When Recession Comes Knocking
“Inflation’s friend, Recession. For real, this time! Maybe."
Dang. Just when we thought we’d moved through raging inflation and tamped down the risk of a painful recession, recent numbers have bad news beating down the door again.
This week’s inflation news showed that the consumer price index increased 0.1% in August (excluding food and energy, the inflation gauge rose 0.6%). As noted by CNBC, both of these figures were higher than expected and the news quickly shaved 1,200 points off the markets for the biggest drop in more than two years.
We’ve also just heard that mortgage rates pushed higher, over 6% – the highest since 2008. The Wall Street Journal says:
“The average rate on a 30-year fixed mortgage climbed to 6.02% this week, up from 5.89% last week and 2.86% a year ago, according to a survey of lenders released Thursday by mortgage giant Freddie Mac. The last time rates were this high was in the heart of the financial crisis almost 14 years ago, when the U.S. was deep in recession.”
And as I write this post, despite what seems to be bad news on the economic front, the Wall Street Journal reports that consumers are spending – the August report shows overall retail gains of .3%, which WSJ calls “resilience in the face of inflation.”
As reported in WSJ:
“Retail sales, unlike many government reports, aren’t adjusted for inflation. Retail sales also rose in August from a year earlier at a quicker pace than inflation, which this summer trended near a four-decade high. Continued strong job growth—employers added 1.1 million jobs the past three months—and rising wages are giving consumers a tailwind, even as they grapple with rapidly rising prices for everyday goods…”
And herein lies the rub – the last sentence of the above quote from WSJ goes like this:
“...Economists say that keeps the Federal Reserve on track to keep raising its benchmark interest rate in an effort to slow demand and inflation.”
So, in summary, we have strong jobs reports and strong spending, despite rising inflation and mortgage rates. These mixed signals, then, are why the economy is so confusing right now and why the Fed wants – no, needs – to keep raising interest rates: Because consumer demand and prices keep rising together, so the Fed has to do something to cool things off.
It’s true that consumer spending was likely boosted by the fall in gas prices and back-to-school needs and a slowdown in spending next month wouldn’t be a surprise. And likely the next month, too. And even the next.
When all of this comes together – rising interest rates, slowed spending and possible job losses as a reaction to consumer pullbacks – we may find ourselves in a real recession, not simply the temporary blips that we’ve experienced so far.
The unfortunate reality, too, is that the people who can least afford the financial setbacks that come with recession are the ones who will be hardest hit. It’s the painful truth that comes with a reset. It’s also, unfortunately, a necessary hardship that has to happen for the economic ship to right itself.
A bit of an offset may be that industries in which there are larger segments of middle-to-lower wage workers are often safer in times of recession – healthcare and education, transportation, and even restaurants and retail and others like them that are necessary for day-to-day life and the smooth functioning of our society. Instead, middle-management roles may be at higher risk as companies take advantage of recessions to cut back on payroll costs (take heed if you’re among the workers who are currently bragging about “quiet quitting”).
What’s happening in housing…and where I see it headed
Housing, as I’ve often said, is typically an inflationary hedge. Now, though, due to rising mortgage rates, inflation and other economic turbulence, housing’s place as a mitigator of inflationary impacts will be dampened. If you buy and hold, then you’ll be okay, but if you’re looking to housing as a short-term way to shore up your portfolio against inflation’s corrosive pain, you may not get as much benefit as you’d hope to gain. In part, this is because of the lag time between stocks and housing: While a bad economic report can sway the markets in an instant, the impacts aren’t verifiable in housing until 30-90 days down the line.
We’ve seen some listing- and sales-price softening in many markets already and we’ll likely see some further declines. Increases in mortgage rates have helped to slow the competition and the simple reality – that people aren’t running from the pandemic like they did two years ago – means that many would-be buyers are going to wait things out and see where interest rates go. Even premiere markets and those that boomed during the thick of the pandemic will feel an impact, at least for a short while.
CNBC reported this week that mortgage applications are down 29% from last year. The good news is that if you’re in the market, you’re likely going to find less competition.
Even still, I always say that it’s a solid investment and I’m sticking with that.
When recession’s at the door…
In not so many words, I’ve said in recent posts that when recession is at the door, sometimes you just have to let it in. The Fed tried for a softish landing and it hasn’t worked out yet, not in a way that will stick, because consumer demand is still high and jobs are still plentiful. But I think we have a harsher economic reality ahead than most of us realize.
Now’s not the time to panic, but it is absolutely the time to prepare. Figure out your optimal, most probable and worst-case scenarios and how you’d manage if things took a downturn. What could you leverage now to best position yourself later? What do you need to secure and what can you let go? It’s always best to have a realistic game plan.
Protect your investments, stay away from speculation and promises of a quick buck. And know that you can operate in a high-interest environment and when things turn around, you can re-evaluate, refinance and do whatever else you need to do to strengthen your foundation.
Once you’ve got a good plan in place, get creative. I’ve said before that many people thrive in times of recession – what can you do to be one of them?