I Might be Wrong
One of the rare features of my column is that I will freely admit when I am wrong. I am human. I misjudge things. I can get it wrong.
What, you ask, am I admitting to getting wrong? Since many of my readers insist I am wrong about a multitude of things, what am I actually admitting to?
Well, I think I may be wrong about an impending recession. Yup, I am looking at more and more data that is leading me away from recession and more towards slow, steady growth over the next two quarters.
Remember, I firmly am in the camp that believes that no recession can start with a robust housing market. We saw for the last eight reporting periods, housing starts were contracting. Slowly, yes, but still contracting. To me, that is my recession red flag. Hence, my prediction of that dreaded recession coming in the first or second quarter of next year.
Now, I am not so sure. Last week we had a pretty surprising housing report. Not great by any means but pleasantly surprising. Generally, I do not let one fairly positive report change my mind either way but given that report and the fact that consumers are still spending, hard to see a recession happening anytime soon.
Consumers, which account for around 70% of US economic activity, have not stopped spending. Where are they getting the money? Inflation still exists and unemployment is ticking up slightly, so why do consumers still feel empowered to buy?
It’s jobs, jobs, jobs. People are still working and despite all the layoffs in the tech sector (which was long overdo by the way), they feel fairly confident. Could this be a continuation of the pandemic hangover?
I, for one, think we are past the pandemic hangover and people are working. Wages may not be keeping up with inflation, but they aren’t that far behind. Return to normalcy is more prevalent.
Before I go on, let me explain pandemic hangover. It was the period after most restrictions were lifted, cases dropped significantly and Americans felt safe to go back out and live their best lives. They spent. They produced an economic revival not seen since the end of WW II. Spend till you drop was the mantra. That period has passed. That rush to freedom, along with multiple other factors, created an inflationary spiral it will take years to get out of. While hangover may not be the proper term, just remember, after you recover from your hangover, you typically rally. Thats where we are.
What about the Fed hiking interest rates? Ahh good question grasshopper. I think with some of the data they look at coming back a little better than the previous data, they may slow or halt rate hikes. Under the guise of letting the economy absorb this higher rate environment and lets let some of this work through the system. So, they pivot.
The pivot. Yes, I am pivoting as well. I think the Fed will do little to nothing in December and say the typical “We will be monitoring the data closely to see if more action needs to be taken”. The markets will love that for sure and that beloved Santa Claus rally will reappear again this year.
To wrap this up. I do not think a recession is imminent. I think the Fed will do as little as possible in December. I think we will see a fairly substantial rally into the end of the year as well.