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There has been much written about an impending recession facing the United States

October 10, 2022

There has been much written about an impending recession facing the United States. Though the definition of a recession seems to be a hot-button topic of late, the reality is no one knows whether we’re in for an economic downturn or how severe it will be.  

So instead of suggesting the likelihood (or unlikelihood) of a recession, I’d like to offer this: If we ultimately experience a recession, consumers are in a far better position to weather the economic downturn than they have been in decades.

First, let’s consider the average consumer’s balance sheet. Consumers represent some 70% of the economy and hold about $17.5 trillion in cash, up from $13 trillion at the beginning of 2020 and $10 trillion in 2015, according to the data from the Federal Reserve. A recent Wall Street Journal article states, “…U.S. households never experienced anything like the increase in cash they have experienced over the past two years, and this remains true even after adjusting for the run-up in inflation.”

And this isn’t just a “rich get richer” story. While people in the top 10% of wealth increased their cash and cash equivalents by about 32% in roughly the same period, those in the bottom 50% increased their cash by 45%. That’s just cash. If we look at total household wealth, Americans went from $109.9 trillion in Q4 2019 to $141.1 trillion at the end of Q1 2022, roughly a 30% increase in two and a half years!

What about debt? All this extra cash doesn’t do households any good if they’re swimming in debt, right? In 2008, at the market’s peak of “overexuberance,” household debt as a percentage of disposable income sat at about 13%. That means, of the disposable income households earned, about 13% went to paying back debt. Today, that number sits at about 9.5%. That means either Americans are making more money, having less debt, or some combination of the two.

If we consider mortgage debt, Americans were spending about 7.2% in 2008. Today, it’s 3.9%. Two primary reasons: First, we learned our lesson about borrowing and lending following the mortgage crisis, and second, the low inflationary environment that followed allowed those with mortgages to refinance at historically low interest rates.

Even with a relative slowing of housing prices, most borrowers have significant home equity, a fixed finance rate and plenty of cushion if their values continue to drop. For example, June to July brought about a $10,000 dip in the price of an average single-family home partially due in part to persistently high interest rates. But even with high rates weighing on homebuyers, they kept buying faster than a year ago. As a result, a typical home now sits on the market for only 14 days.

That’s a lot of data and numbers, but they all point to a similar conclusion: overall, Americans seem to be in a good financial spot. And yet, consumer sentiment is at lows not seen since the 80s. People don’t feel confident about their position. Why is that?

Inflation is undoubtedly a part of it. Prices for the goods and services we all use continue to climb to rates unheard of only a few short years ago. Whether it’s gasoline, food or electricity, we all have to pay more for the things we need to survive. While the month-over-month inflation increase may have been low this month, the reality is that many individual categories continued to climb. Whether they will continue to increase or begin to slow is another hot topic. I’m old enough to remember the lasting bouts of inflation we experienced in the early 80s, which persisted through four presidential administrations. Inflation tends to stick around. What is important is the trend of inflation. If that trend is reversing albeit slowly, the markets will respond positively.

Our country has a unique ability to innovate and compete that tends to counterbalance stubbornly high inflation. Consider video conferencing as an example. COVID rapidly sped up the adoption of tools like Zoom that allowed for dramatic reductions in travel and the costs of meeting in person. For example, our office went from using this technology with a few of our out-of-state clients pre-COVID to occasionally using it with clients who live within walking distance from our office building simply because they prefer the convenience. This is only one example of deflationary innovation that will eventually help us turn the tide on inflation, but it will take time.

When looking at the broad economic data, I’m encouraged. Households seem to be OK. But that does not mean that a recession will not be painful. Jobs will be lost, savings will be lower, and so many will feel the pain. There are two areas of your life that will need awareness.

  1. Do you have adequate cash reserves for an emergency or for an unplanned layoff since investments will still be down and you don’t want to tap your investments as much when down. Make sure your debt is under control.
  2. Your investments are important and your awareness of market cycles will be critical. One fact about recessions is not the recession but what comes after the recession. Once the recession hits (slow down of the economy not just negative GDP), the markets tend to see 6 months down the road and will begin to move up not down. This will also be an indicator that the Fed is done with interest rate upturns. Recessions are times to buy stocks, not sell.

We all need to turn our attention to what to do in a recession rather than argue whether we are in a recession. The sooner the recession, the sooner the markets will begin a long term upturn. For now we look to quarterly earnings and a potential bounce in the markets. Our exposure to growth stocks and growth mutual funds will depend on the quarterly earnings.

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