Deja Vu – Recession or Soft Landing?

Check out the TGIF 2 Minutes (cut & pasted below) from September 2022 when nearly everyone – especially the media – was saying the US was already in a recession. Today, the potential recession scenario seems even more compelling but somehow the US economy has crept along.

Currently in 2023 and in times like this, it pays to keep a sharp eye on spending and debt levels while maintaining a long-term outlook with savings and investments. If the US does creep or crash into an actual recession, emergency funds with calculated levels of cash can soften the blow. The following points are worth reiterating.

From September 2022:

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 a 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.

This material 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.

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