Hard Landing Recession or Soft Landing?

It is fairly safe to say that the US has entered a recession, even if the backwards looking, narrowly focused, official “National Bureau of Economics Research”, or NBER, has not declared it yet. The NBER is a private, non-profit organization founded in 1920 that somehow came to possess the distinct “responsibility” of declaring recessions in the US. Seriously?

In the case that the US has entered a recession (not yet “declared” by the NBER) then what does that mean for savers and investors? A quick bit of background: typically, economic cool-downs come in two varieties: hard landings and soft landings.

  • The hard landing ends a period of economic expansion in recession,
  • The soft landing ends a period of expansion with a smoother period of mere economic slow-down.

Neither is “fun,” but a soft-landing can be a great deal more pleasant. Think: as a passenger on an airline flight where a “Navy pilot-type landing” ends in a bumpy, abrupt landing; and the “Air Force pilot-type landing” ends smoothly and gradually on the tarmac. In both cases, the pilot has landed the plane, but each feels different.

This time around in the US economy there are more factors than ever out of whack and sending conflicting signals:

  • National levels of unemployment are still very low (a strong factor)
  • Workers are quitting at historically high levels either because they can, or for jobs with higher pay (strong factor)
  • Wages are UP – at high enough rates to allow workers to quit (strong but getting dangerous factor)
  • Inflation has fed on a cycle of low interest rates, increasingly higher wages and higher consumer and producer prices (a negative factor)
  • Food and energy prices are alarmingly higher (a negative factor)
  • Consumer prices overall are higher than in 40+ years (a negative factor)
  • Interest rates are higher (both a strong and negative factor, more strong at the present time)

Official recession or not, economic growth – as measured by US GDP, company profits and levels of employment at companies (in numerous reported cases) – has been marching down. Persistent lower growth can, and most times does, lead to recession.

Believe it or not, after considering all these factors there is still lack of conviction amongst the “experts” whether or not the US is in recession, and whether there will be a hard or soft landing. Amidst this uncertainty, a well-thought-out portfolio asset allocation that includes a mix of stocks, bonds and ample cash is prudent.

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