Client Portals

More Spending, No Recession4 min read

Consumers Rule the Economy

Jan 22, 2020 - John Osbon ( 5 mins to read)

John Osbon

Investors are always on the lookout for the next recession, because a recession can slow down or reverse portfolio appreciation for a year or two. Moreover, a recession reveals a lot of investment mistakes which no one likes to be reminded of. Here are three measures to look at when trying to determine if a recession is coming and if any portfolio adjustments may be needed.

More money in consumer hands – three sources

The consumer has been propelling economic growth for decades. Consumer spending requires steady incomes that increase over time. With high employment, consumer spending has been strong and strengthening for years. In fact, economists say that manufacturing – a small part of the economy for at least thirty years – is still small and having NO impact on overall economic growth. Consumer spending is overwhelming manufacturing to the point of oblivion. If we take a big picture view of what consumers have available to spend, we find three areas that deserve more attention than they typically get.

Social Security

Social Security is a well-documented source of income. What is less appreciated is that it rises every year and that is not subject to the fluctuations of the economy. Congress may worry about funding Social Security in years of slow or negative growth, but the increase in benefit payments will continue regardless. Since there are a growing number of people on Social Security and a large percentage don’t need the money to survive, it makes sense that Social Security checks get spent for discretionary items, a big plus for economic growth. Social Security is a certainty in good times and bad.

The gig economy

Compared to ten years ago, many more people can make money from the things they own. Specifically, many people own houses and cars. Thanks to Airbnb, Uber and others, these previously single use assets can generate income. Many participants find they can make significant income and make driving or hosting a priority in their financial plan. This is a strong stimulus to the economy.

We used to have a rule in the old days that a 10% increase in home prices would lead to a .5% growth in GDP. Now the calculation is much more complex and nuanced but we do know that rising home prices are not necessary for a housing-led increase in GDP. The same is true with cars. I have talked to many Uber drivers who rent their cars from investors. Spending begets spending. Gig economy effects are certain. Who knows, a recession may actually increase cash flow from the housing and car sectors.

Payroll tax cuts

When payroll taxes are cut, workers are left with more money. Most of it gets spent rather than saved. This kind of tax cut immediately stimulates the economy. There is a good chance that President Trump will cut payroll taxes before the election. President Obama did it in 2012. It is the right of presidents. Incidentally, the payroll tax cut is number one on the octogenarian Bryron Wien’s Ten Surprises list. Let’s assume we do get the cut. That’s more fuel for the GDP engine.

It all adds up

Social Security, the gig economy and payroll tax cuts each boost the economy. More importantly, their effects are cumulative and mutually beneficial. A tax cut leaves a worker with more to spend on a vacation, leading to an Airbnb rental that puts more money in the hands of a homeowner. And so on. Suddenly, or so it seems, our economy is ratcheted up a notch or two and the rest of the world gets a push, too.

Signs of a looming recession are few and far between right now. Forecasts of growth are easier to find. For instance, the World Bank global growth forecast has been positive for as long as I can remember. It goes as low at 2% and as high as 5% but it is never negative. Interesting. If recessions and negative growth are largely a thing of the past, then we perhaps should spend more time looking at things that can boost the economy bit by bit.

If you are interested, we can test your portfolio against these three spending increases for upside and downside. Knowing your exposures helps to manage risk over time.

WEEKLY INSIGHTS
delivered to your inbox

DISCLAIMER

This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”

“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.

Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.

Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.

This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.

While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.

Adviser does not endorse the statements, services or performance of any third-party vendor.

Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.

Any IPO alerts are purely informational and should not be construed as recommendations to invest.

Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.

Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.