Economists have spent a lot of time lately debating whether the US economy will experience a hard or soft landing. And more recently some have even talked about no landing at all. But let’s see what the hard data is telling us.
The National Bureau of Economic Research is the organization that officially declares recessions and the indicators that they focus on are income consumption, production, and employment. Now, the only one of those indicators showing material weakness is industrial production with ISM manufacturing data in contractionary territory. However, this is a little misleading because the US economy has turned more into a services based economy and ISM non-manufacturing data is actually an expansionary territory. Now, this isn’t to say that things couldn’t turn for the worse, and we experience a hard landing scenario, but the data just isn’t there yet. Unemployment levels remain near all time lows and incomes have gone up meaningfully since the pandemic. In fact, the US consumer balance sheet is about twice the size of its pre-great financial crisis, 2007 peak, and Americans are sitting on over $1 trillion of excess savings.
Now, the wild card, of course, is the Fed’s war on inflation. The risk there is that the Fed tightens monetary conditions enough to tip us into a recession, but that’s not a scenario that keeps us up at night. You see the major structural imbalances in the financial system that would lead us into a deep and prolonged recession are just not there. The more likely scenario is that we would have a short and shallow recession, one that wouldn’t change the trajectory of long-term investment performance. We are maintaining a cautiously optimistic positioning in good companies with strong balance sheets in cash flow. We haven’t chased the recent rally in riskier assets. We keep a long-term view for our clients that adds value and helps them weather uncertain times. It’s a strategy that has proven time and again that owning companies is better than trading them.
I’m Daniel Mannix with ProVise Management Group. Financial Planning for Your Life and Lifestyle.