RECESSIONS AND INTEREST RATES
John Lui
March 01, 2024
A recession has not occurred as our economy is just not that interest rate sensitive coming out of the pandemic…
Despite rapid interest rate hikes by the Federal Reserve, the US economy did not enter a recession as our economy is just not that rate sensitive due to pent up consumer demand for services, a strong employment situation and smart consumers locking in historic low 30-year fixed rate mortgages.
The chart above shows the huge spike in unemployment as employers laid off millions of workers during the pandemic. Employers were not optimistic about a COVID vaccine, and they foolishly let go of their employees, only to desperately hire/try to hire them back once COVID vaccines were developed/approved earlier than expected.
The hotel owners I spoke to laughed at the pessimistic experts (economists and Wall Street strategists), telling me that higher interest rates were not stopping them from hiring hotel workers as their hotels were very profitable:
Spiking consumer demand allowed them to raise room rates far in excess of the increases in their costs
Lack of competition as many operators had closed
This is the bottom of the business cycle for services and not the top (bust turns to boom)
It wasn’t surprising to me that month after month of employment data showed that the leisure and entertainment industries were consistently hiring the most workers.
Consumers are about 70% of the economy and they were in a very strong position to support a growing economy post pandemic. With the unemployment rate back to pre-pandemic levels and 2 job listings for every 1 person looking for a job, consumers had income to spend and no fear of losing their jobs. Their management of their debt put them in an even stronger position as the vast majority had smartly locked in historic low mortgage rates, making them immune to the rapidly rising interest rates.
The chart above is as of August 2022 and it shows while the stock market was tanking in 2022 due to stagflation (recession and inflation) fears, rising rates did not negatively impact a vast majority of consumers with mortgages, as 80% of them had locked in fixed mortgage rates of 4% or less!!
Fear mongering and declarations of “there is a hurricane out there” has made the average individual investor too conservatively positioned with their investments. Inflation has already peaked at a year-over-year 9% annual rate to under 3%, and with time, Jay Powell and the Federal Reserve, will have to lower short term rates. This is already the consensus view on Wall Street and the debate now is just when Powell will cut and how many cuts. With about $8 trillion in CDs and money market funds, rates cuts will mean lowering interest income and an eventual rotation out of $8 trillion in non-productive investments. This rotation will support this new bull market that started on October of 2022, when the stock market bottomed.
I will close with a recent quote from Jelly Roll:
“the windshield is bigger than the rearview mirror for a reason because what's in front of you is so much more important than what's behind you!"
If you have any questions, please feel free to reach out to your relationship manager or schedule an appointment to talk.
Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.