If you google “economy” today, two competing narratives take place; There are the positive metrics showing job growth and ample liquidity, and then there are the headlines about a possible recession. While we face a new breed of uncertainty and ongoing challenges, I don’t necessarily think a recession is on the brink. However, we are witnessing a shift in our economy from a green light to a blinking amber light, warning us to slow down, be careful and prepare for what lies ahead.
The past two years have been unprecedented, with one-off events that have made waves in both the US and global economy. Interest rates have moved from record lows to hikes to put the country into recovery mode. Rent rates are high at all times, especially in cities like Miami where they have seen a 50% increase. Not to mention the volatility in newer sectors, like the crypto and NFT markets, where people have been making and losing exorbitant amounts of money due to fraud or the drastic volatility we’ve seen over the last few years. All of these factors are now playing a role in how the country will recover.
Today there is a lot of liquidity and sources of power in the economy. Wages are rising, unemployment is low, businesses are doing well – they’re still expanding and looking for new talent. Most key indicators say the economy is in good shape, but some of the more traditional metrics, like the inverted yield curve, are pointing to a recession. While I don’t think a recession is likely, we are in a changed environment and it is crucial that we act with an increased level of awareness.
Additionally, JP Morgan Chase CEO Jamie Dimon recently said storm clouds are on the horizon, and he hinted that economic growth will continue through at least the second and third quarters of this year, driven by consumers and businesses crammed with cash and debt pay back on time. I agree – if you really look at the inflation figures, if you exclude energy costs, they look dramatically different and we are already starting to see signs of a tipping point.
What we’re seeing is a whole new environment — we didn’t have a $9 trillion federal balance sheet 15 years ago, and we don’t have all of the excesses that were building up in the economy back then. What we are seeing now is a transition from extremely low interest rates to just low interest rates, which also creates a unique environment.
At the upcoming May Fed meeting, I expect a 50 point rate hike, which would send a strong signal to the rest of the market that things are about to change. Last month, when interest rates were raised, the two-year Treasury bond rose nearly 200 basis points, but there doesn’t appear to be any correlation between the two decisions. The message is more important than the action itself, and a 50 basis point hike would send the message that the Fed is serious about taking control of our economy.
Small businesses can expect a new environment compared to what they have experienced in recent years, and the concept of cheap, easy money with no credit problems is likely to change. My advice to consumers and small business owners right now would be to remember that we are in uncharted waters. – It’s important to be prepared for the rainy days ahead by building up a sufficient cash reserve to help with future fights as well as for potential opportunities that arise. We always discuss stress testing with our clients and now is a crucial time to understand the state of your business.
Ultimately, we currently know that we are heading for challenging times. Past recessions or indicators cannot be taken as gospel – this entire pandemic has been unprecedented and therefore its recovery will likely break new ground as well. Proceed with caution as you make your way through the economy’s flashing yellow lights.
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