Friday, July 26, 2019

Are we Due for a Recession?

July 2019 marks the 121st month of the current economic expansion making this the longest in US history or at least for the 150+ years we've measured business cycles. You may hear people talk about being due for a recession. Being due for a recession uses the same logic as being due for a hurricane, tornado, or a significant snowstorm. It suggests that because things have happened with a frequency in the past, they must occur at the same rate in the future. The frequency of past weather events is not part of the current weather forecast, and the frequency of previous recessions is not part of the current economic outlook. Most of the time, the economy is expanding. The last recession, "The Great Recession" lasted 18 months. The ongoing economic expansion has lasted a decade.  To draw another analogy. When you drive a car, you may drive at different speeds. Sometimes you're accelerating; sometimes you're decelerating, but you are moving forward more than you are in reverse. If you are concerned about the economy, let's talk about it. You may have more risk in your portfolio than you are comfortable with.

I've also created a YouTube video to accompany this post. 

Thursday, July 11, 2019

Chairman Powell's Congressional Testimony

Federal Reserve Chairman Jerome Powell concluded his bi-annual report to Congress today as required by the Humphrey-Hawkins Act. His primary concerns were with issues around trade uncertainties, global manufacturing, global growth, and low inflation.

Chairman Powell described the US economy as being in "a very good place." and told Congress, "We want to use our tools to keep it there. It is very important that this expansion continue as long as possible."

In his Senate testimony, Chairman Powell talked about the Fed's concerns about persistently low inflation in the US. Low inflation has been a chronic economic problem in Japan and Europe for decades.  He cited these concerns as a reason for growing support for rate cuts. Cutting interest rates is a tool the Federal Reserve uses to boost inflation. Based on Chairman Powell's testimony, and recent comments from other Fed Governors, Investors believe a July rate cut is nearly guaranteed.

Given the current state of the US economy, it is unclear what effect a rate cut will have. The current unemployment rate is 3.7% and recently ticked up as more people have entered the workforce. Inflation is below the Federal Reserve's 2% target as it has been for some time. A rate cut under these economic conditions demonstrates the weight The Fed places on its inflation target.

Wednesday, July 3, 2019

Market Update 07-03-19 - Markets at New High

The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite indexes all closed at record highs today. We’ve had several weak jobs reports showing that the rate of job growth is slowing. Market participants believe that the slowing pace of job creation gives the Federal Reserve reason to cut interest rates when they meet later this month. Lower interest rates can reduce borrowing costs for businesses and individuals. In theory, this can lead to economic growth. Lowering interest rates is one of the tools the Federal Reserve has used in the past to encourage economic activity and pull the economy out of a recession. It is unclear if lower interest rates will have the same effect when the economy is not in a recession. If the Federal Reserve decides not to cut interest rates as expected, you could see markets reverse course and give back much of the recent gains.