169: The Good, the Bad, & the Ugly of Our Current Economy

Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.

Austin Wilson:

All right. Hey, hey, hey. Welcome back to The Invested Dads Podcast, the podcast where we take you on a journey to better your financial future. I’m Austin Wilson, a research analyst at Hixon Zuercher Capital Management.

Josh Robb:

And I’m Josh Robb, Director of Wealth Management at Hixon Zuercher Capital Management. Austin, how can people help us with our podcast?

Austin Wilson:

We would love it if you would subscribe. If you’re not subscribed, hit that Plus, Follow, whatever button that is on your podcast player, so that you get new episodes when they drop each and every Thursday. And we’d love it if you’d visit our website and sign up for our weekly newsletter so you get notified when those episodes drop, as well as get a nice little summary and some good links to listen to it directly from there.

So that’s how you can help us, but we are here today to help you in determining whether or not the United States economy is in or going to be in, very soon, an economic recession.

Josh Robb:

Ah, yes.

Austin Wilson:

I’ll say this is a follow-up to a discussion we actually had in 2022, and we’ll link that episode in the show notes, where we kind of talked about a similar thing, but a lot has changed since then. This is a very fluid economy we got going on.

Josh Robb:

The number at the end of the year changed. I do know that.

Austin Wilson:

It did. Now it’s ’23 instead of 2022.

Josh Robb:

Yep.

 

[1:22] – What Is a Recession?

 Austin Wilson:

But we are going to be looking at the good, the bad, and the ugly in the economy today. And give you some expectations on where we’re at now and where we’re headed.

Josh Robb:

Yeah. All right, so we’re mentioning recession, so maybe it’d be good to define a recession.

Austin Wilson:

Oh, that goes into what we talked about in that other episode, because-

Josh Robb:

I know it does.

Austin Wilson:

… in the old days you could say, two negative quarters of GDP in a row, boom, recession.

Josh Robb:

Yes.

Austin Wilson:

We had that. No recession was called by the NBER, National Bureau of Economic Relations.

Josh Robb:

Which is, by the way, a non-governmental agency.

Austin Wilson:

Correct. However, they are the ones that are officially responsible for calling a recession. Now, they always call it well after it starts in retrospect, and they’re very late on that, so that’s not such a surprise. But hasn’t been called yet, even though we got last year two negative quarters GDP.

 

[2:13] – The Good of The Current Economy

 Austin Wilson:

But we actually got a really, really strong fourth quarter. So the good, the good parts of the economy right now

Josh Robb:

You tell me the good.

Austin Wilson:

This is going into one of the major reasons why the NBER did not say we’re in a recession, and it’s because the labor market is the strongest it has been in our lifetimes, and probably will be forever in our lifetimes.

Josh Robb:

Okay. Bold statement.

Austin Wilson:

I think you’re going to have more times where the labor market’s worse than it is now, than better, for sure in our lifetimes.

Josh Robb:

I’m going to just wait until next month when it just ticks slightly lower, and I’ll be, “Oh, you were wrong, Austin. You said-“

Austin Wilson:

“You were wrong, you were wrong.”

Josh Robb:

Best ever.

Austin Wilson:

So here’s the situation. We live in an economy where there are 11 million job openings, as made evident by the latest job openings and labor turnovers.

Josh Robb:

And those are companies reporting their hiring expositions. Al right.

Austin Wilson:

Yeah. 11 million is a lot, and that is nearly double, 1.9 times actually, but nearly double the amount of people in the labor force that are actually unemployed. There are-

Josh Robb:

So, their unemployed number, that looks at … How do they factor that number?

Austin Wilson:

Well, it’s looking at the actual labor pool. So the people who are-

Josh Robb:

Okay. Eligible.

Austin Wilson:

… quote unquote, in the labor market, by determined by age and disability and all these different factors. And then the percentage of them that are unemployed, looking for work. So there are roughly half as many-

Josh Robb:

Looking for jobs. Okay.

Austin Wilson:

… looking for jobs that there are actual jobs available. So everyone’s saying, “Well, why doesn’t everyone just go get a job because there’s so many out there.” Well, there’s a little bit of friction between what areas of the geography those jobs are, or what fields and industries those jobs are. So it’s not necessarily a one-for-one. But this indicates some tightness in the labor market. There’s a lot of jobs out there and there’s not a lot of people looking for them, which really puts upward pressure on wages. But this is a really strong thing that we have that we’ve not really experienced in a long, long, long time, and it’s at a very, very strong labor force.

One other factor that is key is that the unemployment rate, which as we just got as the time of this recording for the month of January-

Josh Robb:

Always looking backwards.

