Steady For Now

Joel Ross

Lately there have been various pundits predicting the risk of recession or even saying we are already headed for one.  That makes no sense to me. Recessions are caused by a variety of factors such as excessive inflation, bad lending practices and rising defaults, high interest rates, rising unemployment, collapsing real estate markets—especially housing—or a black swan event like 9/11. None of this is the case right now. Inflation is very low and, even though unemployment is very low, there seems to be a cohort of several million who are able to work if they were just forced off food stamps, fake disability and unemployment insurance. When Congress passed welfare reform and required work in 1994, suddenly many went to work. Now with states requiring the able-bodied to work for food stamps and for Medicaid, the number of those collecting entitlements dropped dramatically and they went to work. Right now at the low wage level, the Obama-era entitlements made it better to stay home than to work for several million able-bodied people. If more states do this, then there will be many more people coming off the dole and back to work which will keep wages somewhat more subdued than we would normally think. In addition, we now have a worldwide labor market which also keeps wage inflation low. Lastly, AI is coming to factories and warehousing very rapidly, and replacing labor. This is now going to flow into hospitality, and even to telemarketing by robots.

Interest rates for the ten year are still 50% of where they have been in what was considered a “normal market range.” Even with the Fed likely to continue to raise rates over the next 18 months, the ten year is still very low by historical standards, and on an after tax basis, they are still so low that they are not creating pressure on real estate or business borrowing. It is likely to be two years,or more before we see Fed rates pushing the ten year back to the 5%-6% range. Even at that level, real estate is still very viable so long as you are not over levered. So high rates are not likely to create a recession for at least two years.