(Minneapolis/St. Paul Business Journal) - Many economists and market participants originally predicted a recession would have arrived by now.
The thought was the Federal Reserve’s aggressive interest rate increases would slow the economy down more than it has. While a slowdown is occurring, much of the economy is still on solid ground.
The consumer and the labor market have been surprisingly resilient through the interest rate increases. In short: there are not enough workers in the U.S., which is making the Fed’s mission to cool the labor market difficult. The lack of workers is creating sizable wage gains too, which is partially why inflation has been so sticky.
The number of unfilled job openings (demand) has exceeded the total number of persons unemployed (supply) every month since March 2018, except for the pandemic period. The number of job openings in the U.S. has hovered around 10 million for months with little signs of decreasing. More than 10,000 people in the U.S. are turning 65 every day for the next 15 years. That eye-popping statistic is putting more pressure on the labor market. Baby boomers are retiring faster than they can be replaced.
Consumers are getting a boost in real incomes as inflation subsides, a banking crisis has so far failed to materialize despite tightening capital and lending requirements, and the agreement on the debt ceiling leaves overall fiscal stimulus intact.
But not all the metrics are positive.
What does the data say?
Consumers are finding it increasingly difficult to keep up with inflation. Wage growth generally exceeded the rate of inflation for most of the 2010s. However, inflation has recently eroded purchasing power and consumers have spent any excess savings accumulated during the pandemic. As a result, retail sales, a major driver of GDP, are declining.
The good news is that several significant components of inflation are poised to improve in the second half of this year, thus lowering the odds of a deeper or protracted recession.
Core goods inflation will continue to decline, led by used car prices and improving supply chains. The shelter component of CPI will likely fall despite an increase in home prices because the cost of renting is trending lower.
What we are watching
The Fed is keenly focused on the labor market, particularly the overhang of excess demand for labor which it sees as a major source of wage inflation. While there are signs that inflation in general is cooling, the service side of the economy is still struggling with labor costs. The Fed is concerned that backing off rate hikes now and leaving the labor market in its current imbalance will not fully subdue inflation.
Each rate hike increases the odds of a recession, but at the same time, ensures that inflation continues to fall toward the long-term target of 2.5%.
If the economy falls into a shallow recession beginning in the fourth quarter of 2023, it won’t be much of a surprise. Conversely, with so much anticipation, it is equally plausible that consumers and businesses will adjust spending and output preemptively thereby avoiding an actual economic contraction. Much depends on the Fed not overshooting their target.
Investment consideration
A severe economic downturn is becoming less likely, which is certainly a positive. The flip side though is we may have sluggish economic growth for the foreseeable future. In that environment, generating solid returns is more challenging. It will become especially important to watch costs while also making solid investment decisions.
Part of our focus on the investment side includes:
- Fixed income. Consistent returns are desirable in such an environment.
- Dividend-yielding investments often are sound since they supply current income.
- Active management within high-quality companies with strong earning potential and companies with strong innovation (such as generative artificial intelligence) are appealing.
Part of our focus on the expense side includes:
- Being prudent on the number of transactions. Changing investment positions often comes with transaction fees.
- Making sound decisions to minimize taxes is important, particularly in this scenario.
- Exposure to low-cost funds and trading on lower volume days often reduce expenses.
Everyone’s situation is unique. If you have questions on how to handle your investment portfolio in this environment, contact 1834, a division of Old National Bank.
1834, a division of Old National Bank is a boutique-style wealth management firm that caters to high-net-worth clients who have more complex or diverse financial needs.
References
Wall Street Journal, The Federal Reserve, Oxford Economics, Goldman Sachs.
Disclosures
Investment and securities information presented herein is unique to 1834’s approach to investment management. All information and opinions have been obtained from sources believed to be reliable and current at the time of publication but are not guaranteed and do not claim to be a complete statement of all material factors. Examples or other representations made herein are for illustrative purposes and are not intended to be specific legal, tax, or investment advice and do not represent a solicitation.
Investments and strategies that may be presented may not be suitable for all investors. 1834 wealth advisors and the expanded 1834 team will work with interested parties to execute plans based on further investigation of your specific goals and risk tolerance. We may also consult with your attorney or tax advisor in certain situations.
The comments, views and opinions expressed herein are those of the author and 1834. From time-to-time, Old National Bancorp affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. Old National Bancorp and its affiliates do not accept any liability for any direct, indirect, or consequential damages or losses arising from any use of this report or its contents.
Investment instruments utilized by 1834 are not insured by the FDIC nor any other government agency, are not deposits or other obligations of 1834, Old National Wealth Management, Old National Bank, its parent company, or affiliates, and involve investment risk including the possible loss of principal invested.
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Jim Steiner has more than three decades of leadership and portfolio management experience in the investment industry. As chief investment officer for 1834, Steiner leads a team of 30 plus investment professionals who provide portfolio management and holistic investment services to clients. Contact him at admin@1834.com.
By Jim Steiner – Chief Investment Officer, 1834, A division of Old National Bank
