As a Certified Financial Planner ® professional, I help clients plan for their future. Part of that is managing their investments. Part of my role is discussing the current conditions and clients’ fear of what is happening and what is to come. As we know, 2022 was not a good year for both stocks and bonds, and it is too early to tell how this year will turn out. Regarding recession, much of this concern is based on what people hear on the news. For the past year, all the media and financial experts have talked about is inflation and recession. If you believe some, the U.S. economy has been in a recession and is in terrible shape. Others talk about the impending doom ahead of us. But let’s focus on what we do know.
LET’S BREAK DOWN WHAT IS GOING ON.
Job creation remains strong. In a recession, jobs are lost, not created. So based on this, it is hard to conclude that we are in a recession.
Consumer spending remains strong. People are spending money, but spending patterns continue to change. Early in the pandemic, consumers spent money on home improvements and new homes. Now, travel and entertainment are where a lot of discretionary dollars go. In a recession, consumers cut back on spending.
The big concern continues to be inflation. Many want to point the finger at government spending in the U.S. But that doesn’t explain inflation throughout the world. A basic economic concept is supply and demand. As demand came back through the pandemic, there was not enough supply to meet the demand, so prices went up. Supply chain issues due to the war in Ukraine and continued shutdowns in China have caused many of these problems. Let’s be honest; dealing with an event that has not happened in 100 years has left many economists, and financial experts confused about how to interpret the economic numbers. To fight inflation, the Federal Reserve (FED) has been pushing interest rates higher and looks to continue doing so. The idea of higher rates, especially short term, is to slow the economy down.
Simply put, it’s like putting your foot on the brakes of a speeding car. It has worked in the real estate market as mortgage rates have soared, slowing purchases. In the past months, we are seeing inflation easing. The delicate balance is to slow the economy but not have a “hard landing” or a deep recession.
So, what does this all mean? Well, many experts who have said that the economy will be in a recession and possibly a deep one in 2023 are now calling for a mild or no recession. The economy is in good shape overall. One last thing to consider, the stock market is not the economy. Just because prices are down doesn’t mean the economy is in bad shape. Historically, the markets are already recovering when we are in a recession. The old theory “don’t fight the Fed” has been true. When the Fed signals that interest rate increases will slow or be done, markets should have a rally. When? That is hard to say, but as usual, be prepared for the unexpected in 2023