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The Recession That Isn’t Happening

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Editor’s Note: Today we’re doing something rare…

We’re sharing the lead article from this month’s issue of Chief Income Strategist Marc Lichtenfeld’s newsletter, The Oxford Income Letter.

Typically, these articles are reserved for subscribers to The Oxford Income Letter, but we felt that the article below had such valuable insights into Marc’s current view of the market that it should be shared with everyone.

– Rachel Gearhart, Publisher


Heading into this year, nearly everyone – including me – called for a recession.

Federal Reserve Chairman Jerome Powell dreams of going down in the history books as the second coming of Paul Volcker, the former Fed chair who famously jacked interest rates higher in the late 1970s and early 1980s to tackle inflation. I expected him to push interest rates too high, causing the economy to hit the brakes.

However, as John Maynard Keynes famously said, “When the facts change, I change my mind.”

Powell has boosted rates considerably. The federal funds rate has jumped 5.25 percentage points in 18 months. And Powell has suggested that he may not be done raising them. Though the recent trend in inflation suggests Powell should take a breath.

In July, U.S. inflation came in at 3.2%, a steep drop from the 9.1% high that was reached in June of last year.

Chart: U.S. Inflation Is Declining

While I still believe Powell could overdo it, the fact is the economy is on solid footing and there is little reason to expect a recession going forward.

In fact, Goldman Sachs now assigns just a 20% chance of a recession in 2024, and many others are no longer calling for a recession in the immediate future.

Why Recession Fears Are Fizzling

One of the reasons a recession was expected was the anticipation of a decline in spending. The idea was that consumers would have burned through the savings they accumulated – thanks to those generous government checks during the pandemic – by this summer.

But there is no evidence of a slowdown in spending. In fact, just the opposite. American consumers are spending more than they ever have. In July, personal spending rose 0.8%. That’s accelerated from the 0.6% rise in June and 0.2% in May.

That’s not surprising considering many consumers feel flush with bubble-like home prices in many markets, record-low unemployment and rising wages.

Another contributing factor to diminishing recession fears is the Inflation Reduction Act. As with most things in Washington, the policy actually does the opposite of its name. It’s hard to fathom how half a trillion dollars in government spending will reduce inflation, but that’s politics for you.

The Inflation Reduction Act’s initiatives include…

  • More than $1 billion to farmers under financial stress
  • $11 billion to improve electrification in rural areas
  • $12 billion to upgrade energy infrastructure.

Importantly, the plan has sparked a wave of investment in the U.S. from overseas companies. In fact, direct foreign investment in the U.S. is now more than double its average since 1995 and is just off record levels. Foreign investment is also more than double what China is bringing in. That’s a big change from 2020, when China and the U.S. were neck and neck for attracting foreign investment.

Chart: Foreign Direct Investment in the U.S.

More international money is being invested in the U.S. than in any other nation. In 2021, 30% of all dollars invested in another country were invested in the U.S. And when I say “invested,” I’m not talking about a large purchase of a hot tech stock. These are foreign investments in manufacturing plants and facilities that provide jobs, put money back into the community and are expected to generate profits for investors.

Here are a few recent examples:

  • South Korea’s Ecoplastic Corp., which makes auto parts, is investing $205 million in a new factory in Bulloch County, Georgia, which is expected to create 456 jobs.
  • Toyota invested $3.8 billion in a battery plant near Greensboro, North Carolina.
  • Taiwan Semiconductor Manufacturing Company is investing a whopping $40 billion in two facilities in Phoenix, Arizona.

What Does This Mean for Investors?

All of this economic activity, plus a two-year high in consumer confidence, is why I expect GDP growth numbers to be higher than the official 1.9% estimate in 2023 – and considerably higher than the 0.5% forecast for next year.

The markets also suggest a solid economy. Bond yields continue to move higher, indicating inflation may not be over with. And the stock market, while not having a great summer, has been up since the beginning of the year.

The stock market is a forward-looking indicator, generally predicting economic conditions about six to nine months out.

Now, there is one big potential monkey wrench that may be thrown into the mix – a government shutdown later this month.

For the federal government to continue operating as normal, an agreement on spending must be reached before the end of September. As of now, that doesn’t seem likely, as the Freedom Caucus (a group of around 45 Republicans) is calling for a reduction in spending (which would be difficult enough to achieve) as well as requiring some other political demands to be met. These demands include more action on the border, the end of what the caucus calls “woke” policies in the Department of Defense and no “blank check” policy in regard to Ukraine. Democrats are unlikely to agree to any of those things.

A government shutdown wouldn’t be positive for the economy, but any spending that is delayed because of the closure would just get pushed out several weeks or months.

If the economy remains on solid footing and performs better than expected in 2023, we should see further gains in the stock market well into 2024.

There’s a lot of doom and gloom out there in the mainstream and nonmainstream media. But the data doesn’t support it, and neither do conditions on Main Street.

Things aren’t perfect. Prices are still too high after the recent bout of high inflation, but the American economy is humming along.

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