After December, when we look at various statistics of the economy, it does not look like we are heading toward recession. One reason for our general concern is that even though the economy is doing well, the stock market is not doing so well. Plus, the big companies are making big headlines about experiencing layoffs, while their employees only make up 2 percent of the US workforce.
Another concern is that raising rates to reduce inflation increases the risk of a recession. Talking in a different context, unemployment numbers were down to pre-pandemic levels. But, in December 2022, they fell to just 3.5 percent. So, there are 1.7 job openings for every unemployed American. At present, the hourly wage growth has slowed already in December 2022. It fell from a 5 percent increase in September 2022 to 4.6 percent. So, inflation is starting to slow down.
Prices and rate hikes
Chair of the Federal Reserve of the USA, Jerome Powell, has acknowledged that there is no proof or evidence that wage increases have increased inflation. And he often cited it as the reason the Fed has kept rates low. However, the reduction in wage growth can encourage the Fed to slow the rate hikes.
Recession and speculations
Annual inflation in June 2022 was at 9.1 percent. However, November 2022 shows a decline of 7.1 percent. It is still far from ideal. And the Fed aims to get it back to 2 percent or less. The National Bureau of Economic Research or NBER considers that things shall still look good when officially declaring a recession. Not many worrying factors indicate that a recession is ahead, except inflation.
How inflation affects the stock market
In the stock market, this past year was financially hard. The economy is recovering, but the stock market has faltered. Many people think that a downturn in the stock market indicates a recession. But, in reality, these two are infinitesimal and overlap from time to time.
Since the last year, the same factors pushing down inflation negatively affected investor sentiments. Higher interest rates mean that future investment returns will decrease as bond rates rise. Conservative options shall look better than volatile stocks. As a result, the stock market suffers.
Here, the technology sector is especially sensitive to stock market volatility. And their products are seen as high-risk. Also, it shall be difficult for them to attract investor dollars. With thousands of layoffs, the tech sector only represents 2 percent of the US job market. The job market in the USA is strong, though the tech sector is suffering. However, one result of the Fed raising rates is low inflation. But, low inflation is achieved by the general market contraction. Recently, more economists have been optimistic that the USA can avoid a recession even in a high-interest environment. Here, the saving grace is the job market.
Other Employment Problems
So, many believe that unemployment will not be a problem in the near future. But it will be interesting to see if wage growth is still slow. When inflation is 7.1 percent, even a 4.5 percent pay hike is not enough to keep pace with the cost of living. If this difference becomes even larger, it can become a problem for the average US consumer.
Over the past year, bereavement policies and sick leave have taken center stage. Many Americans fell sick, and there was less support for workers. The prolonged covid pandemic caused disabilities and death, which are problems when they affect the workforce.
However, we can still avoid a recession in 2023. However, despite all the good news in the market, the economic climate is volatile. Now, if you are a long-term investor with the outlook that this will pass, you are in a good place. This is because, with longer time horizons, the stock market has historically mostly gone up. However, if you like to invest even when the market is slow, add portfolio protection to your investment.