With apologies to popular 1970’s British rock band Supertramp, my title paraphrases their classic November 1975 album release entitled “Crisis? What Crisis?”(1) That’s because nearly every person on this planet, all 8 billion of us, has either been predicting or expecting a recession for the good part of a year now.  But it hasn’t happened. My objective in writing this article is to explain why a recession was expected, what happened to stave it off, and whether its onset has just been postponed or has been completely taken off the table.

Coming into 2022, inflation was rising rapidly as US consumers were still spending big money on physical goods and home improvements while also starting to spend generously on experiences, including travel, eating out, cruises, conferences, concerts, and bucket-list items.  Some refer to these experiences as “revenge travel” because pandemic restrictions and concerns had largely faded away and we all decided it was time to do something F-U-N.  But by June 2022, CPI inflation had risen alarmingly to 9.1% on an annualized basis, the highest increase in prices in 40 years.(2)  This galvanized the Federal Reserve Bank, responsible for implementing monetary policy for the US economy, to begin raising interest rates to stem inflation and try to bring back “price stability.”  And raise rates they did!  As of July 2023, “the Fed” has hiked its Federal Funds rate 11 times from essentially zero in early 2022 to 5.5% by the end of July.  This has been the fastest rate hiking cycle in modern history!(3)

Largely due to rapidly rising rates, economists and market forecasters expected consumers to reduce spending, corporations to pull back, institute layoffs, and become less profitable, housing prices to fall, and economic activity to dramatically slow down (i.e., GDP growth to slow and possibly stall or fall).  But most of that didn’t happen.  Why?  Primarily because consumers were flush with “extra cash” due to Government stimulus and were forced to reduce spending, at least early in the pandemic, as lockdowns and restrictions limited certain activities.  And the labor market has remained tight, meaning “good” (for workers, anyway, with unemployment still only 3.6%).(4)

According to data from the US’ largest bank JP Morgan Chase, consumer bank accounts were about 60% higher in mid-2020 through mid-2021 than in 2019, before the pandemic hit US shores.(5)  With consumers employed and able to continue spending, corporations raised their prices to maintain or even increase earnings, which economists call “pricing power.”  Despite rising interest payments along with higher input and labor costs, many companies have maintained or improved profitability over the past 3 years.  And as above-trend “goods” demand waned last year, demand for “services” picked up as “revenge travel” accelerated, offsetting a decline in manufacturing.  Consumers just kept on spending!

Residential housing prices did fall in most of the US, however, due to mortgage rates essentially doubling in a very short time.  But with a limited housing inventory for sale and homes taking on increasing importance (e.g., due to popularity of work-from-home trends), many residential housing markets have now stabilized or even seen higher prices than before the pandemic – despite 7% mortgage rates.(6)

Where do we go from here?  It’s always hard to predict macroeconomic factors like recessions, inflation, interest rates, housing prices, and unemployment – and that’s when we’re not still dealing with the after-effects of a global pandemic.  That said, what we can say is the US economy is slowing down.  Labor markets are still tight, but loosening just a bit, and although inflation is coming down, ‘core’ inflation is falling much slower than the Fed wants to see.  (‘Core’ inflation strips out the most volatile components of CPI, including energy and food costs, to get a better perspective on US inflation trends.) 

In terms of consumer spending, there may be trouble ahead as consumers have now “burned through” all but 11% of the “extra cash” in their bank accounts, on average.(5)  In a few months, not only will consumers be back to where they were in 2019, bank account wise, but for the first time in 3 ½ years many will have to start paying off their student loans again, reducing discretionary spending.  To exacerbate things further, credit conditions are tightening, partially due to recent bank failures, and economic growth has slowed down significantly across the globe.

Have we “dodged a bullet” in terms of avoiding the long-predicted recession, with the Fed engineering a so-called “soft landing” of our economy?  Well, to invoke another notable British rock band album title, this time I’ll borrow from Oasis’ critically acclaimed August 1994 release entitled “Definitely Maybe.”(7)  Hopefully that illustrates how cloudy my crystal ball is right now!

(1) Crisis? What Crisis?, https://www.allmusic.com/album/crisis-what-crisis–mw0000195960
(2) US Bureau of Labor Statistics, Consumer prices up 9.1% over the year ended June 2022, largest increase in 40 years, July 18, 2022
(3) Federal Reserve Board of Governors website, FOMC’s target federal funds rate or range, change (basis points) and level, www.federalreserve.gov/monetarypolicy/openmarket.htm
(4) Nerdwallet, Current Unemployment Rate and Other Jobs Report Findings, www.nerdwallet.com
(5) JP Morgan Chase Institute, article in The Washington Post, Americans are still better off, with more in the bank than before pandemic, by Abha Bhattarai, July 17, 2023
(6) Reuters, US home prices in May make gains again from the prior month, by Safiyah Riddle, July 25, 2023
(7) Definitely Maybe, https://oasisinet.com/music/definitely-maybe/

More Articles Written by Scott

Scott McClatchey is a wealth advisor and CERTIFIED FINANCIAL PLANNER­™ with WWM Financial in Carlsbad, CA, an SEC-registered investment advisor. He can be contacted by phone on 760-692-5190 or by email at  scott@wwmfinancial.com .

WWM Financial is an SEC Registered Investment Advisor

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