Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money. This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. Let the financial fun begin!
I will note that my voice is a little bit scratchy today and that’s because it’s allergy season right now in Colorado as well as in many parts of the country. I know I’m not the only one. Those of you who also suffer from seasonal allergies can commiserate with me.
Today, we’re going to talk about the number one topic that our financial planners, including myself, are getting at Keystone Financial, and that is, “Are we in a recession? And if we’re not in a recession, are we headed into one?” That’s the question that comes up more than anything, so it’s worth unpacking, and that’s what we’ll do today.
If you have to narrow it down, there are four things I watch that tell me where we are in the economic cycle. What I mean by the economic cycle is that just like seasons of the year, you don’t stay in the fall or summer or winter forever, you move through them over time. And personally, we do so as well. There’s a spring, there’s a winter. There are tough times we end up going through in life. And as long as we don’t lose hope and give up, there’s a springtime, right? There’s always a dawn after the darkness.
If we are in a recession, there’s going to be another day. Those of you who can remember know that there have been other times that the economy has been in a tough spot, like the financial crisis back in ‘08 and ’09 when the entire financial system looked like it was going to collapse and almost did. And back in the early 2000s we had back-to-back years of the US stock market going down. In 2000, 2001 and 2002, all three years, the market was down double digits. We had a recession in 2000 with the dot com crash which was followed in 2001 by 9/11. That was followed in 2002 by the accounting scandals at Arthur Andersen that ended up taking down a lot of companies that don’t exist anymore.
If you look at it historically, after these things have burned themselves out, kind of like a wildfire, things regrow. In Colorado this year, we’re very blessed that our wildfire danger is fairly low right now. That’s not normal. Usually, this time of year is when we’re at the peak of wildfire danger. We’ve been getting a bunch of rain, and that’s a good thing because it’s kept the fire danger down. And in the end, these economic things do burn themselves out and things regrow and the world moves on. We move on and businesses move on. The economy moves on. So just to give you some encouragement, no matter what this is right now that we’re going through, there is another day.
So let’s talk about where we came from after the financial crisis. It was one of the worst recessions we ever had. The stock market went down over halfway, and it took about 18 months to get there. Sometimes these things last a while where it’s not just a quick drop. Everybody freaks out and then we’re good to go in a few months. During the financial crisis, we had about 18 months of pain. But afterward, things regrouped. In 2009, things bottomed out and away we went. So after that we had the largest and longest economic expansion we’ve ever had in this country’s history.
I remember giving our forecast presentation in January of 2020 and talking about how things have been going quite well for a long time, but they won’t last forever. Something’s going to happen. And of course that something hit right after that talk. COVID really affected the global economy, not just the US economy, but the global economy. So it was a global recession.
These things don’t always end up being global in nature. Sometimes they’re just isolated to certain countries that might be going through something, like a war. Think of Ukraine and Russia, for example.
Or it could be something that’s related to a natural disaster or a terrorist attack. There could be all kinds of things that could cause an economy to go backwards.
We had a nice run there when for quite some time the economy was growing and the stock market was doing well. Then we hit 2020 and had a global recession. Many governments, including the US government, pumped trillions of dollars into the economy. Now we know it was too much. They went too far, and it created too much money floating around. There were too many dollars chasing too few goods. Congress passed legislation to spend money in the trillions of dollars. The Federal Reserve lowered interest rates to zero, and then did large rounds of what is called quantitative easing. That’s kind of a wonky term for printing money. They printed a lot of it. In fact, our money supply increased by 40% during the last couple of years. That’s a lot when you think about all the dollars that exist in the US economy and the fact that those have been spread out over a couple 100 years and now that’s increased by 40%.
No wonder we have an inflation problem. Also COVID. It’s crazy how big of a deal that was and now it’s kind of become a non-issue. We’ve moved on to other stuff because pretty much everybody who wanted to get vaccinated got vaccinated. The virus isn’t causing the same types of lockdowns and disruption, at least in the US economy.
We ended up this year with two negative quarters of GDP growth. It went backwards, technically. That’s a recession. By that measure, we are in a recession. Was the negative growth severe? No, but it’s still going backwards. That being said, you look at the purchasing managers’ index and it’s been above 50 consistently. There’s a lot of buying going on. Job growth is also very strong and continues to be very strong, at least in the US.
Unemployment is very low now, has dropped down to 3 1/2%, which historically is extremely low.
That’s a 60 year low of unemployment and means anybody who wants a job can get a job. It may not be the job they want, but they can get a job. Labor force participation is up, has been rising now, partly because of inflation. People are going back to work at least in some capacity. Maybe they had gone into retirement or just quit and given up for a while and now they’re going back. With the unemployment rate so low, we don’t have enough labor force participation to cover the jobs that we’ve got open, especially service jobs, hospitality, restaurant workers, things like that. Thankfully, we don’t have that issue at Keystone, but every business owner that I talk to tells me that finding the right people to hire is their biggest challenge. That’s always a challenge, but right now there just aren’t a lot of people available. Companies end up having to entice employees from other companies. And that feeds into the inflation problem.
