There has been a lot of news lately about the possibility of a recession. The economic data has been evolving over the past few months, so I wanted to help break it down.
I’ll start by sharing some of the good news, followed by some of the bad news, and then my take.
The Good News
- Inflation may be declining: Recent data shows inflation growing at 8.5% per year. It was previously growing at 9.1% per year.
- Gas prices are down about $1 per gallon, or 20%, from their high in June.
- The unemployment rate is at a 50-year low of 3.5%.
- We’ve recovered all the jobs lost during the pandemic.
- Home prices hit a record high for the 40th month in a row. They are up 20% over the last year and 40% over the past two years (through May, the most recent data available).
- Company Earnings are strong: Over half the S&P 500 has now reported second-quarter earnings. Three in four have beaten earnings estimates.
- Savings accounts are finally paying meaningful interest. You can earn over 1.50% at a number of banks. Plus, Inflation Bonds are still paying 9.62%.
The Bad News
- America’s inflation-adjusted Gross Domestic Product has declined for two straight quarters.
- Only 10% of people feel positive about the economy.
- Inflation is still near a four-decade high.
- Housing activity may be declining. Prices in San Francisco are down 8% from a year ago. Mortgage applications to purchase a home dropped 19% compared to a year ago.
- The war in Ukraine is ongoing, and tensions with China are rising.
- Despite a good start to this quarter, stocks and bonds remain negative year-to-date. Unprofitable technology companies, in particular, are down 61%.
There is a saying that stocks “climb a wall of worry.” When it comes to investing, there is always something to worry about. Yet in the face of these persistent and ever-present risks, stocks (and bonds) have provided positive long-term returns. If there was no risk, there would be no return.
I think The New York Times summarized our current situation well: “If the United States is headed into a recession, it is taking an unusual route, with many markers of a boom.” While a recession could occur later this year, or next year, or even the following year, for now the positive news outweighs the negative.
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