By Aditya Sesh
You will be surprised to learn that since 1745 there have been 48-50 recessions in the US that spanned from a few quarters to 11 years of the Great Depression from 1929. Within the great depression itself was an expansion.
Since 1990 US has had many periods of economic expansion and contraction, so logically speaking a recession should not come as a surprise.
There have been World Wars, Banking collapses, Trade Wars between the US the UK and France in the 18th & 19th Century etc. Again the 2019/20 period was catastrophic due to the Coronavirus. Between 2010 to 2022, there have been 7 years of expansion and 5 years of contraction, while between 1990 and 2000, there was an equal period of expansion and contraction. The same trend can be seen in the latter part of the 20th Century.
Data trends also tell us that each expansion or contraction is now of a shorter duration. Thus, it begs a question as to why it is worrisome?
The median household family income currently is about $64,000.The median annual wage growth was 5.5% as of July 2022. In the last 5 years, the NASDAQ Composite Index clocked about 12% Dollar return. The average inflation from 1960 to 2021 was 3.81% going up sharply to about 8.20% in July 2022. The years 1974,1979,1980 and 1981 in the US saw inflation in double digits.
These have also accumulated into a situation where the inflation rate is now relatively high though not the highest. The annual inflation rate has certainly increased close to 8.20% p.a.
At a retail level home heating and electricity bills have shot up, as have food prices. Between 2000 to 2021, the net household savings in the US according to OECD data has increased from 4.9% to 17.00% but is projected to decline to around 7% in 2023. All this was also aided by the Food Stamp program for 43 million Americans which cost the government $113 bn.
The average American individual has about $96,000 as personal credit excluding mortgages as reported by Experian, which is an individual credit scoring agency. The home mortgage rates for a 30-year fixed interest loan, increased from 2.9 % in 2021 to 6% today.
Based on this above statistic, it is clear both the income and expenses kept in tandem with each other. This is also reflected in the increase in inflation, growth of the economy and therefore the stock market.
2022 and ahead
The annual inflation is expected to fall to 2% in 2027 according to Satista data. Until inflation cools down interest rates will continue to stay at current levels declining down a few years later.
Increase in interest is also causing the flow of dollars into the economy, which will further increase money circulation. The Federal Reserve in all probability issues treasury notes to suck out the excess liquidity. This will however increase Public Debt.
The appreciating dollar is further causing imports to be cheaper. The confidence index of businesses seems to have also dipped and to some, it appears that the US is on the threshold of a business cutback and may look like an employment freeze.
It seems that once inflation starts to cool down to around 3% or 4%, the Federal Reserve may cut interest rates, which will spur business confidence in 2024 or 2025.
Thus, based on past trends, the next two years are likely to be mild recessions or flat growth assuming the interest hike has its effect on inflation. The stock markets will also reflect this trend and thus fixed income instruments may afford a better bet for capital preservation.
However, for value and long-term investors with a risk appetite, it could be the best time to pick up stocks on declines.
Certainly, for many Indians, the American Dream of going on a Visa to the US for work may have just become harder. From an Indian perspective, we are likely to see trade exports to the US grow, existing IT contracts get deeper but also margins get squeezed.
(Author is Founder and Managing Director of Basiz Fund Service Private Limited)