To get to grips with why we have no recession despite rates going vertical we need to look to the labour market. For all the layoff fears, this is still a tight labour market.

People I talk to are switching jobs (yes, even in the banking sector!) while others are going as far as not showing up to interviews since they scooped better offers elsewhere (don’t worry – my friends all have manners).

And the biggest data point of all: unemployment is historically low aka layoffs aren’t much of a biggie. Not right now anyway. So all this doesn’t exactly scream “weak labour market” because it just ain’t.

Sure, the cracks might be starting to show especially in tech + banking but that’s largely due to the fact that these sectors greedily over-hired during the boom years of ‘21. And things have slowed down since then. They thought these cushy conditions would go on forever.

But more broadly, we’ve not seen job losses inch up to any sort of scary levels typically associated with big recessions. Oh that’s right – we’re not in a recession! So maybe the real title of this blog should’ve been something like ‘where the heck is this recession’. I mean it is only the most talked-about and predicted recession (albeit wrongly) like, ever.

But if you’re already sick of this macro chat – ignore the macro rollercoaster that’s shaping up to be the 2020s. And you’ll be richer for it too (inflation-adjusted, of course).

Speed matters

Interest rates filter through the economy with the speed of a drunken teen. It really does take time. It’s not something you can simply switch “on” and “off” and see the effects immediately. Like going from light to dark. It’s more of a lets-wait-till-the-fog-clears-till-we-see-the-damage kinda thing.

There’s a range of opinions as to how long rates actually take time to filter through the economy once they’re been raised. And as you guessed there’s a lotta debate around this! But as a rule of thumb, it’s usually 19 months after the first hike.

But whatever the consensus is (each time it will be different since our economy doesn’t follow stiff models) you can bet it will take time. Interest rates also affect different parts of the economy at different speeds and times.

Areas like manufacturing & construction are super-sensitive to changes in monetary policy whereas areas like the tech sector seemed to have shrugged it off entirely. AI, AI, here we go again….my, my. Speaking of – are we in an AI bubble?

But either way, it’s not an exact science. By any means. Our experience as a consumer (and as business-owners) has drastically been altered since covid and so our responses are going to be different to what they might have been in the past. Case in point: this epic rise in YOLO spending. We just can’t help ourselves despite our shrinking savings.

The consumer = the economy

OK – before we get into the nuts ‘n bolts of why a recession is nowhere to be seen (phew) we gotta understand how critical the consumer is. In the US, consumer spending makes up ~70% of GDP. A weak consumer = weak economy = recession. Econ 101.

The less we spend the more we hurt economic growth since we’re the centre of its universe. You matter (and so does your shopping).

So to understand why a) unemployment is record-low and b) there’s no recession despite rates going from 0% to 5% in a matter of months, we gotta see what’s going on with the consumer – aka all of us! What have we been doing? Or not doing.

There’s been a bunch of things that have kept the consumer in awesome shape: low mortgage rates, plenty of jobs going round, pandemic savings and a bunch of other stuff added in there. So let’s dig in. 

Locking in low rates on your mortgage 

This is a huge one to keep in mind. The dynamic of mortgages really matters recession or no recession. Higher mortgage rates lower consumer spending which squeezes growth out of the economy.

But mortgages aren’t created equally. Over in the US you’re able to take out a 30yr mortgages so anyone who locked in a 30yr rate at 2% is quite literally laughing to the bank. So this group won’t be selling anytime soon. And that means a whole chunk of mortgage owners have made themselves bullet-proof to any kind of rate rises.

Here in the UK we don’t have the luxury (or curse – depending the % you locked those rates at!) of decade-long mortgages but we have a situation where only around 1 in 3 home owners have a mortgage. So this is a small section of the overall economy that have a mortgage and will feel the pinch that way via rising monthly bills when they face the hell of having to remortgage. 

So here, and across the pond, we’ve got a lot of people that are insulated from mortgage rises. It’s usually the main funnel through which the temperature of the economy falls a few degrees and we’re seeing this isn’t working as it once did.

Boomers are staying put while younger gens can’t exactly afford these 5%+ mortgage rates. But until you have a situation where mortgage arrears skyrocket and people default on their loans (thanks to being jobless) we’re gonna have smooth-sailing.

And you can kick that recession can back where it came from. But once the economy starts to wobble and consumers start to seriously cut back on their spending and companies start laying off workers will that trickle down to shrinking economic growth and voila, that right there is a recipe for a recession. Not that I’m recommending you try it, of course.

Pent-up demand (despite low savings) 

One thing that helped the consumer stay in tip-top shape (which held up our economy like glue) despite rates pretty much going vertical was the fact that we had savings built up from the pandemic.

But those savings have all but vanished (double-digit inflation kinda has that effect) and yet we’re still spending. Though the rise of the “lipstick effect” might tell you something about the state of the actual economy.

We’re just still so desperate to spend. Like a sugar craving. We can’t get enough of it. After having had so little of it (thanks, covid) for what felt like ages. So we’re opening our wallets and splashing out on things from travel to restaurants. Especially travel. That one is not dying out. And that is keeping our economy afloat.

Fiscal > monetary

When interest rates rise that is clearly a contractionary move. It takes steam out of the economy and squeezes consumers pockets. We know high rates cause our economy to shrink (eventually – since isn’t that the whole point) but what about gov spending? Where on earth does that come into play? 

The Fed has been running a rather overweight budget deficit. This is where the gov spends more money than what it receives from taxing us lot. And so this means that there’s lots more money sloshing about into all sorts of areas. And we’ve had a situation where the fiscal side (so gov spending) dominates the monetary side (interest rates).

It’s like a game of tug-of-war. With 1 elephant vs 2 elephants. The heavier one always wins. So all this extra spending has been pumped into the system taking out a lot of what would have been nasty side effects from the high rate drug dose. And investors underestimated how powerful it would turn out to be.

A spanner in the works

This perfect world of strong consumers in the face of tight monetary policy hinges on the fact that the Fed is gonna cut rates soon (like, c’mon it’s already March – you promised!!) and that inflation keeps on falling. But looking at Feb CPI figs, it rose to 3.2% above estimates. Not good. It means prices are rising more than they forecasted. 

So if inflation continues to remain sticky and unemployment is still very much low then the Fed will find themselves in a real pickle. You also gotta bear in mind that the US gov has very little wiggle-room on spending.

They’re already spending up to their eyeballs (and are actually beyond their eyeballs in debt) and while corporates all think Trump is great for biz and assuming he makes it to the Whitehouse for his sequel, he doesn’t have that same leeway as he once did to cut taxes. Psst: the 2024 elections got you spooked? Turn to this one asset for a long term hedge for risks we can’t run from.

But also looking at where we are now: high interest rates + strong employment. Why will the Fed cut rates when a) their job is not yet done – inflation is above their 2% target and b) jobs market is strong so no one needs a rescuing (apart from us greedy investors right?)

Or, the US gov will keep on spending. And throw away that 2% inflationary target. Why not 3% you say? Then you can kiss goodbye all your previously-held assumptions. And say hello to an inflationary world! Oh, and loads of currency debasement. Yay! Though this one asset will help you with that.

And you know what I’m gonna say: right when everyone (and their mum) has totally abandoned something, that’s when that something can hit you right in the face. When you least expect it. 

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.