Austin Wilson:

Always looking backwards, was 3.4%, 3.4%, which is the lowest since 1969. That’s really low. And if we really get aggressive with comparisons, we just saw some of the highest we’ve seen in a long, long time during COVID, when we were up in the 15s I think. This is a steep decline on that. But we’ve kind of been ho-humming around the 3.6 to 3.5 range for a while, and now we’re down at 3.4. Really, really low. So that’s really a very strong part of the economy. Labor market, doing very, very well.

Another strong part of the economy is retail sales. Consumers, you and me, listeners, you and me, Josh, everyone, spending money. Consumers have continued to spend money well above what they were spending pre-pandemic. We could actually, back in the day, connect a nice little trend line versus over time of consumer spending. And there were consumer spending recessions, but they all hovered around this trend line. Slow and steady, up into the right, increasing slowly over time. Since COVID happened, it dipped. It dipped in COVID.

Josh Robb:

Makes sense.

Austin Wilson:

In fact, in the global financial crisis it took 40 months to get back to the level of spending it was before, at the peak. Well, during COVID, it did dip. It only took five months. Very, very quick. But since that dip, it just shot to the moon.

Josh Robb:

Yeah, people went crazy spending.

Austin Wilson:

People went crazy spending money. And it is showing some signs of softening, but still remains vastly above that trend line from pre-COVID. What that means is that company revenue, top line, is looking very strong and people are just spending money like crazy.

Another one is wage growth. While it has not kept up with inflation over the last couple of years, it has remained above historical levels, because of the high inflation largely. And depending on what metric you’re looking at, people are making four to 6% more year-over-year. Now that’s, again, less than inflation, but still strong by historical standards.

Josh Robb:

Higher than it’s been doing before that.

Austin Wilson:

Exactly. So pretty strong on that front as well. That’s another good thing. Another good thing is services. This is experiences, movies, going to a park.

Josh Robb:

What is a carwash? Is a automated carwash a service? And then the one where you have to get under yourself, how’s that work?

Austin Wilson:

That’s a great question, Josh. And I do not know the difference of carwashes, but-

Josh Robb:

The self-service versus the automated one.

Austin Wilson:

I do know that we go to our local Bell Stores for … When we need a car wash in the winter, because here in Ohio they love to put salt down. And we took both vehicles this weekend to get gas because they both needed gas. And when you get a car wash you get 10 cents off a gallon.

Josh Robb:

There you go.

Austin Wilson:

So that’s pretty good deal.

Josh Robb:

Did you ever do the math, how many gallons you need to get a free car wash?

Austin Wilson:

It’s not free. It’s just much, just cheaper.

Josh Robb:

Yeah, it’s cheaper.

Austin Wilson:

The car wash probably ends up being like-

Josh Robb:

Couple bucks.

Austin Wilson:

… four or $5, and then you get a little bit less gas. So yes, my five-year-old loves the carwash.

Josh Robb:

Loves the carwash.

Austin Wilson:

Our three-week-old-

Josh Robb:

Is indifferent.

Austin Wilson:

… doesn’t even know what’s going on yet. Yeah, so services going very, very strong. December 2022, so the end of year was actually the only month since May of 2020 where we had a negative PMI reading. So this data provider called ISMs, they provide data where it’s a ratio essentially, where if you have a 50 or above, that reading means that part of the economy’s growing. It’s an expansionary territory. And if it’s below 50, it’s in contractionary territory.

Well, other than December 2022, which was kind of a blip, every other month, including January ’23, has been expansionary. And we’re back in expansionary territory and a reading for 55, strongly expansionary territory. This is actually one of the major drivers of our inflation story, but this is very strong in terms of growth. So that’s another pro of what’s going on, the good in the economy.

And the last, but not least, inflation. We talk about it all the time. It’s likely to have peaked. In fact, it would take crazy things to happen for it to go back to where it was. So last June, June 2022, we saw a headline CPI, consumer price index, headline meaning all-encompassing of that basket of goods, reading of 9.1% increase year-over-year. That’s a fricking crap ton of inflation, the highest we’ve seen in four decades. Now since that peak in June, we’ve had six months straight of cooling of year-over-year inflation increases, bringing us back to 6.5% in the latest reading that we have.

Josh Robb:

Still high, but working its way down.

Austin Wilson:

Still high, but working its way down. And as the comparison years, if we’re looking at year-over-year, we’re now going to be looking at the beginning of 2023. Well, as we continue to step along, you’re going to get a nice boost from the beginning, being really high.

Josh Robb:

It’s a high starting point.

