It was our privilege to host Adam Schickling, CFA and economist with Vanguard to speak about the state of the economy and where we may be heading as we wrap up 2022 and head into 2023. While we are unable to share a replay of the presentation, below we share some of the insights gleamed from our conversation.
US Economic Recap Year to Date
Year to date, unsurprisingly, the US GDP forecast has been lowered. Consumers have cut back on service consumption, which in part can be attributed to a larger portion of consumer budgets now covering the increased cost of food and gas.
Nominal wage growth has increased year-over-year, but inflation has more than chipped away at those gains. With real wage growth at a net negative, economic sentiment and consumer behavior has experienced downward pressure.
Mission Impossible: Soft Landing & Quelled Inflation
As the COVID recession took hold in 2020, producers relied on textbook solutions to navigate the ensuing months. Automakers, by way of example, reduced forecasts on car sales and slowed production. Common knowledge at the time suggested that people wouldn’t want to buy a new car if the market was in a recession. As hindsight is 20/20, we can see now that car sales exploded and consumer demand for durable goods took off like a rocket, aided in part by fiscal stimulus. Low supply and high demand are a recipe for inflation.
While the Fed has a lot of economic sway, they have far greater control over money supply than they do of consumer demand. Too little action upfront might have felt like the right answer at the time, but now they are playing catch up. In a perfect world, they can quell inflation AND prevent an economic recession, but their primary focus remains on quelling inflation.
Vanguard’s expectations are that inflation has peaked, and will gradually come down over the next few years, but that there is a high probability of a recession in 2023.
A Tale of Two Recessions
In technical terms, a recession means that there are two consecutive quarters of negative growth in real gross domestic product (GDP). The National Bureau of Economic Research (NBER) uses a more subjective definition of a recession in that it is a significant decline in economic activity that is spread across the economy and that lasts more than a few months. Put more literally, the NBER definition FEELS more like a recession.
It’s quite possible that idiosyncratic events like a trade deficit can push us into a technical recession, but we fail to meet the NBER definition of a recession. So, in the year ahead, we might very well enter a recession, but it might not feel like it from a day-to-day standpoint.
Housing Prices are all about Location, Location, and Demographics?
The housing market has been hot, and even rising mortgage rates seem to be doing little to push buyers out of the market. Looking at national demographics provides insight as to why this may be happening.
- A large percentage of the population is turning 30-35, a typical first-time home-buyer age.
- Another large percentage of the population is also turning 65, a typical retirement age. These folks are either staying in their home, or moving to a new one.
- A small percentage of the population is turning 70-75, a typical age where people will be exiting the housing market in favor of community living facilities, or unfortunately passing away more frequently than the two younger groups.
Add that home building has been lagging since 2008, and we have a recipe for higher prices. More people entering the housing market than are exiting it and the supply of housing has remained roughly the same. High demand and low supply leads to faster appreciation.
International Recessions? Europe, You’re Up (Next)!
The United States is not alone in facing a recession. Europe is also on difficult footing between the impact of Russia’s invasion of Ukraine, and the related economic sanctions on Russian oil and natural gas. The European Central Bank and Bank of England are also on monetary tightening paths in an effort to lower inflation.
Vanguard finds it more likely that Europe will experience a recession before the end of the year compared to the US, but that next year, US and Europe are roughly equally as likely to experience a recession.
Politics and Market Expectations
Is there a perfect mix of political parties in the executive, judicial, and legislative branches of government for market outperformance? Probably not.
Looking back to elections as far back as 1860 (the election of Abraham Lincoln), there is no consistent statistical relationship between parties in power and market returns. If you want to tell a specific story, then there is likely a slice of time that you can use to justify a narrative. That said, nothing consistently reigns true over our nation’s history. So vote with your heart, not your portfolio.
The commentary contained herein is intended for educational purposes only, should not be construed as investment advice, and reflects the opinions of Adam Schickling of Vanguard.
Adam Schickling, CFA®
Adam Schickling, CFA®, is an economist in Vanguard Investment Strategy Group. He has co-authored research on productivity, demographics, labor markets, and China’s economy. He joined Vanguard in 2012. Previously, he was a fixed income investment risk analyst in the Risk Management Group. Mr. Schickling is a CFA® charterholder and holds an M.A. in economics.