DV Journal

When Federal Reserve Chair Jerome Powell told reporters last week he wanted to avoid “further cooling” in the labor market, it was taken as a sign that an interest rate cut was on the horizon.

Two days later, the U.S. hit its highest unemployment rate since President Joe Biden’s first year in office. Markets plummeted across the globe on Monday, particularly in Japan where the central bank is considering more interest rate hikes. Markets quickly began to recover, but not before economists and market analysts began throwing around the “R” word.

Recession.

“It’s starting to look like a recession,” Jai Kedia, a research fellow with the Cato Institute, told InsideSources.

“Right now the data I’m seeing points to a recession either has begun in July or it’s beginning this month of August,” Heritage Foundation economist E.J. Antoni told WPHT radio’s Matt Rooney on Sunday. “So my guess is, when they finally backdate the recession, that’s when they’ll say it started.”

The economy added 114,00 jobs last month. But unemployment was 4.3 percent, according to the Bureau of Labor Statistics (BLS). An estimated 7.2 million Americans are unemployed, up from 5.9 million this time last year.

The manufacturing industry contracted for the fourth month in a row, according to the Institute for Supply Management (ISM) a nonprofit that tracks business purchasing data. As a result, the sector has seen job losses in 20 of the last 21 months. That led manufacturers to slow production last month due to decreased demand.

The Fed has been trying to avoid a so-called hard landing for the economy since inflation spiked to nine percent in June 2022. A so-called soft landing is when interest rates rise but there’s no unemployment spike.

Congressional Republicans blame Bidenomics for the economic turmoil.

Ways and Means Committee Chairman Jason Smith (R-Mo.) said the Biden-Harris administration’s increased government spending has caused many companies to replace full-time jobs with part-time jobs. Federal spending surged to more than $25 trillion during Biden’s presidency. The nonpartisan Congressional Budget Office projected a deficit of $1.9 trillion this year. The national debt passed $35 trillion last month.

Another troublesome factor is the recession indicator developed by the Federal Reserve Bank of St. Louis. The real-time Sahm Rule Recession Indicator suggests a recession starts when the average unemployment over the previous three months hits .50 percent compared to the average low during the past year.

That means America’s economy is slowing down.

But economists cautioned against a definitive declaration that the U.S. is entering a recession.

Dr. Claudia Sahm, the Brookings Institute economist who created the Sahm rule, suggested the current data is distorted due to the pandemic-created recession of 2020 and increases in immigration. At the same time, Sahm noted “the risks of a recession have risen.”

Even though Kedia was discouraged by the July numbers, he said he thinks it could be a “rebalancing in the macroeconomy” and not the start of a trend. He’d rather wait to see if the poor employment numbers stretch for  several quarters.

Other economists acknowledge the forecast is gloomy.

A group of Goldman Sachs economists said there’s a 25 percent chance of a recession happening in the next 12 months.

“Something needs to change for the labor market to remain relatively healthy, but it’s unclear if that change can come in time,” wrote Nick Bunker the Economic Research Director for North America at Indeed Hiring Lab.

Patrick Horan, a research fellow at the Mercatus Center at George Mason University, told InsideSources there are warning signs that the “economy is weakening.” He urged the Federal Reserve to cut interest rates.

The only question is ‘When?’

Sen. Elizabeth Warren (D-Mass.) pressed Powell to get started on the interest rate cut as soon as possible.

That’s not likely to happen.

“If the question is, ‘should the Fed consider an intermeeting cut now?’, we think history says, ‘no, not even close,’” wrote Bank of America economist Michael Gapen in a research note after the Monday stock market slide.

Republicans want Powell to delay any interest rate cut until after Election Day. They say any cut now could signal that the Fed wants Democrats to remain in the White House.

That’s also not likely.

More than 80 economists told Reuters last month they expected a rate cut in September. And 70 of those economists suggested the Fed would cut rates twice in 2024 with the second happening in December.

Kedia argued the Fed’s inaction on interest rates could cause the U.S. economy to further contract. And while inflation hasn’t hit the 2 percent level the central bank prefers, he advised the Fed to cut rates now “with the expectation” of inflation eventually hitting the 2 percent mark. That could happen in 2026, at the earliest.

Inflation has remained above the Fed’s 2 percent mark for 39 months.

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Niall Ferguson, the Scottish historian, reminds us that world stock markets failed to anticipate World War I. They failed despite all the clues pointing to a world sleepwalking toward a calamity. They remained buoyant until the war’s outbreak, only to find the European and American stock markets would have to be shut for several months to forestall a total market panic.

Markets also did not cover themselves in glory in the run-up to the September 2008 Lehman bankruptcy that precipitated the 2008-2009 Great Economic Recession. Despite the many signs that the U.S. housing and sub-prime credit market bubbles were bursting, markets remained buoyant until Lehman failed. They remained that way only to find world stock market prices would fall by the largest amount in the postwar period.

