QUOTE OF THE WEEK
“I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear.” – Nelson Mandela
TECH CORNER
I know, I have been predicting a recession for over a year. Unfortunately, or fortunately, the recession has been delayed due to the massive infusion of direct payments to consumers and businesses due to the flood of money instituted by the Biden administration. However, all that money has now been spent leaving very low liquidity with the consumer and many businesses. The other factor in the delay of the recession was a huge amount of stimulus via the CHIP’s act and Inflation Reduction Act. I am not criticizing these acts, to the contrary we needed to spend the money to promote business investment.
The new administration has stated very plainly that there will be no stimulus going forward. In fact, they are already pulling back on any government spending.
But, is there ever going to be a recession? Just imagine a freight train coming down the hill and the brakes do not function. I don’t see any possibility of avoiding it.
There are two factors that cause a recession. High unemployment and increasing credit spreads. Credit spreads are widening but not to a great degree so far. When credit spreads widen, businesses have to pay more in interest to borrow money, thus, putting pressure on profits. Lower profits cause stock values to decline.
The factor of unemployment rising is now accelerating. The factors have been in place for a while, however, the tariffs are putting a sledge hammer to the economy. Remember, it is not the exporting country that pays the tariffs, it is the importing country that pays the tariffs. Because of this fact, tariffs always slow the economy of the importing country. If people and businesses are paying the cost of the tariffs, that leaves less money to spend, so consumption goes down. And when consumption goes down so does production which causes layoffs to climb thereby causing incomes to go down. This creates a vicious cycle that accelerates and is hard to stop.
So, let’s take a look at what’s going on in the labor market.
– Currently the unemployment rate is at 4.2% which historically is good. However, the statistic to watch is the rate of the increase. Last year the unemployment rate was at 3.4% It is not the level of unemployment but the rate of the change that is alarming.
– The hiring rate is lower than before COVID. The layoff cycle always follows the decline in the hiring rate.
– The job opening rate is way down.
– The voluntary quit rate is down because the job openings are down. A few years ago, employers were desperate to hire people.
– The new administration via Elon Musk has already eliminated over 200,000 government employees and has greatly reduced spending on many projects that currently employ thousands of people.
This hollowing out the labor force will have downstream negative effects on the economy. Remember, laid off people spend less. The tariffs and the decline in the labor market makes the possibility of a recession much higher.
