Viewpoint

September 5-September 18, 2022

Viewpoint VIEWS, PERSPECTIVES AND READERS’ LETTERS

What to expect when you’re expecting a recession

Where will the second half of 2022, and even 2023, take us? The Wells Fargo Investment Institute, believes the economic cycle will run faster, interest rates will rise further, and the economy and capital markets will remain fragile in the months ahead as we likely head toward a moderate recession.

Uncertain about how to respond or what actions to take next?

Let’s start by unpacking what this forecast means for both your investments and wallet. CRONK

Prepare, don’t panic

If you feel anxious just hearing the word “recession,” keep in mind that recessions are a natural part of every economic cycle. In our Wells Fargo Investment Institute Midyear Outlook, we discuss the hallmarks of a recession, how long and deep this moderate one may be, and what Federal Reserve actions may aff ect the job market and interest rates. Make thoughtful decisions

When you hear about a recession, you might feel the need to take action in the moment, like fl ipping a light switch. Our recommendation is for a “dimmer switch” approach for equity portfolios and more, along with talking to a professional advisor to assess your needs vs. wants.

Take stock of priorities and options

Even if you don’t have a big investment portfolio, now is an opportunity to refl ect on the quality of your investments and make sure you’re making the right decisions, fi nancially and psychologically. It’s time to review the Great Resignation, how much cash you should have on hand, and consider the risk of trying to time the markets.

Explore insights

For help determining what to do with your portfolio while facing the unknowns of the remainder of this year and beyond, visit the WFII site at https:// www.wellsfargo.com/investment-institute/.

Darrell Cronk is the chief investment officer for Wells Fargo Wealth & Investment Management.

Berkshire Hathaway HomeServices C. Dan Joyner Realtors announced that Michelle Harris joined the company’s Midtown offi ce as a sales associate. We have argued for some time that the underlying cause of the current soaring inflation rate was the surge in money supply growth that began in March and April Coldwell Banker 2020. Money growth skyrocketed as the Jennifer Fed expanded its balance sheet by $3.0 at its Green-trillion in the spring of that year. The ville offi ce as a resi-Fed continued to buy securities every dential agent. month from then until the end of March 2022 and money growth remained rapid. It flooded the economy with trillions of dollars of excess liquidity. Th e M-2 measure Berkshire Hatha-of the money supply way HomeServices is the sum of a numC. Dan Joyner Real-ber of diff erent assets tors announced that can be used to

Casey Shugartpurchase goods and joined the company’s services. Specifi cally, Anderson offi ce as a it consists largely of sales associate. checking accounts, savings accounts, money market fund Coldwell Bank-balance, and small er Caine hired Jan CD’s that we could be used to purchase at its Green-something today if we were so inclined. ville offi ce as a resi-In short, it measures what’s in our wallet. dential agent. If we have money in our pocket it tends to burn a hole, so rapid money growth can stimulate spending which, in turn, boosts infl ation. Typically the M-2 measure of the money supply grows by about 6.0% every Berkshi.re Hatha-year which is roughly in line with the way HomeServices growth rate of nominal GDP. At its peak C. Dan Joyner Real-year-over-year growth in M-2 peaked at tors announced that 27% in February 2021. Its growth rate We want to hear from youJasmine Jackson joined the company’s Woodruff at Five Forks offi ce as a sales subsequently slowed but continued to expand at roughly a double-digit pace through the end of 2021. But beginning in February of this year and continuing through June money Write: Ross Norton, Managing Editor-Content SC Biz News, 35B Cessna Court Greenville, S.C. 29607 growth has slowed dramatically. In the Email: rnorton@scbiznews.com

fi ve-month period between February and June M-2 was unchanged. Th at dramatic slowdown in money growth has gone largely unnoticed. Of the economists who have paid attention some now fret that 0% money growth is far too slow and the Fed is likely to push the economy into a deep recession if the lack of growth in the money supply continues.

We do not share their concern about non-existent money growth — at least for the foreseeable future. Th e reason is that when money growth soared in the spring of 2020 and for the next 18 months, the level of M-2 climbed farther and farther above its trend path. It currently stands $3.6 trillion above its desired path.

It will take years to eliminate that excess liquidity. If the Fed can cause M-2 to decline at a 4.0% pace every month going forward, the bulk of the excess liquidity will be eliminated by the end of next year. But the Fed is not going to allow money growth to decline at a 4.0% pace for an extended period of time which means surplus liquidity will be ample for several years.

As long as there is surplus liquidity in the economy it is unlikely the infl ation rate will shrink to the Fed’s desired 2.0% pace.

We believe that the 9.1% year-overyear increase in the CPI for June was probably the peak infl ation rate. It will slow, but to what? Will infl ation approach the Fed’s desired 2.0% target infl ation rate quickly? Or will it prove to be more stubborn and remain above 5.0% for the foreseeable future?

We expect the CPI to increase 8.1% this year and slow to 5.2% by the end of 2023. Excluding the volatile food and energy categories, we expect the so-called core CPI to rise 6.0% this year and 5.2%

Money growth slowdown has some economists worried

in 2023. All of those numbers are more than double the Fed’s 2.0% target. If that is the case, the pressure will remain on the Fed to keep raising interest rates. At its meeting in June the Fed suggested that a federal funds rate of 3.4% by the end of this year and 3.8% at the end of 2023 would be suffi cient to reduce infl ation to 2.7% by the end of next year. But, as we see it, the Fed is not going to slow growth if the funds rate remains below the infl ation rate — i.e., the real funds rate remains negative. Even the Fed seems to believe this. In its longer run forecast, to produce 2.0% infl ation the Fed needs a funds rate of 2.5% — a positive real rate of 0.5%.. How high rates will eventually need to go depends greatly upon how quickly the infl ation rate slows. If the Fed is right that infl ation slows SLIFER quickly to 2.7% by the end of next year, The United Community Bank building was designed then a 3.8% funds rate should do the trick by McMillan Pazdan Smith. (Photo/Provided) and allow the Fed to actually lower rates in 2024. But if we are right and by the end of Correction 2023 the infl ation rate remains elevated at In our recent Market Facts edition, the 5.2%, the funds rate will need to be 5.0% wrong photo appeared on page 52 in the or higher. Upstate Under Construction section. Th e At the end of 2023 we expect the funds image of a Clemson project was incorrate to be 5.0% and the infl ation rate to be rectly used above the United Community 5.2% — still slightly negative in real terms. Bank Headquarters building designed by Th e market currently believes that the Fed McMillan Pazdan Smith Architecture. will be right, infl ation will slow quickly, Th e correct photo is the beauty above, and the Fed may be in a position to reduce provided by McMillan Pazdan Smith. rates by the middle of 2023. If we are right, both the stock and bond markets are wildly optimistic and will eventually have to do a rethink. As always, we will see. Stephen Slifer, former chief U.S. economist for Lehman Brothers, can be reached at www.numbernomics.com