Austin Wilson:

Yep. That should continue to come down going forward. So those are some really good things we have going on in our economy. And looking at those things alone, you’d be like, “Yeah, I guess I can understand why we aren’t in a recession technically at this point.”

 

[9:06] – The Bad of the Current Economy

 Austin Wilson:

However, there are some negatives, and the negatives are kind of increasing day by day right now. One of those negatives, the bad we’re talking about here, manufacturing, looking at the other side of the economy as measured by ISM.

Josh Robb:

So services.

Austin Wilson:

Yep. Services and manufacturing. Looking at that 50 threshold as being contractionary or expansionary. Same thing. Manufacturing has been under 50 for over three months now, so that’s contractionary. And this is interesting because this is all during a time where the US is talking about reshoring some production and things like that.

Josh Robb:

Bringing it back.

Austin Wilson:

Bringing it here, because there’s been a lot of drama with geopolitical tensions around the world with China and Russia.

Josh Robb:

Supply chain disruptions.

Austin Wilson:

Yeah.

Josh Robb:

Yeah, all that fun stuff.

Austin Wilson:

So the more you can bring that in-house, so to speak, in the US, the better that will be over the long-term. Well, manufacturing’s been slowing as we’re trying to do that, so that’s not necessarily a good thing at all. Especially when you think that a lot of the economy is employed as manufacturing associates.

Another weak area of the economy is housing. Housing starts, they’re down 23% from their cycle highs, which was in early 2021. In new home sales, on the other hand … So that was housing starts. And the new home sales, so the sales of those new homes, those are down 38%.

Josh Robb:

Wow.

Austin Wilson:

That’s huge. And historically speaking, as these numbers drop this much, typically that is leading into some sort of recession. Why, you might ask, is this happening? And well, one big reason is mortgage rates. As interest rates across the board have gone up, mortgage rates have gone up as well. And you really were able to get a 30-year fixed rate mortgage at the beginning of 2022 for under 4%. At the peak that was almost seven. Now it’s down around six. But that has made housing affordability really come under pressure, so there’s been a lot less demand for housing in general. So that’s another weak area of the economy.

And then another one is layoffs have begun to occur. The labor market is very strong, we talked about all the good news. But in certain areas, and a lot of that being retail or technology industries and more all the time are being announced, we’ve seen a lot of layoffs being announced as companies have been doing their earnings. It really in an effort to save money because these companies are running into earnings pressure.

So a lot of the companies that were actually doing the best and stood to gain the most during COVID, they got a little fat. They got a little aggressive with their hiring without doing it responsibly.

Josh Robb:

They saw the growth and thought that would continue at the same pace. Yep.

Austin Wilson:

And it did not. So they’re being forced to lay people off. That’s sort of the bad parts of the economy right now.

 

[11:38] – The Ugly of the Current Economy

 

And then we have to talk about the ugly. And the ugly is really an unknown at this point, and my opinion is the ugly is the Fed impact. So many economists believe that the Fed, when they hike rates, which we’ve gotten a lot, to slow down the economy using monetary policy, it takes 12 to 18 months of a lag before that’s really felt in the economy. Well, if we think about March 2022 as being the starting point of those interest rate hikes, starting with 25 basis points-

Josh Robb:

Yeah. 25 basis points, yep.

Austin Wilson:

… in March 2022. March 2023, coming up real quick, will be 12 months from the first hike of the tightening cycle. Then we got seven more hikes, which included four 75 basis point interest rate hikes in a row.

What this means is that we’ve not felt the impacts, economically speaking, of what the Fed has done. The Fed has not broken anything yet from their interest rate hikes. But will all of the impact of the lagged effect of these hikes break something? We don’t know, but it could be … The question is, do we run into a wall? So you get, maybe in March, you really start to see some slowing from the beginning of that, but by the end of the year-

Josh Robb:

And then it just drops off.

Austin Wilson:

Yeah, by the end of the year you’re just running in mud because of all the increase of interest rates. So that’s where we are. That’s the ugly. The ugly is an uncertainty because it’s been the second-fastest tightening cycle ever from the Fed, the fastest since the early ’80s. And we don’t really know how the economy’s going to react. We know how the markets are reacting, that wasn’t so great, but the economy really has yet to feel it yet. And I think that that is one of the key things looking at 2023 that we really don’t know what’s going to happen.

 

[13:19] – Dad Joke of the Week

 Josh Robb:

Let’s take a break. We saw kind of the background of the recession possibility for this year. I’m going to give you a dad joke and then-

Austin Wilson:

I need some laughter.

