It's Wednesday, August 2nd, as I write this. This is an NBC national news report from yesterday (8/2/2023) about the collapse of 99-year-old Yellow Trucking company, which put 30,000 drivers, mechanics, and other employees, out of work this week. This business shutdown became the first major middle class business shutdown to really garner major media attention this year.
Is the tremendously hyped Recession 2023 finally here?
Let's look at the world of business, finance, and the economy. There have been a parade of layoffs in tech workers, over 386,000 total in 2022 and the first half of 2023. There has been a record number of bankruptcies, business and personal, in the first half of 2023. Six U.S. banks have closed this year, either in full collapses, buyouts, or forced mergers. Silvergate, Silicon Valley Bank, Signature Bank, and First Republic went under in March, 2023. This past week, PacWest entered a forced merger with Banc of California (with J.P. Morgan involved), and Heartland Tri-State Bank, in Kansas was shut down by the FDIC.
After the initial banking crisis in March of this year, banks, overall, began to slow down on making loans. Trying to keep themselves out of further trouble, they raised standards on lending to both businesses and individuals, and have made less loans overall, this is called a "credit crunch," and is often a major factor in recessions. The Federal Reserve (aka The Fed), in their own report, found 722 banks on the verge of being insolvent in May of 2023.
The sales of residential real estate have dropped off a cliff in most areas, and price drops are beginning to show up in the data for several of the cities that boomed during the pandemic, and in recent years. Then there's commercial real estate, where major corporations are "handing the keys back to banks" on entire skyscraper office towers. This has happened to several major office buildings in recent months. Many office buildings are financed on short term loans of 1-4 years, then they get refinanced. Well over a trillion dollars in commercial real estate debt has to be refinanced in the next couple of years. Because of the higher interest rates, many landlords are seeing their loan payments double or triple when they go to refinance.
In addition to all of these things above, several treasury yield curves have been inverted for up to 18 months, which are one of the most reliable indicators of coming recessions. The most widely used, the U.S. 2 year/10 year treasury curve, is the most inverted it's been since the 1980's.
All of these different factors above are sign of a weak economy, if not an actual recession. They all have occurred during the last 18 months, most since The Fed began to raise interest rates from near zero to 5.25%. The higher interest rates raise the payments on loans, which ripple through the economy, as businesses and individuals get new loans, and refinance old ones. This eventually causes all borrowers to pay a lot more in interest, which causes businesses and people to spend less, overall. That's what slows down the economy. This usually brings down inflation, over time, which is why The Fed began raising rates in 2022.
With all of this going on, there's been this recent narrative that the economy is still strong, and we missed having the expected recession. Through all of these things above, the unemployment rate has stayed low, and the stock markets kept going up. Until today... Ratings agency Fitch downgraded the quality of U.S. government bonds. That finally got the stock market's attention.
CNBC chart of the Nasdaq index today, looking at the 5 day chart, with today's cliff drop on the right.
So... are we in recession? Technically, recessions are officially called months, even years, after they happen. That means, no, we are not officially in a recession. But it's never called a recession when we're actually in one. But we have all kinds of factors slowing down in the business and financial worlds, and if we're not in recession territory, it appears we will be soon. There are just to many parts of the economic world slowing down dramatically right now.
What does this mean for average people? The credit crunch means it will be much harder to get loans, in general, for several more months, maybe a year or more. That's for all kinds of loans, credit cars, car loans, home loans, lines of credit, home loans, and refinances. Debt payments are a killer in recessions, so it's best to pay off any debt possible, and reduce what you can't payoff. If you can restructure loans to pay them back at a lower interest rate, that's really smart.
In the work world, there will be a lot more layoffs, as more businesses struggle financially. This will affect some people, depending on the industry, and how solid of employees they are. You want to be the most needed person in the office in a recession, in case the company has to lay off people.
Just in general, it's smart to cut back on unneeded expenses, particularly if you don't have a large savings cushion, which few people do these days. Look at your life, and figure out if there are things you can do without for a while, as the coming months play out. If you can use that extra money to pay down debt, or just build savings, just in case of an emergency, that's always a smart strategy. We all know this, at some level, but everyone spends some extra money on things that aren't really essential.
To answer the original question... No, officially we are not in recession. But we are in an economic period that's slowing down rapidly, and the next year or so will be a tough time for a lot of people. Many people will struggle. Lots of people will find completely new jobs, and many will find great opportunities in the tough times ahead. Spending less in general, saving what money you can, and looking for new opportunities, are always good qualities to have in tough economic times, recession or not.
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