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F E A T U R E D A R T I C L E
How will we know if the U.S. Economy
is in a Recession?
The government’s report Thursday, April 27th that the economy grew at a 1.1% annual rate last quarter signaled that one of the most-anticipated recessions in recent U.S. history has yet to arrive. Many economists, though, still expect a recession to hit as soon as the current April-June quarter — or soon thereafter.
The economy's expansion in the first three months of the year was driven mostly by healthy consumer spending, yet shoppers turned more cautious toward the end of the quarter. Businesses also cut their spending on equipment, a trend that has continued.
The list of obstacles the economy faces keeps growing. The Federal Reserve has raised its benchmark interest rate nine times in the past year to the highest level in 17 years, thereby elevating the cost of borrowing for consumers and businesses. Inflation has eased slowly but steadily in response. Yet price increases are still persistently high.
And last month the collapse of two large banks resulted in a whole new threat: A pullback in lending by the financial system that could weaken growth even further. A report on business conditions by the Fed this month found that banks were tightening credit to preserve capital, which makes it harder for companies to borrow and expand. Fed economists are forecasting a “mild recession” for later this year. Still, there are reasons to expect that a recession, if it does come, will prove to be a comparatively mild one. Many employers, having struggled to hire after huge layoffs during the pandemic, may decide to retain most of their workforces even in a shrinking economy.
Six months of economic decline are a long-held informal definition of a recession. Yet nothing is simple in a post-pandemic economy in which growth was negative in the first half of last year but the job market remained robust, with ultra-low unemployment and healthy levels of hiring.
The economy's direction has confounded the Fed's policymakers and many private economists ever since growth screeched to a halt in March 2020, when COVID-19 struck and 22 million Americans were suddenly thrown out of work.
Fed officials have made clear they're willing to tip the economy into a recession if necessary to defeat high inflation, and most economists believe them.
So what is the likelihood of a recession? Here are some questions and answers:
Why do many economists foresee a recession?
They expect the Fed's aggressive rate hikes and high inflation to overwhelm consumers and businesses, forcing them to significantly slow their spending and investment. Businesses will likely also have to cut jobs, causing spending to fall further.
Consumers have so far proved resilient in the face of higher rates and rising prices. Still, there are signs that their sturdiness is starting to crack.
Retail sales have dropped for two straight months. The Fed's so-called beige book, a collection of anecdotal reports from businesses around the country, shows that retailers are increasingly seeing consumers resist higher prices.
Credit card debt is also rising, evidence that Americans are having to borrow more to maintain their spending levels, a trend that probably isn't sustainable.
What would be some signs that a recession might have begun?
The clearest signal would be a steady rise in job losses and a surge in unemployment. Claudia Sahm, an economist and former Fed staff member, has noted that since World War II, an increase in the unemployment rate of a half-percentage point over several months has always signaled the start of a recession.
Many economists monitor the number of people who seek unemployment benefits each week, a gauge that indicates whether layoffs are worsening. Weekly applications for jobless aid have been creeping higher as a range of companies, from Facebook's parent company Meta to the industrial conglomerate 3M to the ride-hailing company Lyft, have announced layoffs.
Still, employers added a solid 236,000 jobs in March, and the unemployment rate slipped to 3.5 percent, near a half-century low, from 3.6 percent.
Any other signals to watch out for?
Economists monitor changes in the interest payments, or yields, on different bonds for a recession signal known as an “inverted yield curve.” This occurs when the yield on the 10-year Treasury falls below the yield on a short-term Treasury, like the three-month T-bill. That is unusual. Normally, longer-term bonds pay investors a richer yield in exchange for tying up their money for a longer period.
Inverted yield curves generally mean that investors foresee a recession that will compel the Fed to slash rates. Inverted curves often predate recessions. Still, it can take 18 to 24 months for a downturn to arrive after the yield curve inverts.