Josh Robb:

… we’re going to come back and talk your thoughts and my thoughts on what is all this.

Austin Wilson:

Yeah.

Josh Robb:

All right. So we’re in winter, it’s cold-ish. Yes, some days are colder than others. Do you know why bees stay in their hive during the winter?

Austin Wilson:

Nope.

Josh Robb:

Because it’s swarm.

Austin Wilson:

Because it’s swarm.

Josh Robb:

It’s swarm in there.

Austin Wilson:

That’s great. So, I had a bee infestation at my house last summer. And had to have some guy come and take care of them and did a great job, took two treatments, but it got them all. But it was in the wall. The old TV antennas had the post things attached to the side of the wall. Well, the old owner of our house took it down, but never filled the holes in, so bees made their way into there.

Austin Wilson:

And it just so happened to be right in my daughter’s room, and because I installed a bunch of ductless mini-splits air conditioners in the house, there were teeny, little cracks that I thought were pretty well fixed, but small enough for a bug, I guess, to get in. So we had bees getting in. That was not good for our little girl’s room.

Josh Robb:

No.

Austin Wilson:

So we got that fixed.

Josh Robb:

That’s good. If they couldn’t get in, it’d be almost like a white noise machine type of thing, just in the background.

Austin Wilson:

Bzzzz.

Josh Robb:

Not super loud, just kind of a low hum. Yeah.

Austin Wilson:

A low hum. Like aloha.

Josh Robb:

That’s it, yeah.

 

[14:39] – Austin’s Opinion on Whether We’re in a Recession

 Austin Wilson:

So Josh, that’s a dad joke of the week. Now we must impart our opinion.

Josh Robb:

Thoughts. Yes.

Austin Wilson:

I’ll go first. Here’s what I think. I think it’s going to be really hard for the NBER to call a recession with the labor market as strong as it is. 3.4%, unemployment’s, no joke, 11 million job openings is no joke. That has got to weaken very quickly for them to be like, “Oh, wow, the economy’s in trouble.”

Josh Robb:

Yeah, even a 1% hike is still relatively low long-term for unemployment.

Austin Wilson:

And if you get laid off, the friction level to find a new job is pretty low. You can find something pretty quick.

Josh Robb:

You can get some income.

Austin Wilson:

Exactly. So I think that that is a big thing keeping us from saying we’re in a recession and we’re headed to one right now. Now I do think that the recent jobs data, so we got great … Jobs report came out for January, where we had 500 and some thousand jobs created in the month, more than double the expectations. And that’s where the 3.4% unemployment rate came in. Very, very strong. Kind of makes me think that any major economic contraction … I had originally thought that it would’ve been happening early to mid this year. I think it’s now more likely to be late this year to early next year as far as likelihood goes.

And I think what that is going to be driven by is the lagged impact of the Fed. The lagged impact of the Fed is the wild card. We don’t really know exactly how that’s going to work out, but the middle of the year is going to be pretty aggressive from the economy’s feeling of last year’s impact. That’s what I think is going to be happening.

Again, we’re not in a recession right now. We had great economic growth in the fourth quarter. We have a great job market. There are some cracks occurring, some weakening occurring. Companies’ earnings are coming under pressure, those sorts of things are happening. But I think it’s more likely very, very, very late this year or early next year now that we get an official recession than we do mid this year, or even early this year. So, what is your thoughts, Josh?

 

[16:35] – Josh’s Opinion on Whether We’re in a Recession

 Josh Robb:

Well, you’re more in tune with economic side of things than I am, but I’m going to say, just by my own experience, that it seems like lately the market reacts to not so good news positively, the stock market, because that means that the Fed may have to back off or even lower rates sooner. So I’m wondering if the market will mute some of this economic data by responding positively to it, which would lessen the brunt of what people are seeing in these reports, and in doing so … Because consumer sentiment matters.

Austin Wilson:

Oh yeah.

Josh Robb:

Because 70% of GDP is consumer. In a sense, the stock markets go up because the data’s weakening, which is what we’ve been seeing.

Austin Wilson:

It’s about the Fed, yeah. You’re all big-

Josh Robb:

Yeah, if you get bad data news, the market’s like, “Oh good, the Fed’s going to let off.”

Austin Wilson:

Yeah, the Fed’s going to let off.

Josh Robb:

So bad news ends up being a positive sign for the market if we start … In a sense they counteract as everything starts weakening because of the rising interest rates finally impacting the economy, the market responds by being positive, saying the Fed is going to back off. They may even lower rates. And they, in a sense, cushion that blow, because whether … Same as last year. Even though we had two negative quarters of GDP, we weren’t in a recession and people are spending like crazy still. Through the middle part of last year, people were-

Austin Wilson:

Nuts.

