Are we headed towards a recession? This is a question everyone keeps asking.
Of course, the fact that it is being asked means that it is on the mind of many. YouTube is filled with videos of people promoting the Doom and Gloom. This is creating an interesting situation.
One thing we have to understand is sentiment plays a large role in all things economic and financial. This is something few ever really discuss but it is a reality.
In fact, this is something that the Fed does all the time. If there is one entity that understands this, it is those people. As I repeatedly stated, the Fed doesn't manage the economy, interest rates, or even money. Instead, it does nothing more than try to affect expectations.
This is why it foreshadows every move it is going to make.
Therefore, following this line of thinking, we can see how the economy works.
How Do You Feel?
It might seem like an odd question to ask but this is what I would open any economic survey with. Finding out the feelings of consumers is the core of what any analysis seeks to ascertain.
When we understand how people feel, we can then, with a greater degree of certainty, predict what they will do. Again, this is something the Fed comprehends.
Have you ever heard the term "wealth effect"? What does this mean?
Basically it is all smoke and mirrors.
The idea behind it is that when people "feel richer", they will be more apt to spend money. In other words, their confidence in things going forward dictates what they will do.
For example, if one feels uncertain about his or her jobs, they are not likely to go out and buy a new car. Instead, they will opt to build up their savings in case something negative happens (such as a job loss).
Of course, by expanding this same concept out to tens of millions of people, we can see how this will impact the overall economy.
Therefore, sentiment is a vital component to how things are going to unfold. This is why surveys that deal in this, historically, have been fairly reliable as a forward looking indicator.
Again, if we find out how people feel, we can predict what they will do.
We Think Our Way Into A Recession
Recessions do not just happen. They are a result. Thus, there has to be something taking place before it will occur.
One of the things that impacts this is sentiment. As mentioned, if major sectors of the economy are pessimistic, they will adjust their behavior. In other words, if people believe a recession is coming, they will start to act like it.
This will help to manifest it.
It is something that happens at all levels. Right now, inflation is the talk of the town. However, for those of us who were looking at the indicators, we foresaw economic headwinds more than a year ago. The signs were there.
Now, they are getting louder. That said, the sentiment surveys were clear in 2021: things are not going so well.
Indeed, once the helicopter money from Congress ended, spending in many areas mysteriously slowed. The extended unemployment benefits fully ended in September of 2021. In the 4th quarter, there was a record jump in inventories, twice in the three months.
Coincidence? Not likely.
The reality is the economy was struggling before the lockdowns from COVID. We know the situation was blown up during that time. This kicked off the stimulus boom that sent economies raging. It was not, however, real.
Double dip recession is on tap simply because this is how recessions work. Anyone who follows economic history knows it is always the same story:
- recession hits
- stimulus like there is no tomorrow
- economy takes off
- stimulus dries up
- economy tanks since it can't stand on its own
- double dip recession occurs
Nothing new here.
Of course, people will say it is due to inflation. The reality is this goes back many decades, through all kinds of environments. Therefore, inflation is just an excuse. The reality is that it could be anything. Ultimately, a unsustainable economy leads to contraction regardless of what sets it off.
We see those in power trying to talk things up, or at least they were. Over the past year and a half, we were told how wonderful the economy was doing. Now, nobody is believing that garbage.
And for this reason, we are going to see a recession. Since people are believing it, they are adjusting their spending patterns. Once this happens, economic headwinds are a certainty.
The only question is when it hits and how bad will it be. Personally, I think the proverbial soft landing is off the table.
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