Arthur G. Swalley, CIMA®- Partner, Director of Investments

Let’s dive right in to where our economy stands today. GDP growth for the fourth quarter 2022 was 2.9%. The January labor market report showed nonfarm payrolls rising significantly, adding 517,000 jobs (vs. expectations of 189,000). The unemployment rate fell to a 50-year low of 3.4% in January despite an increase in the labor market participation rate.
However, average hourly earnings in January show that wage growth is slowing. Average hourly earnings rose by less than the prior month in January, increasing by only 0.3% month over month and 4.4% year over year, a 17-month low. Wage growth slowed due to the slower rise in unit labor costs and the increase in productivity in January. The decline in wage growth shows that price inflation is slowing.
Consumer prices rose 6.5% in the 12 months through December, marking the slowest inflation rate in more than a year. So-called core inflation, which excludes food and energy, was up 5.7% over the same period, the smallest advance in a year. The S&P 500 is up 15.6% from its October 12 low.
None of this data is recessionary. In fact, our healthy economy is quite the opposite – with the kicker that inflation is on its way down! Yet for the past 9 months the jungle drums calling for an imminent recession have been booming across the markets, the media, and the national psyche. Is this rational, or have we become so used to (and possibly addicted to) the possibility of bad news that good news just doesn’t have a chance?
The Federal Reserve is the key driver in the analysis of this question. On February 1, the Fed raised interest rates by 0.25%, marking a 10 month rise from 0% to 4.5%. During his press conference, Fed Chairman Powell stated firmly and plainly several times that the Fed’s job isn’t done, and that the Fed has a while to go in order to bring inflation back down to its 2% target. Powell’s comment about disinflation having begun in goods inflation sparked the fixed income and equities markets to significant rallies. Despite this comment, Powell was firm in his statements that “continued rate hikes” are appropriate moving forward.
Combining the prospect of even higher interest rates with an inverted yield curve lends credence to calls for an inevitable recession. The inverted yield curve, currently sitting at 4.5% for the 3-month Treasury bill over 3.5% for the 10-year Treasury bond, has a 100% historical accuracy for predicting an upcoming recession. Could this time be different? A recent Ernst and Young survey found that 99% of CEO’s anticipate a moderate to severe recession, along with most economists and dominant media narratives.
At Arlington Financial Advisors, our question is: What is the actual value of these predictions? There is certainly value for media companies and asset trading firms, which benefit substantially by whipsaws of data and speculation. There is also value for legions of analysts, consultants, and politicians who benefit by manipulating the emotions and short-term biases of their constituents.
Clearly, these “values” are transitory and not at all helpful to entrepreneurs and investors who are focused on the long-term growth of consumer markets and their corresponding wealth creation. We see a vibrant, resilient country and economy that has a proven track record of overcoming far more difficult challenges than higher short-term interest rates. We acknowledge that there are short term risks on the horizon, like the debt ceiling debate and the aggressive Russian war in the Ukraine, but history has proven that these risks are temporary. We are more concerned with the long-term risks of carbon-based fuels and US relations with China, but we maintain confidence that our entrepreneurial system and mutual shared interests will win out over the long run.
The main motivation of corporate media is to get the public to watch/read the advertising that supports their operations by whatever means necessary. All too often, those means