Thursday, April 25, 2019

Recession or Sustainable Recovery?

Ask the CFP


“It’s a recession when your neighbor loses his job; it’s a depression when you lose your own.” ~ Harry S. Truman


Question:  Do you think we’ll have a recession in 2019?

Answer: Based on Harry S. Truman’s quote, the answer would be that it’s not very like that we’ll have a recession based on labor markets and employment rates. In reality there are additional factors that influence economic growth or the lack thereof. A recession is defined as a period of declining economic activity, usually lasting two quarters or more.

There isn’t a rule about when a recession will occur. We’re never “due” for a recession.

Here are six areas that reflect the health of our economy and help gage if growth is continuing at a slower pace or if we’re looking at increased potential for a possible recession. Either outcome isn’t out of the question. Here are items:    

  1. The Tax Cuts and Jobs Act of 2017 (TCJA) lowered corporate tax rates leading to share buybacks, shareholder dividends, and increased capital expenditures. Business investment in 2018 was generally stronger. The TCJA also lowered personal tax rates. The impact will take some time to be fully realized varying across income levels and regions. As a result, overall consumer spending, which accounts for 68% of overall economic activity, should see a bump in the first half of 2019. Real growth is a result of jobs and wage increases which are expected to drive consumer spending long-term. In contrast, the effect of fiscal stimulus decreases over time.
  2. A tighter labor market creates an upward trend in job opportunities. Job growth is trending well above what’s needed to absorb new entrants to the workforce. A low unemployment rate means that many employers are frustrated and finding it difficult to hire qualified employees. In some sectors, wages are increasing and are expected to rise further in 2019. The labor market is an easy to spot and early indicator of economic growth reacting to upward inflationary pressures. A tighter job market and rising wages should lead to a more efficient allocation of labor, reduced underemployment, and create opportunities for younger workers to acquire important job skills. If companies can pass higher labor costs along to consumers, price inflation will trend higher and the Fed will have to work harder to suppress inflation.
  3. The Federal Reserve uses monetary policy to slow inflation by increasing interest rates. The Fed raised short-term rates once each quarter during 2018. Federal Reserve Chairman Powell expressed a more dovish or cautionary approach in monetary policy for 2019. Because there is a lag period between when rates are modified and when we see results of the changes, it may be wise to slow down and wait a bit before raising them again.
  4. Inflation remains low at roughly 2.2% and this expected to stay in this zone as we begin 2019. This should give the Fed more wiggle room when deciding if they need to raise short-term interest rates in attempts to curb inflation.
  5. U.S. and China trade policy issues over tariffs on Chinese goods are causing uncertainty. Tensions could increase and further disrupt supply chains, add to inflationary pressures, perhaps cause retaliatory actions, and inhibit overall growth. Even this worst-case scenario wouldn’t likely be enough to cause a recession, but it could restrict growth to some extent.  
  6. Increasing fiscal stimulus and entitlement programs without increasing revenue, or cutting expenses, adds to the budget deficit. In 2009, after the 2008-09 recession, the deficit rose to $1.4 trillion, or 9.8% of GDP, but then fell to 2.5% of GDP in fiscal 2014 as the economy recovered. The deficit is now expected to approach $1 trillion in fiscal 2019, about 4.6% of GDP. By 2020 there will be 23 million Americans over the age of 75. This number will almost double to 45 million by 2040. This place a greater demand on already burdened Social Security and Medicare payments. Rising rates would add to the government’s interest expense on additional debt.  Hopefully, lawmakers will focus on reducing discretionary spending and stabilizing the debt-to-GDP ratio.

Assessment of GDP levels, business capital expenditures, labor markets, wage levels, interest rates, and management of The Fed’s balance sheet help determine whether we’re headed for a recession or sustainable recovery.

Long-term interest rates continue to remain relatively low contributing to a flattish yield curve. Short-term rates weren’t much different than longer-term rates during 2018 indicating doubt over where the economy is heading. An inverted yield curve historically signals that a recession is on the way, not imminent, but on the horizon. We’ll keep our eyes on rates and the other five factors outlined above.

Economic growth was strong in 2018 and the unemployment rate fell. The transition to a slower, more sustainable pace of growth may be a challenge for investors to assimilate, as such transitions are rarely smooth. However, the economic expansion should continue. Stay focused and plan accordingly.

The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. “Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”  

This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC, 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email darcie.guerin@raymondjames.com.  Website: www.raymondjames.com.

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