“The four most dangerous words in investing are: this time it’s different.”
– Sir John Templeton
Speculation about a potential recession has been prominent in recent financial reporting. The good
news is that multiple elements of the U.S. economy are healthy and provide an economic tailwind for
the future. The bad news is that actions by the Federal Reserve Board (“Fed”), necessary to prevent longterm inflation, are likely to cause an economic slowdown, if not a recession, within the next two years.
Tailwinds: Labor Markets & Consumer Spending
The labor market is strong. The latest reports are that unemployment fell to 3.6% – close to the prepandemic low of 3.5%. The number of workers on payrolls has increased by 431,000, and, importantly, labor force participation of workers aged 25-54 is increasing, from 82.2% to 82.5%. The “Great Resignation” -the concept that many workers decided to leave the job market for good – is turning out not to be the case. These are all good signs for the long-term health and growth of the U.S. economy.
Consumer spending is the largest driver of economic growth in the U.S. Household incomes and spending remained strong in February, but there are signs of change. Personal income increased by 0.5% – a 6%
annual rate. Consumer spending increased by 0.2% – a 2.4% annual rate. However, the rate of increase
was lower than in January, which gives some observers pause.
Headwinds: Inflation, Interest Rates & The Fed
Low interest rates encourage economic growth by making it less expensive to use debt to buy homes,
cars, appliances and other consumer goods. Interest rates have been at historically low levels. However,
rates are now increasing, largely as a result of increased current and expected inflation rates. Inflation
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has climbed over the past year, and now has reached its highest level in 40 years. (See What’s
Up With Inflation?) The benchmark consumer price index rose at an annualized rate of 8.5%
In 2022, 30-year mortgage rates have risen from 3.2% to 4.7%. This means monthly payments
for potential new home buyers are increasing. For example, an increase from 3% to 5% in a
30-year mortgage rate increases a monthly payment from about $1070 to about $1300 – an
increase of over $200 per month. That jump creates a real impact on the number of people
willing and able to buy homes, and the amount that home buyers have to spend on other goods
and services. A similar phenomenon applies in the markets for cars, appliances and any other
goods or services consumers might finance.