Avoiding Economic Paralysis

For the last eighteen months, experts have told us a recession was imminent. The media conjured up visions of volcanoes, earthquakes and landslides destroying the economic landscape. Absent a strong stomach and independent research, it is extremely hard to know what to do or how to invest in this climate.

With the first half of 2023 behind us, here are two true or false questions I used with my students:

The economy is in a recession.
The economy is at record levels of economic output.

More than half of people think we are in a recession. That has yet to be proven. More interestingly, few people correctly understand the US economy currently stands at an all-time record for economic output. Despite the doom and gloom, our economy remains the envy of the world.

How can this be?

Economists make many predictions, but that does not make them right. Remember the old saying, economists have predicted nine of the last five recessions. Furthermore, economic projections do not translate into investment performance.

The U.S. economy is not “one thing.” With the largest economy in the world, we are flexible and diverse. As such, we may have experienced “rolling” recessions, in which parts of the economy contract while others grow quite nicely.

The “services” side of the economy remains strong. As this is the largest portion of our economy, growth is healthy and employment remains strong. However, manufacturing is clearly contracting and, as demand drops, prices decline. The decline in prices calms inflation. We expect inflation will continue declining in the second half of the year.

It is also worth pointing out that GDP does not measure the health of the economy, but rather economic activity. As such, it is quite possible that if economic activity slows, individuals and businesses can still do quite well.

Current growth remains well above levels experienced over the last decade. First-quarter growth was revised from 1.3% to 2% above inflation. Furthermore, the economy is adding about 225,000 jobs per month. Claims for unemployment are modest. There are currently 1.7 open positions for every available worker. This tightness resulted in a push for higher wages, but less than the rate of inflation.

Many people attribute the high level of job openings to people staying at home. That is not the case. Currently 81% of those in the prime working years of 24 to 54 are working. This is a 40 year high. So what’s the problem? There are too many Baby Boomers exiting the workforce and not enough Gen X, Y or Z coming up to fill the holes.

Hopefully, technology will fill the jobs gap. Additionally, since technology is generally deflationary it should aid in keeping long-term inflation in check.

The Federal Reserve may not be done raising rates, but inflation is significantly improved. The Consumer Price Index sits at 4.0% year-over-year versus 9.1% a year ago. Wage inflation is about 4%–5% down from 6%–7%.

If at the beginning of 2023 you adjusted your portfolio based upon economic forecasts, you certainly would have missed out. The stock market finished the first half up more than 10%.

Given this, the wise investor ignores the economic forecast of the day and remain focused on finding high quality businesses. They do not trade based upon macro-economic data. Additionally, you can only worry about things within your control. Whether assessing GDP, unemployment, inflation or politics, these are out of your control.

This should be a cautionary tale for investors with ants in their pants. According to DALBAR research, over the last 30 years, stock fund investors attempting to time the market trailed the averages by 2.8 percentage points per year. Worse, investors in seemingly “safe” fixed income investments trailed their benchmark by 4.7 percentage points per year resulting in negative returns!

There will always be something scary on the horizon. Despite this, you must have an investment plan that anticipates these monsters and intelligently navigates to a productive long-term destination. Despite the volatility you encounter, business ownership remains the best way to access superior business models with capable managements. Business ownership continues to deliver the best opportunities to grow your wealth net of inflation and taxes. However, to derive these benefits, you must remain calm, disciplined and long-term oriented.

Dave Sather is a Certified Financial Planner and is the CEO of the Sather Financial Group, a fee-only strategic planning and investment management firm.