Josh Robb:

… indifferent to what was going on. They were just spending. And I’m wondering if the same thing will happen, not from a spending standpoint, but from a sentiment standpoint, that they’re saying, “Hey, look. Yeah, everything’s weakening, but that’s not news. The Fed’s been saying it, everybody’s been saying it. And look, the stock market’s actually doing well.”

And it almost cushions it, to the point where when everything does play through, and maybe the Fed does have to lower rates, whatever they do, it offsets that impact to mute what could have been a harder recession or downturn. We still may have officially a downturn or a recession. But from a consumer sentiment and an overall outlook of our economy, it’s muted because the piece that already has reacted to this, been priced in, is now reacting to the next phase.

Austin Wilson:

Well, and that’s one of the things that we need to get our minds around is how the market works. The market and the economy are two different things.

Josh Robb:

Oh yeah, totally different things.

Austin Wilson:

I’m speaking of what the economy’s going to do.

Josh Robb:

Yes, you’re talking about all that.

Austin Wilson:

And we saw this during COVID really, where we saw the market bottomed well before, well before the economy bombed. So things are just getting announced that things are looking bad and the market’s bottomed. So the market may have bottomed in October of 2022.

Josh Robb:

Could have been.

Austin Wilson:

And we are looking ahead, the market’s always forward-looking, looking ahead at what is actually going to happen in the economy going forward. So I think that’s a really good point. It’s just to get our minds around the separation between market and economy. Because the market’s going to be pricing in what’s going to happen or what the market’s thinking is going to happen, well before it actually happens. So that’s interesting.

You brought up another good point. I’m going to put you on the spot, Josh. Do we get a Fed cut in 2023?

Josh Robb:

By the end of the year? That’s a good question. I’m want to say no. I think they’re going to stop hiking probably this late spring, early summer. And I think they’re going to do their best to hold, even when they’re seeing slow down in some of their things, they’re going to say … Because they’re going to really … I think Powell does not want inflation to turn around.

Austin Wilson:

Oh yeah.

Josh Robb:

So he’s going to take the brunt of whatever this 18-month trailing impact is going to be of what he already did, and not make an adjustment until he’s sure that inflation is staying down at their level of 2% PCE, or whatever he is looking at.

So my thought is no. I think 2024 we’re going to see something, but I don’t think this year. What do you think?

Austin Wilson:

I could actually agree, and I would’ve changed my opinion over the last handful of weeks because, before some of this recent jobs data, I would’ve said, “I think we’d get a cut at the very end of the year.” That’s what I would’ve said. And now, after listening to the Fed and seeing some of this super great labor market information, I think that we’re a little bit further from that than I would’ve anticipated.

Now, I am thinking now, Fed cuts not until early 2024 is when I kind of think it’ll be, which the market does not agree with.

Josh Robb:

No, the market thinks –

Austin Wilson:

The market is pricing in, at the end of the year, you’re going to get a Fed cut. Even though the Fed continues to say, “No, no, no, no, no, no.”

Josh Robb:

“We’re not going to do it. Not doing it.”

Austin Wilson:

“Stop saying that. We’re not going to cut rates.” And the market says, “Oh yeah, you are.”

Josh Robb:

“Yeah, we know you are.”

 

[21:10] – Final Thoughts on What You Should Do Now

 Austin Wilson:

But there’s this disconnect, and I now think it’s probably going to be more like 2024 before we get that.

So that is where we are. There’s no right answer right now. We don’t know what’s going to happen. We don’t know what’s going to happen in the economy. We don’t know what’s going to happen in the markets. But we do know that having a well-diversified portfolio and sticking to a plan over the long-term is going to work out for you.

Josh Robb:

That’s right.

Austin Wilson:

So, this is a great time to trust your advisor, and if you don’t have one, visit our website. You could check out the Invest with Us tab, and we’d love to talk to you about what’s going on.

Josh Robb:

That’s right.

Austin Wilson:

Talk to you about your situation. So, check that out. And as always, thank you for being here. This is a reminder that if you had someone saying, “Hey, what’s going on in the economy?” You can share this episode with them.

Josh Robb:

That’s right.

Austin Wilson:

And don’t forget to subscribe and leave us a review on Apple Podcasts or Spotify or whatever player you listen to. And until next Thursday, have a great week.

Josh Robb:

Talk to you later.

Austin Wilson:

Bye.

Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review. Click subscribe and don’t miss the next episode.

Josh Robb and Austin Wilson Work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin, or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.

Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.