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After the Berlin Wall fell, the 1990s were celebrated as a symbol of peace and stability, heralding what many called "the end of history." After a brief period of peace and global cooperation, the present paints a starkly different picture, marked by continual global unrest and economic uncertainty.
The 2020s have been a testament to this, with the global pandemic in 2020, Russia's invasion of Ukraine in 2022, and now, in 2023, a significant conflict in the Middle East. It's almost as if the tensions and uncertainties of the 1980s never truly abated.
Anna Rathbun, Chief Investment Officer at CBIZ Investment Advisory Services, suggests that the post-Cold War era was less an end to history and more a deceptive calm before a storm of ongoing economic unpredictability.
Speaking at a Dec. 5 event titled “Navigating the Economic Landscape: Insights and Projections” at the CBIZ office in Kansas City, Mo, Rathbun explored the complexities of the current economic environment, addressing critical questions about the likelihood of a recession, the reality of a true soft landing and the plausible scenarios that could play out in the year ahead.
The Myth of the Soft Landing
For months, news headlines have been abuzz with discussions of a possible soft landing for the economy. During her presentation, Rathbun noted that although inflation has slowed, it doesn't translate to decreasing prices; instead, they are still rising, albeit at a slower rate. With American consumers increasingly turning to alternative forms of payment, savings and credit card balances hitting record highs, the health of the economy remains in question.
“Americans have been spending resiliently, except it’s coming out of our savings,” Rathbun said. “Credit card balances are over $1 trillion, and that’s a record. So, are we really healthy and thriving when we’re spending that much?”
Rathbun pointed out the similarity to 2007, when soft landing headlines were prevalent before the recession hit. She also reminded attendees that when the very term was coined by Professor Herman I. Liebling in 1973, it was followed by a recession lasting two years.
The Challenge of Predicting Recessions
Rathbun emphasized the inherent difficulty in predicting recessions, even by the most astute economic minds. The American economy, with its size and diversity, complicates this further. She likened it to a massive snowball rolling down the Alps, difficult to halt due to its momentum and diversity.
As the world's largest economy, the United States presents a unique scenario where the weakness in one sector is often offset by strength in another, making a full-scale recession less likely unless triggered by massive external shocks, such as a financial crisis or a global pandemic, she explained. American business is creative in times of need. For example, a few years ago, everyone said shopping malls were dead, and then Amazon needed large commercial spaces for inventory – this offset what could have led to greater plummets in the commercial real estate market.
Further complicating the prediction of a recession is the current economic landscape, which has been altered by the global pandemic. The Federal Reserve's rapid interest rate hikes, intended to stabilize the economy, have not shown a substantial impact on the gross domestic product (GDP) data. This phenomenon can largely be attributed to the cushion provided by savings accumulated during the pandemic and the influx of stimulus payments.
Additionally, the labor market's current state adds another layer of complexity. Rathbun noted that while unemployment typically rises during a recession, current labor market data might not follow historical patterns.
“Some things are secular, not cyclical,” she said. “Think about the labor market. Today, it looks so different from the last 50 years. Baby boomers are retiring, the workforce is shrinking and the labor market looks nothing like it has in past decades. How are we supposed to make projections based on that past data?”
Credit, Cash Flow and Consumer Behavior
The U.S. economy's reliance on credit is a critical factor in understanding its future trajectory. Rathbun pointed out that during recessions, lending standards tighten, making credit more challenging to obtain and potentially stalling cash flow. She also noted the record-high Black Friday sales this year, juxtaposed with the increasing reliance on "buy now, pay later" schemes, raise concerns about the sustainability of current spending patterns.
This credit dependency and its tightening not only impact individual consumers but also small and mid-sized businesses which form the backbone of the U.S. economy. The CBIZ Main Street Index, a survey focusing on business trends and outlooks for small and mid-sized businesses, revealed telling data in this regard.
When these businesses were surveyed in January and again in September about their experiences with borrowing costs, the results were significant. There was a marked increase from 17% to 40.6% in the proportion of businesses reporting that increased borrowing costs were impacting their funding needs.
Economic Projections for 2024
Looking ahead, Rathbun presented three scenarios for 2024:
- Base Case Scenario: An economic slowdown is likely, driven by factors like increased bankruptcies, especially among “zombie companies” that thrived in a zero-rate environment, and the depletion of pandemic-era savings.
- Optimistic Scenario: This envisions a scenario where the economy achieves a soft landing, avoiding a technical recession and possibly rebounding.
- Pessimistic Scenario: This entails a recession, potentially bringing unanticipated economic struggles.
In her conclusion, Rathbun emphasized that while historical data and current statistics offer a guiding framework, they are not foolproof predictors of economic outcomes. The unique context of the post-pandemic era, evolving labor market dynamics and prevailing geopolitical uncertainties further complicate projections for the nation's economic future.
And as 2024 approaches, the only certainty is the continued prevalence of uncertainty.
Investment advisory services provided through CBIZ Investment Advisory Services, LLC, a registered investment adviser and a wholly owned subsidiary of CBIZ, Inc.
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