Bautis Financial Advisor Commentary: August 1, 2023

This is a new installment in an ongoing series where Marc Bautis, Wealth Manager and Founder of Bautis Financial, comments on hot topics in the financial industry.

Is a Recession Still Coming?

Here’s a word about recessions. The question on everyone’s mind is: Are we still going to see a recession this year? Let’s discuss.

Why did so many people think a recession was coming?

Inflation and interest rates, primarily. Historically high inflation has cast a pall over the economy since early 2021. In response, the Federal Reserve has raised interest rates rapidly to bring inflation back down. The chart below shows how the Fed Funds rate effectively went to 0% in 2020, then began climbing in 2022 to over 5% – where it stands now.

Analysts have been worried that the rapid interest rate hikes could trigger a “hard landing” recession.

But it looks like the dark mood is lifting. You can see in the chart above that inflation has been on a definite downward trend since last summer. That trend suggests that the Fed’s interest rate program has worked to tame inflation.

So, will the Fed keep raising interest rates?

The Fed raised interest rates again by a quarter of a point at its July meeting, but it’s possible that it won’t raise rates again if inflation remains on a downward trajectory. In fact, some analysts think that the Fed’s next move might be to lower rates in 2024. In the chart below the 3 month Treasury is currently yielding 5.51% while the 2 year is yielding 4.82% and the 10 year yields 3.86%. Usually it’s flipped: You receive a higher yield with a longer maturity treasury. 

Does that mean a recession is definitely off the table?

That’s probably too optimistic. While the economy has been much more resilient than even seasoned analysts predicted, the accumulated effects of interest hikes may still deal a serious blow to growth. There are signs that the economy is weakening in some areas.

For example, while American consumers are still spending, they aren’t buying as much stuff.

That’s hurting the manufacturing sector, which has been in a slump for a while. Since consumer spending is worth about 70% of economic activity in the U.S. it’s an important indicator for future economic growth.

Employment trends will also be important to watch. So far, the work of lowering inflation seems to have succeeded without damaging the job market. However, there are signs that the labor market may be weakening, so that’s something to keep an eye on.

Bottom line: Things seem to be looking up.

The dark clouds on the horizon appear to be breaking and there are reasons to be optimistic. But, that doesn’t mean it will be smooth sailing.