Chris Kuehl
Managing Director • Armada
The media buzzword is now recession. I suppose they have gotten bored with complaining about inflation and wanted to move on to something new. The reality is that inflation is still the number one issue. By the way, fretting about stagflation makes very little sense either (more on that later). Here is my take on recession. There are three reasons to be less than worried but in all candor there is one reason for some concern.
The first reason to reduce worry is that recessions require a lot of things to go wrong and for an extended period. A recession is defined as two consecutive quarters of negative growth. We have been growing at an average of 2.5% per quarter for the last four years. That growth has been spurred by a variety of factors – robust consumer spending, record levels of capital spending, expansion of technology, recovery in the inventory to sales ratio, non-residential construction growth and so on. The growth has not been sporadic and it has not been one-dimensional. The latest data from the Purchasing Managers’ Index climbed back to growth after several months in contraction territory. Generally recessions are triggered by something and that is very often distress in the financial community. The last recession was a bank led collapse that was the result of a housing sector collapse. The hubris of the banks led to idiotic loans and when these went south the banks paid the price. That stalled the financial sector and recession soon followed. It is not impossible that banks or other institutions make another series of bad moves but behavior now is far more rationale and cautious.
The second argument is that key data still trends very positively. Readers of our report will notice some changes with this issue. I have heard from members that they would like assessments to be more forward looking as opposed to rehashing what has already taken place. We will be sharing insights from The Watch – a publication that features outlooks that extend out a year and more. Nearly all of the data is still pointing towards performance that is far above the twenty year trend line. Manufacturing is up, retail is way up. Residential construction is up and so is non-residential. This is not to say that there are no issues but the drivers of the economy remain intact. Remember the issue in which I discussed the “K” recovery? That is still a thing. The fact is the upper third of income earners still spend and are still moving the economy. The middle third spends as long as they have job security and the jobless rate is still low so this group is not yet worried.
The third reason is that tools exist to boost growth if needed. The Fed’s interest rate is now high enough that a reduction is possible and potentially effective. The Trump team is trying to reduce the federal budget and there is ample reason to do so but at the same time there is an ability to spend if deemed necessary. It has been suggested that the money “saved” by all these budget cuts can be redirected to infrastructure and other economic stimulants
Now for the factor that could push recession. More often than not a recession is caused by reaction by the consumer – justified or not. We can talk ourselves into a crisis. Remember the mortgage crisis that triggered that 2008 meltdown. People panicked and assumed that all those mortgage-backed securities failed and that plunged the banks into crisis. Once the dust settled and those securities were examined it was determined that less than 2.3% failed. Right now the public is deeply concerned about the impact of tariffs on inflation – they expect inflation to double from last year. This is possible but still unlikely as we have seen how Trump uses tariffs as a negotiating threat. If these actually reach implementation there will be a far reaching impact but thus far the trend has been to back away once there have been concessions. It is clear this will be an active and chaotic summer but a full-blown recession is in nobody’s interest and there are means by which it can be avoided. The consumer needs to hold their nerve and so does the overall business community despite the drumbeat of an excitable media.
