Economy

Rates, Inflation, Recession?

Just a quick note to offer some perspective on the (many) headlines floating around. There are almost too many things to be worried about right now, so I’d like to pause for a second to remember the abundance in our lives. Especially when so many folks are suffering. When thinking about the world gets stressful, I remind myself to be grateful for what I have.

Ok, let's dive in. (Not in the mood for economic stuff? Scroll down to the P.S. for a mental snack.)

Are we in a bear market?

In some sectors, yes, stocks have dropped more than 20% from their last peak, which is the technical definition of a bear market.(1)

So, we're in bear territory, at least. But, as of this writing, the broader S&P 500 has not entered a bear market. It might, of course. That’s absolutely possible in this environment.

However, let’s remember that we’re not day traders. We’re long-term investors, and the day-to-day and week-to-week gyrations aren’t as important as what happens over years.

Infrastructure & Inflation

I hope you're warm, well, and looking forward to some time with family and friends. I wanted to drop you a quick note about a couple of things: infrastructure, inflation, and taxes.

President Biden signed his much-debated bipartisan infrastructure deal.

What does that mean for the economy?

In the short term, some of the infrastructure funding will go immediately toward clearing port and transportation bottlenecks, so that might help improve supply chain issues. (1) Fingers crossed.

Though it could be years before you or I drive across a new bridge or highway funded by the bill, some of the maintenance funds could get used in spring construction blitzes. (2)

Since the job market is already tight, the economy isn't likely to see an immediate surge in hiring due to infrastructure spending; however, multiple reports suggest ~800,000 new jobs could be added by 2030, though many of them will be temporary rather than long-term jobs.

Economists don't think inflation is likely to increase due to the slow pace of spending, though the deal is projected to add $256 billion to the federal budget deficit over the next 10 years.

Personally, I take any economic forecasts with a HUGE grain of salt, as there are just too many variables to accurately predict what's going to happen in the next year, much less 10 years out. 

Bottom line, analysts project long-term benefits to the economy in lower business costs, increased labor force participation, and improved competitiveness. (3)

Inflation might not be as temporary as the Federal Reserve would like it to be.

Prices are up all over, and folks are understandably upset at paying more at the grocery store, gas station, and most everywhere else.

Many analysts hoped that data blips, supply chain clogs, and other pandemic-related disruptions were creating a temporary spike in inflation that would resolve soon. (4) However, inflation has remained stubbornly high.

In the U.S., prices have increased 6.2% over the last 12 months — the biggest spike since November 1990. And you can see in the chart that some categories measured by the Consumer Price Index (CPI) have soared by much more. (5)

Since the Fed's goal is to keep long-term inflation around 2% (and that's what we've experienced this century), folks are concerned that "temporary" inflation is lingering longer than we want. So, are prices going to continue to rise in 2022?

That's likely, but how much, how fast, and for how long depend on a lot of global factors, including whether the Fed raises interest rates or takes other actions. I'm keeping an eye on it.

Will your taxes go up in 2022?

That’s the question of the month on Capitol Hill as lawmakers debate the Build Back Better deal that could come with tax law changes. We don’t know when (or if) the bill will be passed, but I'm watching closely and I'll update you when we know what's likely to happen.

Happy Thanksgiving to you and yours!

Labor Market Tumult

How are you feeling about work these days?

Are you taking stock of your life and thinking about moving on? (You're not alone.) Are you a boss struggling to fill roles and retain your people? (You're in good company.)

America is going through a pretty major reconfiguration of the labor market.

Headlines are calling it the "Great Resignation" but I think it's deeper than that. The pandemic threw many assumptions out of the window. It caused us to think long and hard about a lot of things. Where we work. How we work. What work means. What we want out of life.

That existential crisis is visible on the supply side of the labor market:

Folks retiring ahead of schedule (not all by choice). (1) Folks quitting their jobs. (2) Folks (primarily women) caring for kids and family instead of going back to work. (3) Folks striking over pay and working conditions. (4) Folks starting new businesses. (5)

And it's visible on the demand side as well:

Restaurants struggling to staff up. (6) Shipping ports clogging up because there aren't enough truckers to haul goods away. (7) Employers offering higher wages and perks to attract job seekers. (8)

At its most basic level, employment is a transaction: a certain amount of work for a certain amount of pay.

But it's really much more than that. For many of us, who we are as a worker... A business owner... A boss... Is central to our identity. And the ground is shifting under our feet. That makes folks anxious. High-anxiety times like these bring plenty of judgment, blame, and dramatic headlines.

Are workers who don't want to take low-paying, high burnout jobs lazy?

Of course not. Are business owners worried about keeping their doors open evil capitalists? Nope. Are employees organizing strikes or leaving for better opportunities disloyal? Probably not. We're all doing the best we can every day.

When we see talking heads griping about "entitled" workers or "greedy" businesses, let's remember that behind the numbers are real people with real struggles. A parent with a medically fragile kid who is afraid to go back to work. A business owner who worries the staffing shortage will put her out of business. A laid-off worker who doesn't have the skills needed to get a different job. A manager who is doing two jobs because he can't fill a key role. Let's be compassionate toward one another.

What does the labor market upheaval mean for the economy?

That's hard to say. It could cause a slowdown in some sectors if businesses struggle to fulfill demand. It could lead to increased inflation if higher wages get passed on as higher prices. It could be a factor in a market correction. It could also accelerate trends toward automation, remote work, and offshoring.

Bottom line: Like most major events in history, the overall consequences won’t be fully visible for a long time.

Edwin K. Retter, CFP®, CMT
CERTIFIED FINANCIAL PLANNER™
Chartered Market Technician®
Retter Capital Management LLC

Now & Future Costs

What do you think inflation will do over the next year? What about the next 10 years? When you see the word “inflation,” do you fall asleep? Panic? Click to the next thing?

It’s with us all the time, but most of us don’t spend a lot of time thinking about it (beyond noticing higher prices). So here’s a way to put it into context: how much will prices increase over the next decade?

Food, housing, gas, college, and health care — they’re all going to cost you more by 2030 because of inflation. Find out why and why some costs will likely rise much faster than others in this month’s Visual Insights Newsletter.