At nVest Advisors, we believe that successful investing depends on an understanding of, and correct response to, changes in the world economy as they happen. We incorporate real-world economic conditions into almost all of our investment models and strategies at nVest Advisors, which we believe provides significant benefit to our clients’ overall investment returns. For more information about our investment philosophies and management style, click here. To receive these economic updates and other company news via email when they are published, always free of charge, please subscribe here.
At-a-Glance:
- Recession concerns are becoming widespread.
- Gasoline prices have stopped falling & oil news this week
- Cracks are forming in the labor market
Recession concerns are becoming widespread.
We received economic updates from another one of the regional Federal Reserve Banks last week, the Dallas (midwest US) bank, showing a continuing decline in business activity in the area:
Source: The Daily Shot
This is consistent with findings from across the country. In fact, when you combine all of the regional Fed Bank results together, we show that the economic slowdown is now being felt across the country, and collectively, points to a contraction (recession) of total economic activity:
Several other private banks also monitor economic activity and produce their own reports. These are fully consistent with the findings of the Fed banks:
Source: Deutsche Bank
Source: Capital Economics
This tells us that if a recession hasn’t already arrived in the U.S., it is imminent. In fact, Capital Economics, the graph immediately above, estimates a 90% chance of recession within the next six months in the US.
Reading just one report and making your investing or business and personal financial decisions isn’t the right way to read this data. Nor should we always give more credence to a report just because it’s newer than the other data we have. But taken collectively, when multiple people analyze the data and all begin reaching the same conclusions, it’s time to take note. At nVest, we’ve been strong believers for over a year that the persistently high inflation would have devastating effects on the economies of the world unless it was addressed.
Frustratingly, most of our central banks, challenged with bringing our economies back after the system-shocking Covid-19 lockdowns, followed by the most aggressive stimulus spending in human history, did not take action fast enough in our opinion, and inflation went from being temporary (they call it “transitory”), to being entrenched into our economy. That means it is very difficult to remove the upward pressure on wages and prices, so much more significant action must be taken by the central bank to “break” this cycle. Historically the only way to do this is by forcing a slowdown (recession) in economic activity for long enough that companies have to lay off workers and consumers have so little money left that we stop spending. It’s a horrible prescription but it’s the medicine we must take to set our economy back on the right path.
And it shouldn’t have come as a surprise to the financial industry, but, like every recession, they always do. We started alerting our clients to this inevitability in August of 2021, and changed all of our investing models to reflect this eventuality in January of 2022.
It’s becoming more widespread
We are very confident that the U.S. is in for a fairly steep and prolonged recession, but our opinion is that the situation will be much worse in other parts of the world, particularly in Europe and parts of Asia. And indeed, we are seeing this situation realize (source: Trading Economics):
- China Services Manufacturing Index just reported the steepest drop in output in six months.
- Business bankruptcies are significantly higher than last year in the United States, much of northern Europe, and Hong Kong.
- Italy’s private sector activity has slowed for the fifth straight month.
- The Eurozone’s retail sales have dropped to the lowest level in 10 months (and this is immediately before Christmas).
We will have much more information about retail sales next week, which is an extremely good indicator of how the consumer is holding up through this economic cycle.
Gasoline prices have stopped falling, and oil news to watch this week
We’ve all enjoyed the decline in gasoline prices from their peaks earlier this year. There were several reasons for this decline in prices:
- Consumer pullback on energy usage because prices were prohibitively high and economic activity is slowing globally.
- The draining of the U.S. and many other nations’ strategic energy reserves to help offset the shortage in supply.
- The dollar was extremely strong relative to other world currencies for much of 2022. (This is a complicated economic concept, but suffice it to say that the rise in the strength of the dollar was because our central bank has been raising the interest rates to borrow money, and reducing the supply of cash out there in the economy through a process called Quantitative Tightening.) Because much of our oil is being imported from the middle east, although we are paying for that oil in dollars, the strength of the dollar caused the prices of oil, other imports, and many of the major commodities like lumber, gold, and wheat to drop in price.
