Spring Has Sprung

Question:  Do you think the economy can continue to grow and avoid a recession? 

Answer:  As we emerge from a winter of negativity, recession fears, and geopolitical tensions there are reasons to believe that the forecast will improve. Reasons for optimism include strong labor markets, increased consumer demand, and healthy manufacturing forecasts. The question is whether the economy is strong enough to absorb the start of the Federal Reserve’s higher interest rates, quantitative tightening policies and of course, the Russia/Ukraine war.

Consumer spending led the economy’s recovery, but there is concern that record cash balances and pent-up demand are causing costs to rise faster than wages. Job growth is critical to improving collective spending. With gas prices over $4 per gallon, the dream of home ownership getting tougher, and pervasive inflation, the question is how much more can consumers spend since consumer spending accounts for approximately 70% of Gross Domestic Production (GDP).

Inflation has not only surged, but it has broadened and is impacting nearly two-thirds of the components of the Consumer Price Index (CPI). Economists are wondering if inflation will shift consumer spending habits. The good news is that the median monthly income of a worker has increased from $3,690 to $3,890 per month which is an increase of more than 5% year-over-year. However, costs are going up faster than wages as seen in gas prices (from $2.87/gallon up to $4.24 over the last two months), utility bills, housing, and grocery costs.  With such an unflattering overview, personal savings and job creation are important factors for how the US economy can avoid a recession.

Fortunately, consumer health was relatively healthy prior to rapid gas price increases and other inflationary pressures. Household debt service levels remains near record lows as consumers reduced debt balances. This, along with job growth should allow for a shift on spending on to goods to more funds allocated for the services industry. With the seven-day average of new COVID-19 cases at the lowest level since last July, the reopening of the economy is putting a spring in its step. People are eager to engage in pre-COVID activities including travel. One statistic of interest is the TSA traveler throughput, which is at its second highest level since pre-COVID, only trailing the numbers from last Thanksgiving.

Restaurant reservations, hotel occupancies, and driving numbers also suggest that consumers are ready to start spending on services. Even the White House is preparing to reopen to regular public tours in April, after a more than two-year hiatus. The bottom line is that these real-time activity metrics all serve as evidence that the consumer is willing and able to spend as normal activities resume. A factor to consider is to what extent elevated fuel prices will influence consumer behavior.

Job creation will improve consumer spending power and lift the economy. With more than 11 million job openings, companies are competing for available labor with many employers offering substantial incentives. Job growth is critical to improving collective spending. 

The humanitarian crisis and devastation of Ukraine cannot be ignored nor understated. At the time this is being written, Russia has drawn up a multi-prong plan with provisions for a ceasefire, and Ukraine has expressed openness to claim neutrality (foregoing a path to become a member of NATO) in exchange for security guarantees that are legally verified. The apparent willingness to talk from both sides is a positive sign that a route to peace could be on the horizon. If a ceasefire and agreement are reached, the easing of geopolitical tensions would likely lead to a favorable reaction in markets. 

As our Chief Economist, SVP Scott J. Brown, Ph.D., so succinctly stated, “soft landings are hard.” Stay focused and plan accordingly. 

The opinions expressed are those of the writer as of March 28, 2022, but not necessarily those of Raymond James and Associates, and subject to change at any time. All investments are subject to risk, including loss. Diversification does not ensure a profit or protect against a loss in declining market. This material is provided for educational purposes only. Past performance is no guarantee of future results. There is no assurance the trends mentioned will continue or that forecasts discussed will be realized. Economic and market conditions are subject to change. Material is provided for informational purposes. Consult your tax professional and financial advisor before making any investment decisions. Holding investments for the long term does not ensure a profitable outcome. The foregoing is not a recommendation to buy or sell any individual security or any combination of securities

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