With the geopolitical and economic risks now confronting the U.S. and world economies, we have to wonder whether today’s buoyant markets will provide another example of markets having failed to anticipate the consequences of downside political and economic risks in plain sight. At a time when dark storm clouds are gathering, the U.S. stock market is setting record highs.

It would be a gross understatement to say that the world economy is confronted with a combination of major geopolitical risks unlike that seen in decades.

Russia’s invasion of Ukraine is Europe’s largest land war since World War II. Israel’s confrontation with Iran’s Hamas proxy risks spilling over to the rest of the oil-producing Middle East. Yemen’s Houthis are threatening to block access to the Red Sea, so vital for world trade. Meanwhile, China is displeased with Taiwanese political developments following that country’s recent presidential election. That risks causing a further deterioration in already strained U.S.-China relations and additional problems in the South China Sea.

Unfortunately, severe as these geopolitical risks might be, there is a host of economic risks that could trigger a world economic and financial market crisis.

The United States and Europe are at the start of the bursting of a giant commercial real estate bubble due to high interest rates and the increased degree of working at home that followed the COVID-19 pandemic. China’s economy appears to be on the cusp of a Japanese-style lost economic decade due to the bursting of its epic-size housing and credit market bubble. Meanwhile, Europe is going into a recession while the European periphery’s public debt is at a higher level today than it was at the time of the 2010 Eurozone sovereign debt crisis.

As if this were not sufficient reason for concern, it is all too likely that the full effects of the Federal Reserve and European Central Bank’s aggressive interest rate hiking cycle are yet to be felt. Underling this point, the U.S. broad money supply is contracting for the first time since the Fed started publishing this data in 1959.

These are some of the known geopolitical and economic risks that are staring us in the face. However, as Donald Rumsfeld might have said, we should also be mindful about the economic and political unknown unknowns. By now, we should know that all too often unknown risks catch us by surprise.

In 1720, with the South Sea bubble’s bursting, Isaac Newton famously muttered that he could calculate the motions of the heavenly bodies but not the madness of the people. We must wonder what he might have made of today’s stock market behavior. At a time when the world is confronted by a combination of unusually large geopolitical and economic risks, it is partying as if there were no tomorrow.

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For the kids of my generation, investing in our futures was as straightforward as a passbook savings account and slotting money from summer jobs into a piggy bank. Seeing our balances grow was satisfying and served us to a point. Young people today, however, need and deserve a much more in-depth entrée into finance and how it works. Some would suggest that now is the wrong time to introduce kids to the ups and downs of the stock market. I contend just the opposite.

It’s easy for adults to accept that teenagers know nothing at this stage of their financial lives. Of course, kids don’t have the life experiences adults have, but they are acutely aware of what’s happening around them and want the opportunity to live the good life. We have the ability and responsibility to help them learn from the past and change the dynamic regarding financial education. Let’s grab the bull by the horns before the opportunity passes us.

Teens need to be guided through making sound short-term and long-term decisions to navigate financially challenging times. The earlier young people develop and follow a strategy to achieve their retirement dreams, the more confident they will be in their success. 

Thankfully, I’m not the only one with this viewpoint. One of the most forward-thinking groups is Junior Achievement, which regularly conducts research among U.S. teens to understand their opinions and provides programs that help them lead financially secure lives.

One piece of research co-sponsored with Junior Achievement revealed that 94 percent of teens say they know some or not much about the stock market and believe the stock market is a somewhat risky way to make money quickly versus being a good long-term investment.

How can parents help? During road trips or even just sitting around the kitchen table, asking kids about brands, companies and individuals they see as successful and having them explain why can help link strategy to success. Invite kids to join conversations with brokers, accountants and financial planners to see how the stock market is still a good strategy for portfolio growth over time. Use current news topics like COVID and inflation to help teens understand that they can overcome the inflection points they will encounter in their own lives with sound planning, saving and investing. 

Encourage them to participate in programs like JA Take Stock in Your Future, which introduces students to the stock market and puts their knowledge into practice via classroom curriculum and a competition event. Other JA programs teach kids about buying a car, starting and operating a business, creative problem-solving, selecting a career, and paying for college, among other vital topics.

Finance and business may seem complex and foreign. Parents should work with their kids in early high school to talk with them about the stock market and business. They need to know these things are not rocket science. And parents want them to be confident they can figure it out if they have a passion for it.

Teenagers need to understand how to cope with increasing education costs and complexities, stock market volatility, inflation, and residual pandemic effects. This is not to mention non-fungible tokens, cryptocurrency, and other contemporary technologies and investment opportunities that will affect their futures. 

For most kids — and many adults — investing is more mystery than clarity. You can raise a successful budding entrepreneur … from the piggy bank to the shark tank with some time and effort.

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