Why the U.S. Remains Far From Recession
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Why the U.S. Remains Far From Recession

The pandemic’s after effects fuel economic resilience despite rising interest rates

By SARAH CHANEY CAMBON
Tue, Jun 6, 2023 9:02amGrey Clock 5 min

More than a year after the Federal Reserve began rapidly raising interest rates to tame inflation, the hallmarks of a widely expected recession remain elusive.

Employers are hiring aggressively, consumers are spending freely, the stock market is rebounding and the housing market appears to be stabilising—the most recent evidence that the Fed’s efforts have yet to significantly weaken the economy.

Instead, the lingering effects of the pandemic have left consumers and employers still playing catch-up. That momentum could prove self-sustaining.

Americans are splurging on the activities they skipped during pandemic lockdowns, such as travel, concerts and dining out. Businesses are staffing up to satisfy the pent-up demand. Government policies in response to the pandemic—low interest rates and trillions of dollars in financial assistance—left consumers and businesses with lots of money and cheap debt. The same inflation that so worries the Fed translates into higher wages and profits, fuelling spending.

Many economists expect the Fed’s rate increases to cool the economy and price pressures over time, triggering a recession later this year. So far, however, the data keep coming in hotter than forecast.

Job gains, in particular, remain robust, pumping more money into Americans’ wallets. Payrolls grew by a surprisingly large 339,000 in May, and the increases for the preceding two months were higher than initially estimated, the Labor Department said Friday.

“I don’t think there’s any chance we’re in a recession,” said Justin Wolfers, professor of public policy and economics at the University of Michigan.

The National Bureau of Economic Research, an academic research group and the official arbiter of U.S. recessions, analyses a slew of economic data to help determine whether the economy is in a recession. Most of those indicators look healthy, Wolfers said.

Post pandemic labour market still recovering

Employers hiring last month included those in sectors such as healthcare, leisure and hospitality and government, which saw sharp job losses at the pandemic’s onset in spring 2020. State and local government—which includes public schools—and leisure and hospitality—a category that spans restaurants, hotels, entertainment and spectator sports—have yet to return to their pre pandemic employment levels amid continuing labor shortages.

Across the economy, job openings increased to 10.1 million in April from 9.7 million in March, far exceeding the 5.7 million unemployed Americans that month. The mismatch between job opportunities and job seekers continues to spur wage growth.

Average hourly earnings grew a solid 4.3% in May from a year earlier, similar to annual gains in March and April.

“I certainly did not think the labor market would remain this strong for this long,” said Carl Tannenbaum, chief economist for Northern Trust.

Courtney Wakefield-Smith is among those who have recently benefited from the strong labor market. The 33-year-old said she was promoted last year to an office job at a New Jersey water utility company. In her new role, she makes more than $25 an hour, well above her part-time jobs earlier in the pandemic that paid between $11 and $17 an hour.

Her higher wage and benefits including maternity leave are helping support her newborn son.

“This is my first child,” she said. “I don’t think I would have been able to afford a child before now to be completely honest.”

The job market could stay tight, largely because millions of former workers near retirement age have dropped out of the labor force since the pandemic began. The share of Americans age 16 and older working or seeking a job held steady last month at 62.6%.

Consumers have money to spend

Americans have about $500 billion in so-called excess savings—the amount above what would be expected had pre pandemic trends persisted, according to a May report from the Federal Reserve Bank of San Francisco.

That allows them to shell out for summer travel, concert tickets and cruises despite rising prices—and enabling companies to keep raising them.

Southwest Airlines Chief Executive Bob Jordan said recently the carrier sees strong demand in the next two to three months, the window during which most people book flights. American Airlines raised its projections for unit revenue in the second quarter, citing strong demand.

The number of people passing through U.S. airports during the Memorial Day weekend topped the pre pandemic figure from 2019, according to the Transportation Security Administration.

Brett Keller, CEO of travel site Priceline, a unit of Booking Holdings, said he has been surprised at the strength of travel demand when many consumers are paying more to book an airline ticket or reserve a hotel room.

Keller has seen examples for this summer, with round-trip fares from the East Coast to Boise, Idaho, exceeding $1,000, roughly double $500 a few years ago.

Economy’s resilience complicates Fed rate outlook

Economic activity and inflation haven’t slowed as much as Fed officials anticipated. Since March 2022, they have lifted the benchmark federal-funds rate from near zero to a range between 5% and 5.25%, a 16-year high.

Higher borrowing costs typically are felt first in rate-sensitive parts of the financial markets and economy, such as stocks and housing. The S&P 500, for example, fell about 25% from late December 2021 to last October as the Fed raised rates sharply. The broad index has since rallied about 20%, which wouldn’t typically happen if the economy were falling into recession.

Sales of existing and new homes fell sharply last year but have climbed since January. A shortage of homes for sale has helped drive home prices higher recently. Home builders are feeling more confident as a shortage of existing homes boosts demand for newly built residences. Residential and industrial construction firms added 25,000 jobs last month, up from a monthly average of 17,000 over the prior 12 months.

These signs of resilience suggest the Fed might need to raise interest rates further to push inflation down from its current rate around 5% toward the central bank’s 2% target.

Fed officials last week signalled an inclination to hold rates steady at their meeting this month. But Friday’s jobs report strengthened the likelihood that they would pair any such pause with a stronger preference to raise rates later this year.

“A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle,” Fed governor Philip Jefferson, said Wednesday. “Indeed, skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming.”

