Page 168 - December_2023

FINANCIAL PLANNING
MILD RECESSION
LOOMING?
The United States economy has been a roller coaster for the last 18 months. The world seems to be drastically different than it was just a few short years ago. Before covid, the U.S. economy was smooth sailing. Interest rates were historically low, and the consumer was living large. However, times have changed, and people are left wondering when the pain will stop. The inflation rate has come down, but the federal reserve still has some work to do. The question is, how much more work? Will they begin to cut rates next year? The levels of consumer debt are alarming and credit card spending continues to increase. A 2024 recession is becoming more likely.
STATE OF THE CONSUMER
The consumer is in a unique position in the fourth quarter of 2023. The side effects of the covid stimulus money are still creating a negative impact. The government overspent by a large margin, and it created misconception in the mind of the consumer. During the pandemic, retail sales had a massive spike
of more than 50%. Retail sales have since dropped to about 3.8% of discretionary income. On the contrary, household net
worth hit an all-time-high this year and can be attributed to a combination of excess covid stimulus, high interest rates keeping borrowers away, and an economy that has been stronger than expected.
As shown on the chart, the net worth of households and nonprofits is up to $154.3 trillion.
There has been a gain of $94.9 trillion since the low of the great recession in 2008. This chart is interesting because consumer debt is also getting very high, at over $17 trillion. The pandemic caused the average person to feel like they had plenty of money to spend, and the side effects are coming to fruition right in front of our eyes. Credit card spending is at an all-time-high because consumers haven’t adjusted to higher prices and higher interest rates. They are trying
to spend just like they would have three years ago. Adjustments need to be made as the economy cycles. The point here is that the consumer drives the economy and the recent inflation struggles are becoming more apparent from an economic standpoint.
MILD RECESSION
There’s been discussion of a potential recession for close to two years now. The common misconception is that a recession is going to send us back to the days of the great depression. That simply isn’t the case. A recession actually happens every few years. A recession is defined as two consecutive quarters of negative GDP (Gross Domestic Product) growth and an increase in
the unemployment rate. The expectations of a recession sent us into a bear market during 2022. The market still doesn’t know what to do in 2023. Seven stocks have done well. Nvidia, Apple, Meta, Tesla, Alphabet, Microsoft and Amazon are driving the performance. Most of the other 493 stocks in the S&P 500 have remained relatively flat or negative in 2023.
As the economy grows weaker, the outlook
for interest rates and the stock market grows more attractive. A weakened economy means the federal reserve might begin to cut rates. I’m hearing whispers of a mid-2024 recession and a potential
rate cut by the end of 2024. That outlook is the consensus view of economists.
The consumer can navigate the storm by tightening up on spending a bit. Avoiding credit card debt during times like this is very important. The real estate market will remain in limbo while rates are high. With the chance of another rate hike this year, borrowing is unattractive. Average household debt is quite a bit lower than it was during the 2008 housing crash. Home prices have corrected a bit and may continue to correct further while the fed remains slightly hawkish in reducing year-over-year inflation. Trust long-term numbers during times like this. Housing prices have always recovered. The stock market has always recovered. Historical data is the best resource we have to get us through this so-called storm that we are sailing through. Hold tight and trust your advisor to navigate you to shore. Again, the consumer drives the economy. When inflation is tamed and there is more discretionary income, the demand for goods and services will begin to rise again.
by Cade Peterson, Financial Advisor
166 SPEEDHORSE December 2023