There's still a risk of recession even though the economy is much better than it was a year ago, according to the chief investment officer for central Illinois-based Busey Bank.
"Not out of the woods yet" is how Busey executive vice president Zach Hillard put it at the 23rd annual community economic briefing at Illinois Wesleyan University. He said inflation is coming down with the Federal Reserve raising interest rates 10 straight times before taking a pause on Wednesday. It's the most aggressive pattern of tightening monetary policy since the 1980s, said Hillard.
But since 1948, Hillard said the Federal Reserve has not precisely gauged the moment to end interest rate increases.
"They really haven't been able to thread that needle of slowing the economy without throwing it into recession," he said.
Hillard said the index of leading economic indicators is now negative. That index has successfully predicted recessions for a quarter century. Short-term bonds are getting higher interest rates than longer term ones — also a warning sign.
Most economic activity, 70% or so in the U.S., comes from consumer spending. And people are still spending. But even that has mixed implications. Yes, the economic engine is running. And wages have been rising — about 4% this year and 6% last year. In Bloomington-Normal, average hourly earnings have gone from $25 an hour at the start of the pandemic to more than $31 an hour now.
That growth is not enough to offset inflation. Hillard said savings rates are going down because people have to dip into their savings to pay for things. They're even taking on more debt. Hillard said credit card debt and revolving credit is at an all-time high though still a fairly low 6.3% of disposable income.
"It's not anything we're overly concerned about at this time, but something to definitely watch," he said. "If savings continue to be depleted and there's more emphasis on credit and the use of credit especially in this high interest rate environment, that can just deteriorate the consumer's position even more quickly."
Another factor that could contribute to a potential recession is if businesses lay off people as they experience lower profits and less activity. Hillard said there may be a countering force that wasn't present in previous downturns: a worker shortage.
The economy lost 23 million jobs in the pandemic, but got them all back. Ten million people dropped out of the labor force during the pandemic and only 7 to 8 million have come back. The current low national unemployment rate is 3.7%. It's even lower in the McLean and Dewitt County labor market, at 3.4%.
"Businesses are going to be a little more reluctant even if business slows down and profitability is not what it used to be. They will be more reluctant to lay off some of their employees just because they know how hard it may be to get them back," said Hillard.
The stock market has gained back most of the drop since its low point last October. That sounds good, but Hillard said history shows any conclusion could be premature.
"Recessions really didn't set in until the unemployment rate moves meaningfully higher. And the stock market historically hasn't bottomed out until we are in the midst of a recession," said Hillard.
The S&P index is up nearly 15% from its low point on Oct. 12, 2022, recouping much of the 20% slide last year.
But Hillard said the risk to equity markets is substantial. Inflation will remain elevated, but will continue to moderate as rising consumer prices and higher interest rates slow demand for goods and services.
In the last 12 recessions, he said the average stock market downturn is 29%. The median drop is 24%. The good news, said Hillard, is recovery typically doesn't take too long. The average market uptick a year after emerging from recession is 40% and after two years it's 50%.
He urged investors to stay cautious and focus on quality, take advantage of higher interest rates by locking in short- to intermediate-term investments. And he said there's more upside right now for international equities than domestic ones. They're a better value at the moment.
Above all, Hillard said, people should focus on the long term.
