Like the majority of pundits in the financial industry, we thought it would be highly likely that we would experience a recession in 2023. As of this point in time, that has not been the case. However, recessions are a normal part of the economic cycle. Just because we experience a recession does not mean we will have a financial crisis a la 2008. There are many cross currents. Some continue to point toward recession, others indicate no recession.
The Case for Recession
We’ve followed the Leading Economic Indicators for many years. Leading Economic Indicators (LEI) is an index of data (average hourly earnings, unemployment rate, manufacturing, interest rates, etc.) intended to forecast future economic activity. The LEI have not previously experienced a decline of the magnitude we’re seeing now without a recession following.
A Green Shoot
Last year and into this one, bank lending has declined (tightened) at a significant rate. Tightening of credit (decreases in banks willing to lend) tends to act as a brake on economic activity. Very recently this trend has begun to reverse.
Forecasted Economic Growth
The generally accepted definition of a recession is two consecutive quarters of negative economic growth. That generally accepted principle isn’t actually accurate. The National Bureau of Economic Research (NBER) is the organization responsible for calling US recessions using a wide array of data points, including the labor market, consumer and business spending, industrial production, and incomes.
For simplicity sake, if we use the generally accepted definition, current forecasts do not show negative growth, but low positive growth.
Planning, Not Predicting
Mark Twain is famously attributed with saying “Prediction is difficult – particularly when it involves the future.” It remains as difficult to do today as it was during his lifetime.
Rather than focusing on correctly predicting the future, we find it more beneficial to focus on items within our client’s control. We are focusing on executing financial planning strategies that likely lead to long-term financial success. Strategies like investing in diversified portfolios appropriate your risk tolerance, living within your means, maintaining a sufficient financial emergency reserve, using tax mitigation strategies when necessary, and matching investments to your time horizon. These are simple strategies that can get lost in the noise of a 24-hour news cycle.
If you are concerned about the effect of a recession on your financial plan, Contact Us for a review and stress test of your portfolio.
Securities offered through American Portfolios Financial Services, Inc., Member: FINRA, SIPC. Advisory services offered through American Portfolios Advisors, Inc. and Novem Group, Inc., SEC-Registered Investment Adviser firms. American Portfolios Denver, Inc. and Novem Group, Inc. are independent of each other and independent of American Portfolios Financial Services, Inc. and American Portfolios Advisors, Inc.