There has been surprisingly little worry reported by advisors and readers in the past couple of weeks. With the headlines in play—bank failures, a recession coming, commercial real estate starting to crash, and so forth—I would have expected more concerns. But people seem to realize that, despite all the headlines, things are not that bad.
What’s Going On?
For example, consumer confidence ticked up the other day, driven by better expectations for the future. Not only do people feel pretty good today, but they’re also starting to feel better about what’s ahead. There are now stories about how, in the Midwest, in particular, for some reason, people simply don’t care about the negative headlines and are out there working, spending, and having fun. According to the headlines, people are getting on with their lives as long as the jobs are there.
This leaves our community here with a bit of a split. I had been in the “no recession” camp for a while, driven by the strong labor market (just as those Midwest headlines are calling out). With the banking situation (I won’t call it a crisis), however, I have moved to the recession camp, as banks will cut back on lending and make it harder to borrow.
So, in that sense, I am more concerned. At the same time, many folks seem to be less concerned overall. I am getting fewer calls for collapse, although I am still worried about a pending recession. What’s going on?
Soft Landing Ahead?
The correct answer, as usual, is somewhere in the middle. We will see slower growth as banks pull back to rebuild their capital base. On balance, this is a good thing. Tighter financial conditions from the banks make it less necessary for the Fed to keep raising rates. The strong labor market will also offset the economic effect of those tighter conditions, although not completely. In other words, while we likely will get a recession, it will be a mild one—and one that doesn’t hit the average person.
This result is, in many respects, the soft landing we have all been hoping for. Slower growth, driven by tighter financial conditions: check, as this is what the Fed has been aiming for. Continued strength in the job market, with everyone working and able to pay their bills: check. Lower inflation, driven by that slower growth: check. It’s not bad when looked at that way.
This scenario is consistent with the less apocalyptic headlines and the data. When headlines express worry about the banking system, they say banks are weak and will pull back: check. Weak banks mean slower growth: check. But with job growth still strong and consumer confidence up, the average person is still doing well.
Job Growth Dog Is Sound Asleep
You will notice that the piece that makes all this work is job growth, and that is what I will continue to watch. We can have a financial recession, driven by the banking system, that the average person will ride out comfortably if job growth holds. Right now, that is the case. When the job growth dog barks? Then we will need to pay attention. But that dog is still sound asleep.
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