On the Economy

Confused about the ECONOMY?

Here’s what you need to know about recession, inflation, interest rates, and jobs.

Two years after COVID was introduced to the world— inflation is sky high, mortgage rates are rising, gas prices are soaring and there is a bear market for stocks (well, almost). And, to market for stocks (well, almost). And, to add insult to injury, it still takes months to get the couch you ordered from IKEA delivered to your home. So how did we get here, and where might we be headed next? Will the economic downturn be as long or brutal as expected?

Regardless of what the “experts” predict— the majority of Americans are feeling the sting of rising prices and anxiety over jobs. The country has experienced two consecutive quarters of economic slowdown (the barometer for measuring a recession) even though there hasn’t been an “official” recession call. At a time like this, we should consider what happens in a recession, one should look at history to determine whether look at history to determine whether we’re in one and try to maintain some perspective. It’s also worth pointing out that down periods are temporary and that, over time, both the stock market and the US economy bounce back (typically). Not to minimize the gravity and hardship of the times, but it can be useful to review how the economy has behaved in the past to avoid irrational or impulsive money moves. For this, we can largely blame an inclination to view the latest experiences as the most valid, which is known as “recency bias.” It’s what led many to flee the stock market in 2008 when the S&P 500 crashed, thereby locking in losses and missing out on the subsequent bull market. So, before you make a knee-jerk reaction to selling your home, unloading your portfolio, or quit your over job—consider these takeaways. rein in spending as gloom sets in, giving recessions a psychological component that can be hard to shake. commodities like lumber and oil. Oil prices,

what led many to flee the stock market in 2008 when the S&P 500 crashed, thereby locking in losses and missing out on the subsequent bull market. So, before you make a knee-jerk reaction to selling your home, unloading your portfolio, or quit your over job—consider these takeaways. ͓ Are we currently in a recession? This one is surprisingly hard to define without a bunch of caveats, but here’s the gist—a recession is a prolonged period of economic decline, beginning when the economy peaks and ending when it bottoms out. Sure, there are plenty of worrisome economic indicators today; but, in general, the economy is in a much better place than it could be—or likely would have been— were it not for lessons that policymakers learned during the Great Recession. Recessions are typically marked by an economy shrinking in back-to-back quarters, measured by gross domestic product. There are, however, exceptions to that rule, including the brief and exceedingly steep recession the United States entered during the early months of the pandemic. A true recession feels economically gloomy—think rising unemployment, a stock market in decline, and stagnating or shrinking wages. Consumers often

BY ADAM BAILEY

rein in spending as gloom sets in, giving recessions a psychological component that can be hard to shake. Truth be known, the jury is still out on what to expect. As the saying goes—hope for the best but prepare for the worst.

͓ Inflation is high, but things aren’t

quite what they seem. Or are they?

Inflation is a measurement of the rate at which prices increase. When inflation is low, it means demand is too weak to push up prices. When inflation is high, it means you’ll pay more for the same goods and services that you paid for last month or year. According to the Kellogg School of Management at Northwestern University, inflation is currently sitting at 9%—a number the U.S. hasn’t seen in decades. There are a number of reasons for this, including the cost of transporting goods around the world and the prices of commodities like lumber and oil. Oil prices, in particular, have been slow to come down. Oil demand dropped in the beginning of the pandemic, sending smaller fracking companies into bankruptcy, and ultimately impacting the global supply of oil. In real dollars, the rise in consumer prices over the past year is adding about $400 more per month to household budgets. In context, per the Brookings Institution, policymakers consider 2% per year to be a “normal” inflation target. Unfortunately, the country’s still experiencing over four times that. The 9% annual rate in July was the largest jump in inflation since 1980, when the inflation rate hit 13.5% following the prior decade’s oil crisis and

high government spending on defense, social services, health care, education, and pensions. Back then, the Federal Reserve increased rates to stabilize prices, and, by the mid-1980s, inflation fell to below 5%. Think of it this way. As overall inflation rates rise, the silver lining might be increased rates of return on personal savings. Bank accounts are starting to offer more attractive yields, while bonds— federally backed accounts that more or less track inflation—are attracting savers, too. Which, by many, is good news.

͓ What’s happening with mortgage rates? As the Federal Reserve continues its rate-hike campaign to cool spending and try to tame inflation, the rate on a 30-year fixed mortgage has grown significantly. In June, the average rate jumped annually by nearly 3 percentage points to almost 6%. nearly 3 percentage points to almost 6%. In real dollars, that means that after a 20% down payment on a new home (let’s use the average sale price of $429,000), a buyer would roughly need an extra $7,300 a year to afford the mortgage. Since then, rates have cooled a bit, even dipping back down below 5%. What happens next with rates depends on where inflation goes from here. Three years ago, homebuyers faced similar borrowing costs, and, at the time, rates were characterized as “historically low.” And if we think borrowing money is expensive today, let’s not forget the early 1980s when the Federal Reserve jacked up rates to neverbefore-seen levels due to hyperinflation. The average rate on a 30-year fixed-rate mortgage in 1981 topped 16%. For homebuyers, a potential benefit to rising rates is downward pressure on home prices, rates is downward pressure on home prices, which could cause the housing market to cool slightly. As the cost to borrow continues to increase with mortgages becoming more expensive, homes could experience fewer offers and prices would slow in pace. On the flip side, less homebuyers mean more renters. Rent prices have skyrocketed, and housing activists are asking the White House to take action on what they call a “national emergency.”

