Wednesday, January 29, 2020

Consumer Confidence, Unemployment Rate and Recessions

Last month I attended an economic forecast event and a few of the slides really caught my attention.  As business owners and advisors we are always looking forward, around corners, etc. in an attempt to see what lies ahead in order to make sound, prudent business decisions.  The following slides both contain shaded areas denoting periods of recession in the U.S. The first slide below is the Conference Board Consumer Confidence Index.  The index basically assesses consumers present feelings about the economy as well as their outlook for business and employment over the next 6 months; how they feel they will fare economically.

This next chart shows the actual unemployment rate against the natural rate of unemployment.  The natural rate of unemployment is the premise that even when the economy is at full employment, there is still a segment of the workforce who are unemployed.  What the chart indicates below is that the economy is so robust currently that organizations are really tapping deep into the available pool of workers, causing actual unemployment to dip below the natural rate.  You can see clearly in the chart that when this happens usually within a few years of going below the natural rate a recession typically begins (again, the shaded areas).  We've been below the natural rate for a few years now, and by many measures this economic expansion is long in the tooth.  We've also heard that expansions don't die of old age, it's generally some catalyst, often times monetary policy, that triggers a recession.

This time could be different/unique.  Perhaps it already is.  We have historically low interest rates that generally cause capital to move into risk assets and foster business investment.  We have technology advances that contribute to greater efficiency, productivity and profit margins.  Our clients 2019 calendar year results are rolling in with, in some cases, record level profits and in most cases healthy profits.  The business outlook for our clients is also strong, looking ahead to 2021 as well.  As always, remain vigilant, capitalize on opportunities and use this strength in the economy to shore up balance sheets.  This balance sheet strength is always a welcome position to be able to withstand the eventual slowdown that will come at some point.