All good things must come to an end. This saying holds true in all aspects of life, but especially when it comes to the economy. Following the end of the Great Recession in June 2009, the economy expanded into 2020, becoming the longest expansion on record.
It peaked at 128 months in February 2020 before the pandemic hit. The current expansion, which began following the April 2020 trough, reached 24 months in April. And now, that expansion is poised to end.
The question isn't if there will be a recession. The better question is when.
With inflation at a 40-year high and the stock market plunging, 81% of Americans believe there will be a recession. Among those 81% are industry leaders and market makers. The idea that a recession, or even worse, is imminent is shared by billionaire investor Carl Icahn, JP MorganChase CEO Jamie Dimon, Elon Musk as well the heads of Deutsche Bank and Wells Fargo.
“Two shocks in recent months, the war in Ukraine and the buildup of momentum in elevated U.S. and European inflation, have caused us to revise down our forecast for global growth significantly. We are now projecting a recession in the U.S.…within the next two years,” a Deutsche Bank team said.
There are numerous reasons to believe a recession is upon us. The war in Ukraine is driving up energy prices, snarling supply lines and creating market volatility. Record-high inflation is pushing up costs across the board on a macro and personal level. Stocks are being driven down by rising commodity costs, increased labor costs and broken supply chains.
Companies are now diverting funds to rebuild supply chains that aren't as vulnerable. Whether or not this is the beginning of “deglobalization” is another story. It does, however, cost a lot of money without necessarily improving productivity or profits. The true cost of diversifying supply chains could be less efficiency and higher prices. Not what you want amid a contracting economy.
The Federal Reserve's dovish monetary policy of near zero interest rates and quantitative easing (buying mortgage backed securities and government bonds meant to increase money supply and drive lending) created a “superbubble of everything.” And all bubbles must eventually pop. Ironically, the one to pop it will most likely be the Fed themselves.
The Fed was slow to act when inflation started rising. It called it “transitory,” thinking that as the pandemic moderated, so would inflation. By the time Fed officials realized there was nothing transitory about it, it was too late.
Fed’s Delicate Balance
“It is probably a good time to retire that word,” Powell said in response to a question about his persistent use of the 'transitory' by the Senate Banking Committee. Only a few months later, Powell confessed, “Inflation is much too high, and we understand the hardship it is causing."
Now the Federal Reserve's singular focus on taming inflation with aggressive interest rate hikes aims to compensate for their slow start. The Fed sentiment seems to be that if the cost of controlling inflation pushes the economy into recession, then so be it. Dimon stated that the Fed has only a 1 in 3 chance of ensuring a “soft landing,” i.e. stopping inflation without pushing the U.S. into recession.
“The odds are the following: something like, yes, they can engineer a soft landing, a third of a percent chance. Probably a third of a percent chance they can engineer a mild recession…and then there’s a chance this could be much harder than that,” Dimon said.
Former government insiders agree. Previous New York Federal Reserve President Bill Dudley argued that the interest rates required to roll back inflation will make a soft landing virtually impossible. He said recession and higher unemployment will be the result.
Prior Treasury Secretary Lawrence Summers emphasized current economic conditions are undeniably reminiscent of previous pre-recession periods in U.S. history.
“Over the past 75 years, every time inflation has exceeded 4% and unemployment has gone below 5%, the U.S. economy has gone into a recession within two years,” Summers wrote.
Today, the U.S. inflation rate is 8.6%, nearly 9%, and the unemployment rate fell to just 3.6% in March. As a result, Summers now sees an 80% chance of a U.S. recession by next year.
Bond Yield Curve
Another indicator is the recent occurrence of a bond yield inversion. A 2s/10s yield curve inversion—where yields on short-term two-year government bonds outpace those on long-term 10-year government bonds—has predicted every recession since 1955, with only one false signal during that time. The average time frame for a recession to begin after the yield curve inverts is between 6 and 24 months—hence, all the predictions of a recession by 2023.
While patterns derived from impersonal, hard data point to recession, there is also a psychological aspect to consider. Like a self-fulfilling prophecy, if business leaders really believe a recession is imminent, they may cut back on investment spending that suppresses overall economic activity.
Faced with the economic data, the real challenge is proving that this boom/bust cycle WON'T end in a recession.
WHEN WILL RECESSION HIT
The definition of a recession involves a fall in gross domestic product over two consecutive quarters, and in the first quarter, U.S. GDP shrank 1.4%. So, when GDP (gross domestic product) data is revealed in June, economists may very well find the U.S. is already in a recession.
In April, Deutsche Bank became the first major bank to predict an upcoming recession. Deutsche Bank analysts attributed their forecast to the Ukraine War and rising U.S. and European inflation. Deutsche Bank foresees it occurring in 2023. Billionaire investor Leon Cooperman shares the bank's 2023 prediction based on oil prices and Fed policy. So does Fannie Mae, which predicts the recession will hit by the second half of next year.
HOW LONG WILL IT LAST
The average predicted length of the recession is 12 to 18 months. We are going to be coming into it with strong business activity and high consumer demand. Those conditions could shorten the recession. Fannie Mae doesn't expect an all-out housing collapse like in 2008, due to historically low inventory and strong demand.
WHAT TO DO IN A RECESSION
Despite the evidence of economic indicators, many corporate leaders may be unprepared for the coming financial storm. This doesn't mean the average American should be.
During a recession, you might be inclined to give up on stocks, but experts say it’s best not to flee equities completely. When the rest of the economy is on shaky ground, there are often a handful of sectors that continue to forge ahead and provide investors with steady returns. Traditionally, the healthcare, utilities and consumer goods sectors hold up as they provide basic needs regardless of the state of the economy.
Precious metals, like gold or silver, tend to perform well during market slowdowns. You can invest in precious metals in a few different ways. The simplest method is buying coins or bars from a seller or coin dealer. While this is different than buying a security, it’s technically as good as any other option, and even presents several unique wealth benefits.
Overall, a recession can be seen looming on the horizon. The individual investor might not have the power to stop it, but they do have the power to prepare for it. With the proper strategy, you can weather this storm and come out on the other side with your wealth intact — ready to grow again.
Recession resistant investments can help your preserve your wealth. In historical terms, diversifying your savings with physical gold and silver could help even more. If you need help designing an investment strategy, you can start here.
Max Baecker is the COO of American Hartford Gold, the nation’s largest retailer of gold and silver. He is committed to American Hartford Gold’s mission of helping clients achieve long-term financial security by providing them with unparalleled knowledge on precious metal markets and products.
Max specializes in helping clients build long-term wealth through the security and stability of precious metals. Under his guidance, American Hartford Gold has delivered over $1 billion in precious metals to thousands of satisfied clients.
American Hartford Gold is the #1 ranked gold company in the prestigious Inc. 500 2021 List of America’s Fastest-Growing Private Companies. It holds an A+ Rating from the BBB and a 5-Star Rating on Trustpilot with thousands of 5-star reviews. AHG offers investment-grade gold and silver coins and bars at competitive prices. Clients also benefit from its buy-back commitment with no back-end fees. American Hartford Gold is the only precious metals company trusted and recommended by Bill O’Reilly and Lou Dobbs. To learn more, visit American Hartford Gold.
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