Despite the decline in prices, our investment models continue to remain invested partially in the energy sector, because we do not believe the supply problems have been resolved in any meaningful way. As Europe continues to face a ground war and Russian energy has stopped flowing to the area (especially as winter sets in), supply in Europe is at historic lows. The United States is also still significantly below our average supply:
Despite our own supply being very low, the U.S. energy sector has continued to provide support to Europe, increasing our exports throughout the year:
But our capacity is not significant enough to refill our reserves, provide what Europe needs, and supply energy for the U.S. After a reasonably mild autumn for the northern hemisphere, allowing our oil supply to climb slightly, the cold winter months are here, and we are seeing supplies drop again:
We believe there will be a reversal of the downward trend in energy prices now and a climb through the winter months across much of the world, but particularly the “West”: North America and Europe. And indeed, we are already seeing the price of gasoline start trending back up this past month:
source: tradingeconomics.com
What will OPEC+ do?
The other significant factor for oil prices will be whether the OPEC nations will be cutting production at their meeting this week, as they implied they would do. As oil prices have fallen in recent weeks, OPEC nations discussed lowering their output to maintain prices at a higher level. Currently, the discussion is to reduce their contribution to the world oil supply by 1 million barrels per day. If that happens, we see oil going back above $100 per barrel fairly quickly, and remaining there for several months.
Cracks are forming in the labor market.
We get labor information a couple of ways, at a pretty good frequency, unlike much of the economic data that may only come out monthly or quarterly. Unemployment claims are reported each week, and robust employment data from a variety of sources comes out monthly, as well. Because of both the frequency and the immediacy of labor market information, it’s considered to be a good leading indicator of what is happening in the broader economy that doesn’t report as often.
The effects of high prices and slowing consumer demand, along with the actions of our Federal Reserve to further slow the economy to reduce inflationary pressures, are now showing up in the labor markets. This is part of the solution we need to crush inflation, but it’s not all of it. To stop the upward pressure for higher wages, we need the economy to retract enough that there is no demand for more workers, and, sadly, even that some jobs are lost. (This is just the ugly truth of what it takes to fix a runaway economy.)
We are starting to see jobs and wages slow down significantly in the data we received this past week. First, job openings are off their all-time highs:
And, although collectively, the economy added approximately 127,000 jobs in November, the trend is definitely down throughout the last 9 months…
… and nearly all of the hiring was in the hospitality industry (restaurants, hotels, etc.):
This industry was struggling for workers since Covid, but because the jobs in this sector are relatively low-skill (and therefore, low-wage), there was no demand for them as other companies (like in technology, manufacturing, etc.) offered better opportunities. That trend has now fully reversed:
Additionally, layoff announcements are becoming a more frequent news event. It’s sad and frustrating that so many layoffs happen during the holiday season, but because so many companies make budget cuts immediately ahead of the new year, this is a common occurrence.
If a job loss happens to you, it’s going to be extremely important, especially in the current economy, to quickly and properly handle the retirement plan funds from your employer’s retirement plan. You do not want to let the money you’ve worked so hard for, be unmanaged as the economy worsens into recession. We’ve written a thorough guide for what to do with your 401(k) if you leave your employer that is worth reading, and if you need help with an old 401(k), 403(b), 457, or other kinds of employer retirement accounts, please reach out to us for a complimentary audit and second opinion.
Bottom Line:
The economy continues to confirm our analysis that many of the world’s economies, including our own, will face a recession in 2023. No one knows exactly when a recession will occur, or how long and painful one may be, but we do have most of the indications that we are very close. Our firm’s belief is that we will see some sudden data changes (most likely corporate earnings and some surprise bankruptcies) that will “jolt” the stock markets into accepting the economic reality, and these short-term rallies will cease.
You need to have your investment accounts prepared before that happens.
Use these economic reports to prepare. You can not only avoid much of the pain that is coming, but you might actually profit from it, if your investments are properly positioned, and you’ve done what you can to shore up your business’ and family’s financial situation. If you need help with this, nVest Advisors has amazingly affordable personal financial planning and fiduciary investment management services to help you.
This is what we do for a living, and we’re very happy to partner with you on that endeavor. Reach out to us for a totally free financial and portfolio checkup today if you’re concerned about where your finances sit for the coming few years, particularly if you are at or approaching retirement age. We’re delighted to offer you our thoughts. You can schedule that time with us below:
Watching This Week:
- Retail Sales during peak holiday shopping season
- OPEC decision on oil output
- Federal Reserve Interest Rate decision
- Labor Market Update