Consumer spending has been very strong. If you go to Disney World or go shopping anyplace, you can see people running around. I watch the Amazon vans in the neighborhood, and lots of packages are being delivered. People are spending money, because they’ve got jobs. Everybody has a job if they want one, and they’re doing quite well.
It’s always a mixed bag when you look at gross domestic product. That’s the primary measure that we look at to gauge whether the economy is growing or shrinking. There are three main categories of spending, too: consumer spending, business spending, and government spending. Those have all been pretty flat. Government spending is down. And oftentimes that is the case when you go through a nasty recession like we did in the pandemic. The government steps in, spends a bunch of money, and then as the economy gets going again, government backs off, consumers and businesses take over, and that’s the economic growth that you end up with going forward. So government spending is down a little bit now, business spending is up a little bit, and consumer spending is up a little. So, looking at the components of GDP, the composite was negative in the first and second quarters, but just slightly.
The market was recovering in 2020. And in 2021 we were seeing some nice balances on our investment statements. Then the war in Ukraine started, geopolitical instability, China lockdowns because of COVID, the fiscal stimulus ended. The Federal Reserve and Congress way overspent in 2020 and they admit that now. They way over-printed money and that created the inflation problem that we have now. The Fed has been tightening rates.
When you go to the grocery store or the gas pump, inflation is right in your face, something that ultimately will impact your bottom line because your income probably is not going up that fast. If you have inflation at 6, 7, 8, 9 percent and you’re not getting raises at that percent, then you’re going backwards.
Consumers are still spending money, but more of it is on bacon and eggs and gas instead of taking a trip or buying things that they want to enjoy. Also, people have been bleeding down their savings, using savings to finance things, and we’re seeing an increasing amount of credit card debt.
We’ve seen two negative quarters of GDP growth. The unemployment rate is low. People are still spending money, still going to Disney World and flying. Have you been to an airport recently? It does not feel like a recession. But in real terms, if you back out inflation, well, the economy is slightly negative right now. Historically, over the last 40 years or so we’ve experienced very low inflation—in the 2 to 3% range. There are certainly periods of history in other countries where we can see inflation way worse than ours is now. Still, it doesn’t feel good for us because we have experienced fairly low inflation for quite some time.
Looking forward from where we are today, what do we think is going to happen? Well, when we look at GDP, inflation, interest rates, earnings, there are a lot of different data points economists use to figure out where we are in the economic cycle. Right now, things are not fantastic. Inflation is tough and so the Fed is aggressively raising interest rates. And this is not just a government problem. This is also a supply chain problem that started back in the pandemic. When you interrupt supply chains, sometimes they don’t come back right away and we’re still seeing that supply chains were dramatically interrupted in 2020 with lockdowns across the planet. We’re still trying to get things back to where they were before.
If you’ve tried to buy a new car recently, you know there’s a long wait unless it’s on the lot. If you order a vehicle, it’s going to take a while because they’re waiting for computer chips to be able to put in the vehicle. In fact, they’re delivering a lot of vehicles that are incomplete. They don’t have the chips in them to make everything work. Nonetheless, people are still taking delivery because there are such shortages that people are willing to take the vehicle when it’s not done.
So, if you look at these data points of inflation, interest rates, GDP and earnings, you get a mixed bag of information because earnings are quite positive with most companies reporting pretty good earnings this season. And consumer spending is strong.
Looking forward, there are a few different ways this could play out, and we don’t know how it will. The Federal Reserve doesn’t know. The president doesn’t know. Nobody knows how this is all going to play out, but there are a few different ways that we see this going.
One is what the Federal Reserve would like to happen, which would be a soft landing. The economy slows down but doesn’t go into a recession. Inflation ends up falling back.
Another possibility is stagflation. That’s what we experienced back in most of the 70s. I was born in the 70s, so I don’t remember this, but many of you do if you have been around the planet longer than I have. Stagflation means the economy is slowing down or going backwards. You’re in a recession or close to it, but inflation persists. That’s the real danger right now. That’s why we think the Fed is going to continue raising interest rates, even though there are some signs that inflation may have already peaked. It’s still higher than what we’re comfortable with and what they’re comfortable with.
The third possibility is a recession. Some people would say we’re already in one with the economy contracting and inflation slowing. It’s possible that we’re just on the leading edge of a recession right now. We think there is going to be at least a mild recession. Depends on how you define a recession, but the Federal Reserve will continue raising interest rates until they’re confident that inflation is down.
If there’s easing in the supply chain for the global economy, that could start to bring those prices back down. Capitalism does work—not perfectly, but it does work eventually. So if there’s something that has a high price, it becomes very profitable to produce that, whether a barrel of oil or a bushel of wheat. Whatever it happens to be, if the price goes up, then people will produce more of that. So eventually an oversupply occurs, and that will bring prices down. We might be seeing some of that right now.
