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 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.
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