Ever since last July, the yield on the two-year Treasury note has exceeded the 10-year yield, suggesting that markets expect a recession soon. And the three-month yield has also risen far above the 10-year, an inversion that has an even better track record at predicting recessions.
Who decides when a recession has started?
Recessions are officially declared by the obscure-sounding National Bureau of Economic Research, a group of economists whose Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
The committee considers trends in hiring. It also assesses many other data points, including gauges of income, employment, inflation-adjusted spending, retail sales and factory output. It assigns heavy weight to a measure of inflation-adjusted income that excludes government support payments like Social Security.
Yet the NBER typically doesn’t declare a recession until well after one has begun, sometimes for up to a year.
Does high inflation typically lead to a recession?
Not always. Inflation reached 4.7 percent in 2006 — at that point the highest level in 15 years — without causing a downturn. (The 2008-2009 recession that followed was caused by the bursting of the housing bubble).
But when inflation gets as high as it did last year — it reached a 40-year peak of 9.1% in June — a recession becomes increasingly likely.
That's for two reasons: First, the Fed will sharply raise borrowing costs when inflation gets that high. Higher rates then drag down the economy as consumers become less able to afford homes, cars and other major purchases.
High inflation also distorts the economy on its own. Consumer spending, adjusted for inflation, weakens. And businesses grow uncertain about the economic outlook. Many of them pull back on their expansion plans and stop hiring. This can lead to higher unemployment as some people choose to leave jobs and aren't replaced.
Title: How will we know if the U.S. economy is in a recession?
Author: The Associated Press
Source: https://www.mprnews.org/story/2023/05/01/how-will-we-know-if-the-us-economy-is-in-a-recession
Copyright © 2023 Minnesota Public Radio. All rights reserved.
Demise of the US Dollar: Greatly Exaggerated
or Destiny?
Key Points
US dollar has gotten a lot of press recently.
Some “de-dollarization” is likely to occur over time.
The long-term impact is both positive and negative.
Dollar fears
After a decade of relative strength, the US dollar has declined sharply over the last six months. This has coincided with media reports that the world may reduce dollar usage. We examine the US dollar from two perspectives – as a medium of global trade and as a reserve currency. Short-term, we see a mixed
environment for the greenback; longer-term, the effects of de-dollarization are likely to be both positive and negative.
What is the Petrodollar system?
The Petrodollar system was created in the 1970s by the United States and Saudi Arabia. The system is an agreement between the US and OPEC¹, which among
other things2, requires OPEC member countries to use the US dollar when they sell oil. The Petrodollar has been dented over the last several years, as some non-OPEC oil producing countries have been transacting in currencies other than the US dollar3.
Earlier this year, Saudi Arabia made headlines when it announced it was open to selling oil in non-US dollar currencies. More recently, several non-OPEC countries4 announced they have been discussing an alternative currency to the Petrodollar. Clearly, if the Petrodollar falls, that would mean a sea change in global politics and economics. However, settling on an alternative currency for oil transactions would be very challenging.
Any alternative currency would need to be relatively stable and easily exchangeable for other currencies or assets. Surprisingly, the number of currencies that meet these criteria is relatively small. Not coincidentally, these are some of the same characteristics of reserve currencies.
What is a reserve currency?
A reserve currency is a currency that is widely held by central banks and other institutions. These entities hold reserves to help manage exchange rates and facilitate global trade. The four largest reserve currencies are the US dollar (58% of global reserves), the euro (20%), the Japanese yen (6%), and the British pound (5%)5.
While there are no official criteria for reserve currency status, reserve currencies tend to have the following:
Stable economies and political systems: reserve currencies should be effective stores of value (i.e., have relatively stable exchange rates).
Free capital flows: reserve currencies should be easily exchanged for another currency or asset and easily moved from one country to another.
Robust financial system: reserve currencies should have liquid, transparent, and well-governed capital markets in which to invest, including a deep sovereign bond market.
