions and even beyond a recession. Recessions often clear out excesses and reinforce market discipline. There are also bargains available for those with cash in recessions. Recessions are an opportunity to prepare for the next economic expansion that lies beyond it. And I continue to believe that the economic system in this country, flawed thought it is, will offer the best opportunity on the planet for people to prosper and be a blessing to others. That is the hope, and that is what we should all be working towards.

At MBC/Foundation Bank our purpose is that we exist as a tool to invest in those things that will outlive us. We believe that every day we can make things a little better in our little corner of the garden. We believe that we can invest in our clients and communities through the vehicle of finance to help them accomplish their financial goals. If you are not a part of our financial community, we invite you to check us out. If you’ve found this podcast helpful, we hope you’ll subscribe to it in your favorite podcast app and share it on social media. Until our next episode, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on July 11, 2023. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.