͓ What about the stock market? The stock market can be a reflection of corporate profitability. It also tells you what investors think the economy will do. Year-to-date, the Dow Jones Industrial Average—a composite of 30 of the most well-known US stocks such as Apple, Microsoft, and Coca-Cola—is about 8.5% below where it started in January. The tech-heavy Nasdaq is in a bear market, having fallen 28% this year. A “bear market” refers to when stocks drop 20% or more from their recent peak. They are a sign of extreme negative sentiment on Wall Street and are more severe than garden-variety sell-offs. Bear markets can be Bear markets can be painful, but they don’t painful, but they don’t last forever. Financial last forever. Financial advisers say the key is advisers say the key is not to panic. Though not to panic. Though you might want to avoid you might want to avoid looking at your 401(k) looking at your 401(k) portfolio until the portfolio until the recovery kicks in. recovery kicks in. Stock price losses in 2022 are not nearly as swift and steep as what we saw in March 2020—when panic over the pandemic drove the Dow Jones down considerably in roughly four trading days. The market reversed course the following month and began a bull run lasting more than two years, as the lockdown drove massive consumption of products and services tied to software, health care, food, and natural gas. What does all that mean? Given the cyclical nature of the stock market, now is probably not the time to jump ship when it comes to the stock market. Think about it? Statistically, when times are down, you at least want to hold and/or think about buying, right? Besides, from an historic standpoint, American stocks have been the surest way to grow wealthy slowly over time.

͓ When it comes to employment,

workers can afford to be picky.

According to the U.S. Bureau of Labor Statistics July jobs report, the unemployment rate held steady, slightly dropping to 3.5%. The Great Resignation of 2021, where millions of workers quit their jobs over burnout, as well as unsatisfactory wages and benefits, left employers scrambling to fill positions. However, that could be changing as economic challenges deepen—more job losses are likely on the horizon, and an increasing number of workers are concerned with job security. And while employment levels are down, job vacancies are up to all-time highs. This curious state of affairs likely reflects the fact that, as the economy improves, workers are quitting jobs that aren’t a good fit for them or were perhaps only intended to be temporary. In addition, thanks to federal relief programs from COVID, checking-account balances across all income levels are higher than they were before the pandemic. These balances allow workers to be choosier before accepting their next role. If you’re worried about losing your job because your employer may be more vulnerable in a recession, document your wins so that when review season arrives, you’re ready to walk your manager through your top-performing moments. Offer strategies for how to weather a potential slowdown. All the while, a potential slowdown. All the while, review your reserves to see how far you review your reserves to see how far you can stretch savings in case you’re out of can stretch savings in case you’re out of work. Keep in mind that in the previous work. Keep in mind that in the previous recession, it took an average of eight to recession, it took an average of eight to nine months for unemployed Americans nine months for unemployed Americans to secure new jobs. to secure new jobs. Also, it’s impossible to talk about the Also, it’s impossible to talk about the employment factors without discussing employment factors without discussing remote work. The shift to remote work remote work. The shift to remote work is likely to cause several ripple effects. is likely to cause several ripple effects. For one, high-wage jobs in law, finance, For one, high-wage jobs in law, finance, and management have traditionally been and management have traditionally been tied to cities. As this tie changes, only tied to cities. As this tie changes, only are these higher-wage workers likely to are these higher-wage workers likely to move out of the city center, but all of the move out of the city center, but all of the lower-wage service jobs in the urban core lower-wage service jobs in the urban core that they support are also suddenly in that they support are also suddenly in jeopardy. This trend produces what some jeopardy. This trend produces what some economists have called a “donut effect”— economists have called a “donut effect”— lower property values and rents in the lower property values and rents in the central business district, surrounded by central business district, surrounded by higher ones in the suburbs. higher ones in the suburbs.

͓ So, what does all this mean? Is there inflation? Yes. Are we in a bear market? Not yet, but close. What about a recession? Maybe, but the consensus view is that any major downturn in the economy won’t happen until next year thanks to a strong labor market. And that last point is important. Gloom can become something of a selffulfilling prophecy: When people aren’t confident in the strength of the economy, they tend to rein in spending—by far the biggest engine of the US economy. When spending collapses, we end up in a recession. Then the headlines are all about how lousy the economy is, which only makes us feel less confident that things will turn around, and that collective angst can be hard to shake. So far, at least, Americans haven’t lost their appetite for shopping. And the Fed is confident that the labor market’s strength means the economy can handle the series of interest rate increases the central bank is deploying to try to take the heat off rising prices.

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Forbes Best-in-State Next Generation Wealth Advisors, 2022

Maureen O'Neal MBA, CFP®, CRPC®, CLTC®, APMA® Private Wealth Advisor Cardinaux Wealth Advisors A private wealth advisory practice of Ameriprise Financial Services, LLC

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