One month ago, in this Blog, I wrote: “This is the best of times, this is the worst of times (my apologies to Charles Dickens). Having spent my considerable adult lifetime studying economics, investing, and personal finance, I cannot remember a more confusing economic landscape. Advising clients as to their financial future options requires balancing pros and cons of the national (and world) economic outlook. Our crystal ball is hazy.”
Throughout the ensuing month, our crystal ball has remained hazy, but we may be seeing a slight clearing through the fog. This week brought the FED meeting, which produced zero surprises. And the market loved it.
For a few hours.
Suddenly, traders woke up on the wrong side of the bed the next morning. A series of reports began to be published, suggesting new fears of recession. Is this warranted? Following are a few of our observations.
The Unemployment Rate is figured differently than when I was an economics student – today, we use the U-3 Unemployment Index, rather than the old U-6, which today’s rate is 7.8%, not even close to the current 4.3% U-3. Manufacturing is in a downturn, contracting in 20 of the last 21 months. The new Purchasing Managers Index for manufacturing dropped to a contractionary 46.5.
Gas prices are up 46% in 3-1/2 years, taking money out of the pockets of Americans, whose spending accounts for 70% of our economy. Overpaying for energy creates no economic benefit, instead robbing consumers of purchasing power. Exorbitant grocery prices have a similar deleterious effect. Overall food prices are up 19.2% during the current Administration.
July jobs reports were dismal, relative to expectations. Inflation, while declining, remains prevalent and punishing to consumers. Wages have not kept pace with inflation, and that doesn’t even include the effects of taxation, which reduces spending power.
The bottom line is still difficult to discern, but it now seems likely that the economy is slowing, and recession is becoming a greater likelihood. However, the probability remains uncertain. FED actions will be taken, and we hope they are not too little, nor too late. This may require emergency action, and soon.
Market interest rates are beginning to ease, and the Yield Curve seems on the verge of ending its long inversion period. These remain some hopeful signs for a “soft landing,” as the FED likes to say. One thing is coming into focus – the Fed will cut interest rates on or before the September meeting. In fact, there is a reasonable (and growing) probability of at least a ½% cut.
Is the Fed going to save the day? A piece of advice from someone who has been around a long time: don’t count on it for your investment planning.
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