While the Petrodollar system creates a natural demand for US dollars, the US also scores highly on the three criteria above. In our view, the most significant risks to the US dollar’s reserve status are not external factors but internal factors relating to reserve currency criteria. Specifically, the stability of our political system has been called into question with issues around the peaceful transfer of power and the ability of our government to effectively legislate.
Similarly, concerns about high government debt levels (and a potential government shutdown this year) have raised concerns about the stability of our economy.
De-dollarization?
Given the developments with the Petrodollar and the concerns mentioned above, the world is likely to diversify some of its exposure away from the US dollar. However, we believe the move is likely to be slow for three reasons.
First, the dollar remains the dominant currency for international trade. Outside of Europe, over 70% of exports are conducted in dollars. This “network effect” is very slow to change. Secondly, the dollar is also the dominant currency in global banking, with about 60% of foreign bank deposits and loans denominated in US dollars6.
Lastly, countries’ supply and demand change slowly.
Developed nations like the US tend to have higher domestic demand than developing countries, meaning we import more goods than we export⁷. The US, for example, imports about $1.2 trillion more than we export. This $1.2 trillion gap needs to be invested in US dollar-denominated assets. Currently, no other sovereign bond market is deep enough to handle this level of investment8.
Outlook for the US dollar?
Near term, the US dollar may weaken for the normal reasons currencies fluctuate in value (differences in interest rates, economic growth, and inflation rates across countries)⁹, but we don’t see a clear-cut bear case. Further, the US dollar remains one of the most reliable safe-haven currencies in the world. Longer term, it seems likely that global diversification away from the greenback will reduce demand for US dollars.
It is not clear to us if the US economy benefits from a consistently strong dollar. Too much demand for dollars results in lower US interest rates. Persistently low-interest rates tend to facilitate debt accumulation and asset bubbles, while also punishing US savers. A structurally lower dollar might require a painful adjustment, but several issues impacting the US economy (e.g., the income gap, position of US manufacturers) would likely improve.
Key takeaway
Global diversification away from the US dollar seems likely over time. Shorter-term, we see a mixed environment for the dollar. Longer-term, de-dollarization is likely to be a negative for the dollar; the impact on the US economy, however, will likely be both positive and negative.
1 Organization of Petroleum Exporting Countries
2 Saudi Arabia agreed to sell its oil in US dollars and invest those dollars in US Treasuries, in exchange for US military support and weapons.
3 Venezuela for example, began accepting euros, Chinese yuan, and other convertible currencies for its oil exports in 2018, before entering OPEC.
4 Brazil, Russia, India, China, and South Africa
5 While the US dollar share of foreign exchange reserves has declined, the decline has not been dramatic. 10 years ago, the USD share was 61%. Source: Bank of International Settlements.
6 Source: US Federal Reserve.
7 Conversely, developing economies like China and India tend to produce more than they can consume, so they export those goods to developed with higher domestic demand, like the US.
8 US Treasury market is about $10 trillion. The Japanese Government Bond market is about $7 trillion (but they own most of it). All other countries have sovereign bond markets of less than $2 trillion. Source: Bloomberg.
9 Among G-10 currencies, the US dollar ranks 2nd best, 5th best, and 6th best, on relative interest rate, growth, and inflation rates, but it ranks very low on trade and budget balances.
Important Information
This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information in this report has been drawn from sources believed to be reliable, but its accuracy is not guaranteed, and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting AssetMark at 800-664-5345. Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss. Actual client results will vary based on investment selection, timing, market conditions, and tax situation. It is not possible to invest directly in an index. Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. Index performance assumes the reinvestment of dividends. Investments in equities, bonds, options, and other securities, whether held individually or through mutual funds and exchange traded funds, can decline significantly in response to adverse market conditions, company-specific events, changes in exchange rates, and domestic, international, economic, and political developments. Bloomberg® and the referenced Bloomberg Index are service marks of Bloomberg Finance L.P. and its affiliates (collectively, “Bloomberg”), and are used under license. Bloomberg does not approve or endorse this material, nor guarantees the accuracy or completeness of any information herein. Bloomberg and AssetMark, Inc. are separate and unaffiliated companies.
