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Recession Worries?

May 4, 2022

When searching “Recession Worries for 2022” Google responded with 128,000,000 articles I could read. Evidently, there are a lot of people writing about the new risks of a recession after 2020’s three-month technical recession.
One favorite is CNN’s April 26 article on Deutsche Bank’s pronouncement that a recession is inevitable. From Deutsche Bank’s report they stated:
 
“We will get a major recession,” Deutsche Bank economists wrote in a report to clients on Tuesday.
 
The problem, according to the bank, is that while inflation may be peaking, it will take a “long time” before it gets back down to the Fed's goal of 2%. That suggests the central bank will raise interest rates so aggressively that it hurts the economy.
 
“We regard it…as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel,” Deutsche Bank economists wrote in its report with the ominous title, “Why the coming recession will be worse than expected.”
 
Evidently, the analysts at Deutsche Bank do not have high regard for the US Federal Reserve and certainly don’t know the history of the Fed’s interest rate process. Their fear is the Federal Reserve will recklessly raise rates until inflation is back to 2% come hell or high water, no matter if it drives the US economy into a deep recession. Should the Feds do that, they then will need to reverse their rate hiking policy to re-stimulate the economy now in a recession by quickly lowering rates or risk spiraling disinflation of plunging prices and rising unemployment.  
 
This report is not from a newbie company; this is from Deutsche Bank, founded in 1870. Even the casual observer of Fed interest rate policies over the years should question this forecast. In your lifetime, have you ever seen the Federal Reserve react this quickly to anything, let alone so aggressively it drives the economy to a standstill?  Secondly, the Feds define rate policies typically each quarter but not until they have broadcast their intentions for months of possible rate hikes. Last quarter they raised rates for the first time since 2018 by 0.25%. Supportive investors rallied the Dow Jones Industrial Average (DJIA) by over 1,500 points in four days (March 15- 18) following this announcement. 
 
We would consider a better indicator of determining the risks of a recession by reviewing the financial health of US consumers, which represent 67% of the economic spending and activity.  
 
In January, the US Bureau of Economic Analysis reported that United States Wages and Salaries Growth increased an average of 9.16% a year the year (YoY) in December and the 18th consecutive monthly gain in wages and salaries.
 

Last week the Bureau reported that personal incomes rose 0.5% in April from the previous month's gain of 0.7% or on track for annualized income increases greater than 6%.

If anyone is out of a job, there are now 11.549 million job openings according to today’s Job Openings, and Labor Turnover report from the US Bureau of Labor Statistics illustrated below. Meanwhile, unemployment is going down as a continuation of a significant rise in the “Gig Economy,” as we reported in our January 11, 2022, Brief “More Jobs, Less (W-2) Workers”. The changing employment environment continues to shrink the W-2 worker population and make more independent and self-employed.

Lastly, consumers have had more disposable income in history since the US Bureau started tracking this statistic in 1950. As of March, US consumers have increased their disposable income to $18.519 billion from the previous month's all-time high of $18,360 billion, or a 0.8% increase. BTW, this is one month of disposable spending, and next month, consumers have another $18 billion to spend.

So if we agree employed consumers are in decent financial shape, then the risk must be with businesses. Correct? Last week the US Census Bureau reported that Factory Orders jumped 2.2% month over month (MoM) and doubled the forecasts. Econoday had this observation for today’s US Factory Orders report from the US Census Bureau:
 
“However, much of Russia's attack against Ukraine upended the global outlook; the US factory sector posted one of its strongest months ever in March. New orders jumped 2.2 percent in the month to exceed the high end of Econoday's consensus range. Other headlines backup this strength, including shipments which rose 2.3 percent to show no sign of transportation snags; inventories extended their strong run of builds with a post-pandemic best of 1.3 percent; and unfilled orders contributed to the month's strength, rising 0.4 percent to extend their strong run of gains.”
 
Today’s monthly factory order gain is the 22nd consecutive monthly gain in orders (excluding April 2021 scant -0.1% decline). 

What Does This Mean to Me?

It may feel like you are hearing about two economies. A positive economy with evidence of sustainable growth and the doom and gloom economy the media keeps peddling. We write extensively about how the main media continues, for reasons unknown, to deliver mis-messaging to investors who base investment decisions on what the media is reporting. In 2017, the media relentlessly pounded the recession story, citing yield curve inversion (when long-term interest rates are lower than short-term interest rates) as evidence the US is heading into a recession. The Market Oracle stated on June 6, 2017:
 
“The bounce in Treasury yields witnessed after the election of Donald Trump is now decaying in the D.C. swamp. If the Fed continues to ignore this slow growth and a deflationary signal from the bond market and continues along its current rate-hiking path, the yield curve will invert by the end of this year, and an equity market plunge and a recession are sure to follow”.
 
There was no recession, and the SP500, DJIA, and NASDAQ rose 19%, 25%, and 28%, respectively.
The best indicator to determine the risks of recession and the health of the US economy is to focus on the people and businesses of the economy that combined represent 88% of the US Gross Domestic Product. The employment market is near capacity, as evident by the 3.6% unemployment (a drop from the previous month of 3.8%) and 11.5 million job openings. More importantly, consumers have more disposable income now than before the pandemic, along with job stability. 
 
Businesses are bullish on their growth, as evident by one of the biggest gains in recorded history of factory orders despite supply chain challenges caused by the war on Ukraine. 
 
Based on the above, our view remains favorable on the US economy and the prospects of a recovery from the current stock market selloff. That said, we want to pay attention to real evidence of risk that will be apparent with consumers first and then businesses. For consumers, we want to monitor changes in household incomes, sentiment, spending, and employment. For businesses, monitor changes in profit, hiring, factory orders, and retail sales. Until we see declines in these indicators, the evidence indicates stock market and economic conditions remain stable.  
 
Let us know if you have any questions about this Weekly Brief. More importantly, give us a call or send an email to discuss creating your retirement plan to achieve financial independence that includes developing an investment strategy for your retirement and personal accounts. We welcome the opportunity to assist you on your journey.

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