Willing Us Into Recession

I was driving to the airport at 5:15 a.m. one very recent morning to catch an early flight, and tuned into one of my favorite business radio channels for my usual dose of early news and data, and the outlook for the markets. Some financial pundit was being interviewed, giving all the reasons why the recent spate of good economic news was just wrong, and that we were headed to recession. He cited ever-rising interest rates and diminishing consumer savings that will soon run out, therefore stopping the flow of consumer spending. And he predicted housing prices will start to descend and then plunge, and added all manner of other reasons why the current reporting of strength in our economy will be short-lived.

Good Lord. Talk about Chicken Little. 

As I have written many times, it is this talk by pundits and informed-but-bearish investment professionals that could will us into recession, as these sentiments become self-fulfilling. But the fact is, all the current news, at least for now, is far removed from these negative views. The U.S. economy grew much faster than expected in the third quarter, according to the latest gross domestic product report, which showed GDP rose by an annualized rate of 2.9 percent. That’s an improvement from the initial government reading in October that showed 2.6 percent growth in economic activity, and better than the Refinitiv forecast of 2.7 percent. And it’s a marked turnaround from economic contractions of 1.6 percent in the first quarter of the year and 0.6 percent in the second.

In any other financial environment, like the pre-pandemic economic boom we were enjoying, a GDP growth rate by the amount observed in the third quarter would be considered a blistering pace. In such an environment, the Federal Reserve would be monitoring inflation for fear that growth at that pace would put upward pressure on wages, goods, and services—stoking the flames of inflation. 

Well, we did experience severe inflation, but not for the reasons stated above. The current inflation environment was driven by stimulus-induced liquidity in the hands of consumers and businesses (think PPP), a historic first in American economic history. And now the smart economists who track these metrics report the better-than-expected growth last quarter came as consumer spending increased more than in the government’s previous reading, a sign that consumers remain a strong force in driving the current economic expansion. 

Further, the much better than expected growth shows the resilience of the economy as it deals with the headwinds caused by the Federal Reserve’s aggressive course of large interest rate hikes in an attempt to slow the economy and tame decades-high inflation. And another indicator beyond consumer spending is that business investment in equipment continues to be strong, despite the higher borrowing costs as the Fed ratcheted up interest rates 3.75 percentage points since the beginning of the year.

One economic metric I watch with great interest is the growth in cement consumption, a reliable proxy for the strength of our own concrete industry. In the most recent numbers published in the late summer, cement shipments were up by 7 percent year-over-year, and this is after a 4.1 percent increase in 2021. This just adds yet another positive indicator on the direction of the economy.

But one of the strongest arguments against a recession is the U.S. labor market, which remains strong; employers are still hiring and unemployment is near a half-century low. The economy added 263,000 jobs in November, with the jobless rate remaining at 3.7 percent. And with this employment strength, consumers may be struggling with higher prices, but they continue to spend money. Many economists view the Federal Reserve’s rate hikes to date have mostly just sent the housing sector into a recession, where the rest of the economy continues to run fairly smoothly. 

There is no doubt the crystal ball remains cloudy with regards to a recession, but the outlook today does not support that prediction. Even if housing and the tech sector, the most vulnerable segments of our economy, continue to stumble, the overall construction sector will continue at a steady pace.

Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter – @allenvillere.