There are some signs higher rates are having an effect. Businesses slowed investment in the first quarter, cutting back on equipment spending particularly sharply.

The average workweek fell to 34.3 hours last month, the lowest since April 2020 and possibly reflecting that businesses are cutting hours instead of workers. The unemployment rate rose to 3.7% in May from 3.4% in April. The tech-heavy information sector cut 9,000 jobs in May.

Many economists and business executives say it is just a matter of time before interest-rate increases—which work with a lag—significantly sap the economy’s vigour.

Economists surveyed by The Wall Street Journal in April put the probability of a recession at some point in the next 12 months above 50%. But they have said that since October, and the recession appears no closer.

—Alison Sider and Chip Cutter contributed to this article.



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The Knight Frank Luxury Investment Index reveals investments of passion are paying strong dividends, in some areas at least

By Bronwyn Allen
Tue, Apr 9, 2024 4 min

Art was the investment of passion that gained the most in value in 2023, according to Knight Frank’s Luxury Investment Index (KFLII). This is the second consecutive year that art has risen the most among the 10 popular investments tracked by the index, up 11 percent in 2023 and 29 percent in 2022. Art was followed by 8 percent growth in jewellery, 5 percent growth in watches, 4 percent growth in coins and 2 percent growth in coloured diamonds last year.

The weakest performers were rare whisky bottles, which lost nine percent of their value, classic cars down six percent and designer handbags down four percent. Luxury collectables are typically held by ultra-high-net-worth individuals (UHNWIs) who have a net worth of US$30 million or more. Knight Frank research shows 20 percent of UHNWI investment asset portfolios are allocated to collectables.

In 2023, the KFLII fell for only the second time, with prices down 1 percent on average.

Despite record-breaking individual sales in 2023, a surge in financial market returns contributed to a shift in allocations impacting on luxury asset value,” the report said. “… our assessment reveals a need for an ever more discerning approach from investors, with significant volatility by sub-market.

Sebastian Duthy of AMR said the 2023 art auction year began with notable sales including a record price for a Bronzino piece. But confidence waned as the year went on.

“It was telling that in May, Sotheby’s inserted one of its top Old Master lots – a Rubens’ portrait – into a 20th Century Modern evening sale. But by then, it was clear that the confidence among sellers, set by the previous year’s record-busting figures, was ebbing away. In the same month, modern and contemporary works from the collection of the late financier Gerald Fineberg sold well below pre-auction estimates.”

The value of ultra contemporary or red-chip’ art contracted the most in 2023.

“Works by a growing group of artists born after 1980 have been heavily promoted by mega galleries and auction houses in recent years. With freshly painted works in excess of £100,000 almost doubling in 2022, it was little surprise that this sector was one of the biggest casualties last year. There is a risk there are now simply too many fresh paint artists with none really standing out.”

In the jewellery market, Mr Duthy noted that demand was strongest for coloured gemstones of exceptional quality, iconic signed period jewels, single-owner collections, and items with historic provenance in 2023. In the watches market, Mr Duthy said collectors chased the most iconic and rare timepieces.

A Rolex John Player Special broke the model record when it sold for £2 million at Sotheby’s in May, double the price for a similar example sold at Phillips in 2021,” he said.

Although whisky was the worst-performing collectable in 2023, it has delivered the highest return on investment among the 10 items tracked by the index over the past decade, up 280 percent. Andy Simpson of Simpson Reserved, said 2023 was a challenging year but the best of the best bottles gained 20 percent in value. In my opinion some bottles that lost significant value in 2023 will return through the next two years as they are simply so scarce and, right now at least, so undervalued, Mr Simpson said.

Whisky was the worst performing collectable in 2023 but it had highest return on investment over a 10-year period. Image: Shutterstock

Classic car expert Dietrich Hatlapa said the 6 percent fall in collectable vehicle values in 2023 followed a 22 percent surge in 2022. The strong performance of other investment classes such as equities may have dampened collectors’ appetites it’s a very small market so it only takes a minor change in portfolio allocations to have an effect, and there has also probably been a degree of profit taking. However, we have seen some marques like BMW (up 9 percent in value) and Lamborghini (up 18 percent), which appeal to a younger breed of collector, buck the trend in 2023.”

Mr Duthy said a dip in the share price of the top luxury handbag brands last Autumn appeared to spook investors. Last autumn it was possible to pick up an Hermès white Niloticus Himalaya Birkin in good condition for under £50,000. The recent slide reflects a general correction at the upper end that’s been underway for some time rather than changing attitudes to the harvesting of exotic skins.

According to Knight Frank’s Attitudes Survey, the top five investments of passion among Australian UHNWIs are classic cars, art and wine. Fine wine values gained just 1 percent in 2023 as the market continued its correction, said Nick Martin of Wine Owners. “It’s been a hell of a long run, so I’m not that surprised. Some wines from very small producers that had enjoyed the most exuberant growth have seen the biggest drops. It had got a bit silly, £50 bottles had shot up to £200 or £300.”

Favourite investments of passion: Australia vs Global

1. Classic cars (61 percent of Australian UHNWIs vs 38 percent of global UHNWIs)
2. Art (58 percent vs 48 percent)
3. Wine (48 percent vs 35 percent)
4. Watches (42 percent vs 42 percent)
5. Jewellery (18 percent vs 28 percent)

Best returns among investments of passion (10 years)

1. Whisky 280 percent
2. Wine 146 percent
3. Watches 138 percent
4. Art 105 percent
5. Cars 82 percent

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