Economic forecasts are all over the map right now. Some economists predict a substantial recession that will decimate the middle and lower class, while others call for tepid growth.
The truth is that no one knows precisely how the economy will unfold in the long run–trade wars, trade agreements, foreign affairs, interest rates, monetary policy, unemployment, government debt levels, exchange rates, consumer sentiment, and a variety of other factors can quickly change economic trends and forecasts.
With that said, economic data can give insights into gathering economic storms, potential economic booms, and even potential investment opportunities.
My mission is to guide individuals toward financial independence by enhancing their financial literacy and awareness and ultimately helping them become better investors.
True to my mission, this report provides my thoughts and the raw economic data to prepare you for future financial situations.
I’ve been chomping at the bit to share my thoughts with you, so let’s dive in!
A Tale of Two Economies: Recession or Tepid Growth
The United States economy has mixed, conflicting economic indicators, trending from slightly positive to outright bad. These indicators show that the economy is at a crossroads right now–it will continue its current trend into a recession, or an external factor will push it towards tepid growth.
Leading economic indicators are readings that forecast future economic activity. They include consumer confidence, personal savings, manufacturing demand, and housing construction statistics.
Lagging economic indicators are readings that confirm trends in the general economy. They include economic data such as GDP, inflation, bankruptcies, loan default rates, and unemployment.
Since the United States economy is primarily driven by consumer spending, my preferred economic gauges measure consumer behavior.
Consumer Confidence
This indicator is one of the best since consumers dictate the pace of growth and direction of the economy. Changes in house prices, unemployment rates, and inflation significantly contribute to consumers’ overall economic confidence.
Consumer Confidence Index (CCI)
Over the past year, consumer confidence has been relatively flat, indicating little change in consumers’ outlook on personal finances, job prospects, and willingness to spend or save.
This flat trend may also reflect a “wait-and-see” attitude until there are more evident signs of economic strengthening or weakening.
Overall, I do not believe the consumer confidence readings provide a clear outlook on the economy; however, I think the following indicators give a better read on the state of consumer’s finances.
Personal Savings, Loan Defaults, and Bankruptcies
The personal savings rate reflects the portion of disposable income that households set aside for savings rather than spending on consumption.
Personal Savings Rate
The personal savings chart shows that the personal savings rate has declined by roughly half in the past 12 months, which is also half its pre-pandemic levels.
As personal savings decline, consumer’s ability to weather financial storms also declines.
Credit Card (Blue) and Auto Loan (Red) Delinquencies
While the personal savings readings can indicate that consumers feel exceptionally comfortable with their finances, the uptick in serious credit card (blue) and auto loan (red) delinquency rates likely suggests that consumers are running low on funds and have struggled to support their lifestyles and spending.
When consumers and businesses run out of money, which we have been seeing, bankruptcies tend to increase.
Bankruptcies
Even though bankruptcies remain below their historical averages, the 12-month trend confirms the decline in the personal savings rate and loan delinquencies, which means that cracks are beginning to form in the economy’s foundations.
Manufacturing and Shipping Struggles
The manufacture and shipping of goods show the number of goods produced and shipped. The Durable Goods Report (DGR), Purchasing Managers Index (PMI), and Cass Freight Shipments Index are good measurements of the country’s manufacturing status.
The Durable Goods Report (DGR) reports on the sale of large items, including automobiles, semiconductor equipment, and turbines, fluctuated wildly over the past 12 months, suggesting an unstable economic environment in which consumers and businesses frequently revise their spending plans.
Durable Goods Report (DGR)
The PMI (shown below) has read at or below 50 since November 2022, indicating a minor manufacturing and economic contraction.
Purchasing Managers Index (PMI)
The Cass Freight Shipments Index, which measures the freight moving across the country and the world, has been trending downward for the past 18 months. The relatively flat decline foreshadows a mild economic recession.
Cass Freight Shipments Index
These leading indicator reports show that the economy is slowing down. As mentioned earlier, without an external factor changing the economy’s trajectory, this contraction in growth is probable to persist and develop into a recession.
The good news is that, even if a recession does occur, these reports indicate that it will not likely be prolonged or intense.
General State of the Economy
The Q1-2024 GDP was 1.6%–it was dragged below expectations by slowdowns in consumer spending, increased inventories, and slower trade.