AssetMark, Inc. 1655 Grant Street 10th Floor Concord, CA 94520-2445, 800-664-5345 AssetMark, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission.
©2023 AssetMark, Inc. All rights reserved.
105670 | C23-19863 | 04/2023 | EXP 04/30/2025
Managing your Retirement Plan when Switching Jobs
To maximize your savings, understand your options – if any – for your retirement plan when you switch jobs.
Changing jobs can impact your retirement plan. To minimize disruptions to your contributions and the vested portion of your previous employer’s contributions, it’s important to understand the choices you may have when you make a career transition. We offer the following key considerations:
Option 1: Stay
Your previous employer may allow you to keep the money in your plan, an attractive option that keeps things undisturbed while allowing you to accumulate tax-deferred earnings potential. While you cannot make further contributions, you still maintain control of how the money is invested. Typically, annual distributions must begin after you reach age 73.
Option 2: Let ‘Er Roll
You can transfer the money into your new employer’s plan, which continues your tax-deferred growth potential. However, there may be rules associated with rolling over your money. Review your new plan and restrictions carefully before selecting this option. If you take money out, withdrawals will be taxed at current rates, with those made before you reach age 59 1/2 subject to a 10% additional federal tax.
Option 3: Cash Out
You may elect to withdraw your money in cash either in a lump sum or in installments, though you’ll face tax consequences: Distributions incur a 20% federal withholding as well as standard income tax. And if you’re under age 59 1/2, you’ll pay an additional 10% federal tax. State and local taxes may also apply, which collectively could sharply reduce the amount you retain.
Option 4: Transfer into an IRA
You can also roll all or part of your money into an Individual Retirement Account (IRA). If you do so within 60 days, you’ll avoid both penalties and withholding taxes. An IRA offers continued tax deferral for retirement, though you should check to see whether fees or commissions will be assessed.
Depending on your circumstances, the money that you accumulate in an employer’s plan may be a major source of retirement income. How you choose to manage it can have a profound impact on your retirement savings. Discussing the options with a financial professional can help maximize your savings.
Chairman Powell opened his statement by pointing out that growth has been “modest” and that job gains had picked up. He then highlighted that the “US banking system is sound and resilient” but stated that recent developments in the banking system would likely result in “tighter credit conditions,” which will weigh on economic activity, hiring, and inflation. In describing future rate hikes, they replaced the term “ongoing” rate hikes with “some additional policy firming may be appropriate.”
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. This material was prepared by LPL Financial, LLC. Member FINRA/SIPC MC-1365950ART3-1222
Strawberry Burrata Salad
INGREDIENTS:
1/3 cup extra-virgin olive oil
1/3 cup balsamic vinegar
1 tablespoon honey
1 pound strawberries, trimmed & halved
1/4 cup pine nuts
5 ounces baby arugula
1/4 cup small basil leaves
1 8-ounce ball burrata, room temperature
Kosher salt and cracked black pepper
Crostini for serving
INSTRUCTIONS:
Preheat oven to 300°F. Whisk together olive oil, balsamic vinegar, and honey in a medium bowl until emulsified. Add strawberries to bowl, toss to coat with dressing, and let marinate 15 minutes.
Meanwhile, spread pine nuts on a rimmed baking sheet and toast in oven until lightly browned, about 15 minutes, shaking pan occasionally so nuts toast evenly. Let nuts cool before using.
Toss arugula and basil together and strew across a platter. Place burrata in center, and gently break open at top, to expose cream and mozzarella inside. Spoon macerated strawberries and dressing over arugula. Scatter pine nuts on top, season with salt and pepper, and serve with crostini.
Sources: https://www.foodandwine.com/strawberry-burrata-salad-7486196; Produceforkids.com