I have been saying the US economy is not going to fall into a recession at least for the next 2 years despite what might be happening in other countries. This article in the November 4 edition of the Wall Street Journal offers further support to my position.
The WSJ article discusses a theory developed by Ph.D. economist Claudia Sahm. Sahm’s theory is that the US economy is in a recession when the 3-month average unemployment rate has risen 0.5 percentage points from its previous 12-month low. In other words, Dr. Sahm believes a spike in the unemployment rate is the canary in a coal mine warning that a recession is afoot. The theory has successfully called every recession for the past 60 years. Currently, the reading is just a tick above 0, meaning we are not in a recession and not in danger of heading into one.
It makes logical sense: Companies fear an oncoming recession or even a slowdown that doesn’t result in a “recession”, which is 2 consecutive quarters of negative GDP growth. So, they start to lay off workers. Currently, instead of laying off workers, companies are facing a different dilemma: Not enough qualified workers to fill open job listings. We are not heading into or already in a recession if corporate profits are strong and growing and companies are looking to hire rather than layoff workers.
If you believe the US is not heading into recession any time soon, what would you do, or what would you change in your investment outlook?
- Risk On: You could opt to go farther out on the risk spectrum in your investment portfolio. This means, perhaps, instead of being 60%/40% stocks to bonds, maybe you bump up to 65%/35% or even 70%/30%. The environment is good for corporations, so own more of them relative to your other holdings. My recommendation is a diversified portfolio of ETFs or low-cost mutual funds so that you are well-diversified and not subject to company-specific risk.
- Relax: If you are working and worried that a recession might cost you your job, don’t. Unless you mess up individually in some way, in general, you should keep your job due to the strong labor market.
- Stable Interest Rates: Former Treasury Secretary Larry Summers recently stated US interest rates could fall to zero or below if we have a recession. This isn’t happening, in my opinion. The Federal Reserve stated that they are on hold with any future rate reductions. I believe there is a better chance rates will go up than down from current levels. The international rates market, with rates in Europe and Japan at zero or below, is a ballast on US rates, so therefore I predict stable rates in the next 12 months or so.
Take my advice based on what you pay for it, but I believe the US economy will remain strong and will not tilt into recession for at least the next 2 years, based on unemployment that remains low, coupled with strong and growing corporate earnings, low interest rates, and plentiful cash in the system. If you are currently hiding behind a tree for fear of recession, then you should heed the All Clear siren and go about your business.