When you google “economy” today there are two competing narratives happening; there are the positive metrics showing job growth and high liquidity, and then there are the headlines about a possible recession. While we are facing a new type of uncertainty and continued challenges, I don’t necessarily think that a recession is on the brink. We are, however experiencing a shift in our economy from a green light to a flashing yellow light that is warning us to slow down, be cautious and prepare for what lies ahead.
The past two years have been unprecedented, displaying once-in-a-lifetime events that have caused waves in both the US and global economy. Interest rates have gone from record lows, to now seeing hikes being put in place in order to put the country into recovery mode. Rent prices are at all time highs, specifically in cities like Miami where they have seen a 50% increase. Not to mention fluctuations in newer sectors, like the crypto and NFT markets, where people have made and lost exorbitant amounts of money due to either fraud or the drastic volatility we’ve seen over the past couple of years. All of these factors are now playing a role in how the country will recover.
Today, there’s a lot of liquidity and sources of strength in the economy. Wages are up, unemployment is low, businesses are doing well – continuing to expand and looking for new talent. Most key indicators are saying that the economy is well positioned, yet some of the more traditional measurements, such as the inverted yield curve, are pointing towards a recession. While I don’t think a recession is likely, we are in a changed environment and it’s critical that we operate with a heightened level of awareness.
Additionally, recently JP Morgan Chase CEO Jamie Dimon, said there are storm clouds ahead and he suggested that economic growth will continue at least through the second and third quarters of this year, fueled by consumers and businesses flush with cash and paying off debts on time . I agree – if you really dig into the inflation numbers, while excluding the cost of energy, they look dramatically different and we’re already starting to see signs of rolling over.
What we are experiencing is an entirely new environment – we didn’t have a $9 trillion- dollar federal balance sheet 15 years ago and we don’t have all these excesses that built up in the economy then. What we’re seeing now is going from extremely low interest rates to just low interest rates, which also makes for a unique environment.
In the upcoming May Fed meeting, I anticipate a 50-point increase in interest rates, which would send a strong message to the rest of the market that things are changing. Last month when interest rates were increased, the two-year Treasury went up almost 200 basis points, however, there is seemingly no correlation between these two decisions. The messaging is more important than the act itself and a 50 basis point increase 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’ve been experiencing over the past couple of years and the concept of cheap, easy money with no credit issues is likely to change. My advice to both consumers and small business owners right now would be to remember that we are in unchartered waters. – It is important to be ready for rainy days ahead by building a sufficient cash reserve to help with any struggles moving forward, 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, what we currently know is that we are heading into some challenging times. Past recessions or indicators cannot be looked at as gospel – this entire pandemic has been unprecedented and therefore its recovery will likely follow unchartered waters as well. Proceed with caution as you go through the flashing yellow lights of the economy.