Wednesday, May 8, 2024
Although an economic recession is likely on the horizon for 2023, these blips are something that the country has endured before and can be weathered again. That was the message that Gatesville financial adviser Scott Johnson recently shared with the Gatesville Lions Club.
Johnson said there is already plenty of talk about an economic recession, adding "some people think we're already in a recession, and some think we're not. He said the National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
Different variables are considered to determine the state of the economy.
Johnson noted the recent economic cycle dating back to 2019 and 2020 showed acceleration "and maybe some of that was artificial because of the pandemic. You had low interest rates, and the government was giving away free money. With that, you started getting inflation."
Pointing to recent interest rate hikes, Johnson said the goal of the Federal Reserve was to reduce inflation and slow down the economy.
"In the late '70s and early '80s, the prime (interest rate) hit 19%," he said. "If you look at what has been done historically, think of what the Fed does in terms of a car. Lowering interest rates is like stepping on the gas (pedal). When the Fed lowers the interest rates so you can borrow to buy a house or a car, they are putting their foot on the gas (of the economy). He compared raising interest rates to hitting the brakes to slow the economy.
On Nov. 2, the Fed raised interest rates for the sixth time this year, which makes it more expensive for people to borrow money. Johnson said the continuing rate hikes are often an indication that a recession can be expected in the near future.
"How long do recessions last? An average of 10 months," Johnson said. "Going into 2023 we are starting to see earning reports from businesses get worse – in tech and with semiconductors. The raising of interest rates is slowing down the economy – slowing down business. The Fed won't stop raising interest rates until the economy slows down (which is intended to slow or stop inflation)."
The interest rate hikes in March and April are just now starting to have an effect on the economy, Johnson said, adding that it typically takes around six months before the impact.
"I believe we'll be in a recession in 2023," he said. "Remember that recessions usually only last about 10 months while expansions last 69 months on average. Over the long term, the economy grows. Over the short term you'll have blips like we'll experience in the not-too-distant future."
Part of what occurs when the economy slows down is the amount of credit available for consumers and businesses to borrow.
"Credit seems to be contracting a little bit – bankers may know more about that."
Local bankers Gary Chumley and Tom Creek agreed, saying that there is less credit available now, with Creek adding, "most definitely."
Economic highs and lows, just like in other areas of life, are part of the natural flow, Johnson noted.
"I'm not trying to be a fear monger or rant and rave about the end of the world," Johnson said. "Most likely we'll go through a recession in 2023. It won't be fun, but we'll get through it."