Going forward we think this is a mild recession, unless there’s a shock event, knock on wood, like a big terrorist attack or something completely outside of any realm of predictability. We think it’s going to be a mild recession with inflation slowing down. And the experts that we pay attention to expect that inflation will not go back down to the 2 to 3% we experienced for most of the last few decades, but probably down to 3 to 4% range. The Federal Reserve will be OK with that because it feels a lot better than 6, 7, 8, 9, percent inflation. When inflation slows to 3 or 4%, what you’ll find is that the Federal Reserve probably will go backwards on what they’re doing right now. They’ll start to lower interest rates because they want to get us out of the recession.
What we talked about at the beginning is that you have winter. We’ve been in winter for a while with the economy in this weird funk trying to recover from where it was before. If you think about what you want over time, you want business and consumer spending to be carrying the bulk of the weight. You don’t want the government to have to throw money into the economy to keep it going. So if we’ve been in winter for a while and we know it doesn’t last forever, that means there are some real opportunities going forward.
I’m not just talking about opportunities from an investment standpoint. When you look at pullbacks or winters, oftentimes there are companies created during those times such as major brands we’re familiar with like Hewlett-Packard or Disney, the monopoly game, lots of others we could point to. They were created during a recession, an economic winter. And there are companies being created right now because of this funk we’re in.
If you like to garden or plant trees, you’ll note that sometimes winter kills things too, and that’s not great. There are companies that die in winter, companies that weren’t prepared or weren’t able to change fast enough. Oftentimes, we find that their adaptability quotient, their AQ is not high enough.
Plenty of companies ended up getting killed in the pandemic. It also created opportunities for restaurant owners to relaunch or for somebody new to come along and create something different that consumers want.
So after winter comes spring, and that’s the opportunity to be aware of right now—not just what’s happening today, but what happens after winter. What happens after any recession that we might have is a period of growth. There’s never been a bear market that’s not followed by a bull market. There’s never been a recession that hasn’t been followed by an expansion.
We can’t guarantee anything, right? We can’t guarantee when that will happen and the details of how that will happen. But the comforting thing is that nobody else knows either. Nobody knows how this is going to play out, no matter how smart they are, no matter how much education they’ve got, no matter how much information they have. Whether we’re talking about the President or the Federal Reserve Board or anybody in Congress, nobody knows. In the end, things will be OK, things will end up playing themselves out.
It could be messy, but that’s why we need to be adaptable and follow solid investment principles and financial principles that we cover on this podcast. It’s important to just be focused on the stuff we can control and the strategies that work for people who listen to the wisdom of those who have come before them. That’s really what this podcast is about.
Winston Churchill, back in World War II said, “Success is never final. Failure is never fatal. It is the courage to continue that counts.” Whether you are a business owner or professional, whatever your occupation, those words hold true. Maybe you’re a retiree looking at the stock market going crazy and wondering if you need to be worried about it, asking if you have to go back to work. Well, we don’t know the answers. Some people are thinking about maybe going back to work, perhaps not full time, but maybe to do some consulting to fund their discretionary budget. Maybe get a fun part time job that they’ve always wanted to do; maybe it’s something they never had the opportunity to do while in their normal professional career.
If that’s you, there’s always a way out of stuff. If you don’t find your financial situation is what you want it to be, there are lots of different knobs and buttons we can work on. And that’s our job as financial planners is to help you work through that.
There’s a lot we don’t know as far as the future and how things are going to play out. But there are all kinds of things we can control, and at Keystone, we love numbers. We love to crunch numbers and run scenarios and things like that, so if it’s something that you want to look at with us, contact us at www.keystonefinancial.com . That’s a good way to reach out to us. It’s easy, there’s a contact on the page. We will always meet with you, have a conversation with you, even if you’re not a client. We’ll be happy to jump on the phone with you or jump on a zoom call or have you come into the office just to look at where you are right now. And for those of you who are clients, of course, thank you for your continued business. Personal finance is an area that a lot of people do not feel confident about.
And our number one goal is to help people feel that confidence and know that they can’t predict the future either but they’ve got a strategy that has a really high likelihood of working out.
We can’t say that word guarantee in our world, but we do have a lot of wisdom, not just me, but collective wisdom from other planners and other people we’ve worked with over time.
If you like the podcast, please do us a favor and click subscribe on your favorite podcast service, whether that’s Apple or Google or Spotify. We’re on all the major services. That helps us out a lot. Also pass this on to other people. We know that a lot of people are scared right now because of economic winter.
That’s a fear we probably can help with. So please pass this information on, because it might be helpful.
That being said, have a great week. God bless and take care.
This episode has been prepared for informational purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors. Investment advisory services offered through Keystone Financial Services, an SEC registered investment advisor.11180751