While many economic reports state this is a momentary blip, I believe it indicates a more significant downward trend in the economy.
Inflation
Inflation has hit all my economic reports for the past few years; this report is no exception because it continues to be a factor.
Simply put, inflation is the increase in the cost of goods over time. Demand and the availability of cheap money drive inflation.
When the government pumped cheap money into the Covid economy, it lit the fuse for explosive inflation. Inflation continues to be a factor in the economy to this day.
The trailing 12 months of inflation readings put the current inflation rate around 3.5% for the year, nearly double the Fed’s 2.0% inflation target.
Consumer Price Index (CPI)
While I appreciate that inflation has declined since 2021 and 2022, I believe that inflation at the current levels will remain an unwelcome companion for the foreseeable future.
Here’s why I think it is going to stick around for a while:
- Recessions are natural economic events. Historically, recessions have helped reset unhealthy parts of the economy–popping asset bubbles, resetting debts to healthier levels, exposing financial skinny-dippers, etc.
- In the last 20 years, the government has tried to prevent the economic pain associated with recessions by pumping excessive amounts of cash into the economy, forgiving debts, and manipulating the economy with quantitative easing–a practice where the government prints money to buy troubled assets from the private markets.
- Each time the government tries to prevent the pain associated with a recession, it takes on debt to kick the can further down the road, where the deferred economic pain will be amplified.
- Consumers are being trained not to expect economic pain when they overborrow, so they borrow money in a very unhealthy and unsustainable way. This borrowing allows consumers to maintain a lifestyle that is above their means.
- As consumers spend money they cannot hope to pay back, economic bubbles and higher demand create inflation.
Until the government allows the economy to take its natural course, with limited interference, I believe inflation will likely persist at these rates or higher in the foreseeable future.
Conclusion
Consumers and spending primarily drive the United States economy. While spending has remained relatively robust, persistent inflation, rapidly declining personal savings, and increases in consumer credit default rates show a shift in consumer spending behavior, which will likely apply downward pressure on the economy.
With consumer savings declining, credit card, auto, and alternative loan default rates increasing, and bankruptcies increasing, the economy will likely continue seeing GDP flat-to-negative declines in the near future.
Recession or No Recession
Based on historical precedent, there is a 61%-79% probability of a recession by January 2025.
The official definition of a recession is two consecutive quarters of declining GDP, which means that the next few GDP readings will be vital in assessing the economy’s overall direction.
If the Q1-2024 GDP is not significantly revised downward and the Q2-2024 is positive, the probability of a 2024 recession will be much lower.
That said, I think this is a scenario in which you want to be an ant rather than a grasshopper.
Word to the Wise
An item of note is that people’s ability to weather financial storms is declining along with their savings rate. The more the savings rate declines, the more likely asset prices will fall in the next recession as individuals will be forced to fire-sell their assets to protect their equity.
Prominent investors known for anticipating downturns, like Warren Buffet, stockpile cash before recessions to take advantage of cheap assets during recessions. His stockpiles tend to swell between each recession and are drawn down during the recession.
Warren Buffet, Bill Gates, and other billionaires recently made the news for increasing their cash holdings.
If you like acquiring valuable assets on sale and believe an economic downturn is underway, consider stockpiling cash for strategic investing, as Warren Buffet has been seen to do.
Book Club
I’m recommending three books in this report: Titan, One Up On Wall Street, and Thinking in Bets. I have previously recommended these books, but given the state of the economy, I believe they are timely.
Titan: The Life of John D. Rockefeller, Sr. By Ron Chernow
I recommend this book because John D. Rockefeller, Sr. became one of the great American financial success stories despite growing up poor, living through the Civil War, and facing government obstacles.
A lot is happening in the world right now, and reading about someone else’s struggles and how he addressed them can be helpful.
One Up On Wall Street By Peter Lynch
Peter Lynch was one of the more successful investors of our time. While he was at the helm, his fund returned wonderful rates of return.
I recommend this book because it provides insights into the types of investing he used to get above-average returns.
Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts By Annie Duke
This is one of my all-time favorite books on investing. Annie Duke does a great job of discussing mindset, decision-making, probabilities, and decision biases.
Every serious investor should read this book and use the information to frame their investing behavior and thought processes. In an uncertain economic environment, this book has the potential to help you take advantage of every opportunity.
