The Recession That Never Came
What happened to the most anticipated recession ever?
A year ago all we heard was how the United States was guaranteed to go into a recession in 2023. There was rising inflation and mortgage rates. We were told that the consumer had no money left and all the stimulus money had been spent. Housing investment seemed to be buckling. Layoffs and fewer jobs were looming. Rate hikes by the Fed were going to make it harder for business and consumers to borrow money.
It was the most predicted and anticipated recession ever.
But it never happened.
Why didn’t it? How were so many smart economists and professional forecasters wrong? Even companies were mentioning it on their earnings calls.
You can see the number of S&P 500 companies that were saying the word recession in their earnings calls below. It peaked at 46% of companies in Q2 2022. After Q3 of 2023 that number is all the way down to 11%.
Among the Russell 3000 companies, at the end of 2022 it was near 30% of companies were mentioning the word recession.
So what did companies and seemingly everyone seem to miss?
If you could sum up why there wasn’t a recession in one chart, it would be this.
People remained employed. As wages rose, the unemployment rates sits at a 50-year low.
If people are employed it makes it almost impossible for a recession. In a recession, opportunities are reduced. Businesses fail, there are fewer jobs and lower wages. Companies reduce their staffing to save money and that’s why unemployment surges.
Those things didn’t happen. As people work and make money they’re going to spend.
And spend they have!
Remember that two-thirds of US GDP is consumer spending and that spend hasn’t slowed down.
Two reasons that the consumer has continue to feel comfortable spending like they have are the following.
Their home values didn’t fall like predicted when mortgage rates rose. In fact, prices have continued to climb higher.
To prove it isn’t just one spot in the country, look at this breakdown among the 40 largest metro-areas in the US. The list is through October of 2023. Love to see Wisconsin and the great Milwaukee area leading this list. It looks like many people other than me also like living in Wisconsin!
The second is that we’ve seen US household net worth rise. People feel wealthier and that can help translate to a propensity to spend more. It’s the I’m worth more or I have more money type mindset.
This rise in net worth isn’t just the baby boomers. In fact, all age categories have seen a jump in their net worth from 2019-2022.
One argument that’s often mentioned to all of this is that consumers are deeper and deeper into debt. Credit card balances are so much higher. Whatever debt metric you want to use, that just isn’t the whole truth.
Household debt has gone up but so did people’s incomes. Debt payments as a percentage of disposable income actually went down. Relative to history the debt ratio is historically low.
US consumers are in much better shape than many realize. We currently sit with the stock market and housing prices nearing new all-time highs.
For now the recession worries have subsided. They will resurface again. But this bout with recession seems to have been defeated.
An employed consumer with stable to rising home values, an increasing net worth and a low debt to income ratio is a happy and spending consumer. Don’t bet against that.
The Coffee Table ☕
I loved Vishal Khandelwal’s post called The Most Important Decision You Will Ever Make. At first I thought what kind of a clickbait post is this. Once I clicked it and after reading what he says is spot on 100%. Warren Buffet, Charlie Munger and Bill Gates agree. I think you will agree also.
I see so many different water bottles around. Everyone seems be carrying one now. My favorite for years has been my Swell water bottle. I have the original bottle in a 17oz and onyx color. It’s stainless steel and tough as nails. From my morning workout until I go to bed I use it for drinking water. There are no scratches or dents after all the these years. I hear some complain about cleaning them. Well they clearly never got the brush for cleaning it. If you get one, get the brush for cleaning.
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