Analyzing four economic shocks and the role of gold as a hedge in times of uncertainty. Get insights into the evolving financial landscape
Wall Street Journal Questions the Nation’s Resilience in the Face of Four Simultaneous Economic Shocks
When Augusta’s Director of Education, Devlyn Steele, presented his 2023 economic outlook back in January, he hinted at a prevailing theme of uncertainty. However, he may not have anticipated just how accurate his prediction would turn out to be.
One glaring example of this uncertainty materialized earlier this year with a banking crisis, marked by the second- and third-largest bank failures in U.S. history. The expected return to dovish monetary policy in 2023 also fell by the wayside, primarily due to the surprising persistence of inflation. Headline inflation saw a resurgence in August, while core inflation stubbornly refused to dip below 4%.
Another cause for concern is the surge in household debt. In the second quarter, household debt surpassed the unprecedented $17 trillion mark for the first time ever, with credit card debt exceeding $1 trillion for the first time during the same period.
However, just when we thought 2023 was offering a clear picture of near-term uncertainty, the Wall Street Journal recently raised the possibility of an even more uncertain future. The Journal pondered the potential impact of not one but four simultaneous economic shocks in the fall: an expanded auto-workers strike, a prolonged government shutdown, the resumption of student loan payments, and surging oil prices.
In recent months, some analysts who had earlier predicted a recession between late 2023 and early 2024 have revised their forecasts. Yet, as multiple shocks loom over an economy already grappling with two years of inflation and rate hikes, the question arises: was this change in sentiment premature?
As the Journal suggests, each of these “shocks,” if occurring individually, might not pose a significant threat to the nation’s economic stability. However, if they were to happen simultaneously, the combined impact could prove particularly challenging for the current state of the U.S. economy.
Gregory Daco, Chief Economist at EY-Parthenon, points out, “It’s the combination of all these factors that could disrupt economic activity.”
Let’s take a closer look at each of these potential shocks to better understand their collective implications.
Federal Reserve Chair Powell acknowledges the economy’s momentum but expresses concern about the “array of risks” currently present.
You might already be aware of the ongoing strike led by the United Auto Workers (UAW). This strike began on September 15, marking a historic moment as UAW members from Ford, General Motors (GM), and Stellantis (formerly Chrysler) simultaneously walked out of their workplaces for the first time in history.
Initially, UAW President Shawn Fain called for a strike involving around 13,000 workers at three plants. A week later, Fain extended the strike to include 38 parts-distribution plants operated by GM and Stellantis. Ford was exempt from this expansion because the union saw progress in its negotiations with the automaker at that time.
However, this truce didn’t last long. Last week, Fain decided to resume the strike against Ford and General Motors, expressing dissatisfaction with the negotiation process.
As of the most recent strike, approximately 25,000 workers, equivalent to about 17% of all UAW members at Ford, GM, and Stellantis, are currently on strike.
So far, the economic repercussions of the strike have been relatively mild. Nevertheless, this situation could change, especially considering UAW President Fain’s willingness to expand the strike as he sees fit.
According to a recent report from the Anderson Economic Group, the strike has already resulted in economic losses of approximately $4 billion in just the first two weeks. If the strike continues to grow in scale, as it appears to be doing, Goldman Sachs warns that it could lead to a weekly reduction in annualized GDP by as much as 0.1 percentage points.
And this is just the strike; we haven’t even addressed the other economic challenges mentioned by the Wall Street Journal.
University of Michigan economist Gabe Ehrlich believes that while neither the strike nor any of the other impending challenges may individually pose a significant threat to the economy, the situation could be different if they all strike simultaneously.
“I don’t expect the strike on its own to push the national economy into a recession, but there are other obstacles on the horizon,” Ehrlich commented. “When you combine all of these factors, it looks like the fourth quarter of the year might be a bit turbulent.”
Another potential obstacle is the looming possibility of a government shutdown.
An agreement was reached just in time last weekend to fund the government for another month and a half. However, this short-term solution doesn’t instill confidence that Congress will remain united beyond the current deadline, especially given Speaker Kevin McCarthy’s recent removal. Some analysts even suggest that McCarthy’s removal increases the likelihood of a government shutdown in the coming weeks.
Goldman Sachs: Increased Probability of Government Shutdown Due to “Leadership Vacuum.”
Jan Hatzius and the Goldman Sachs team have indicated that the dismissal of Speaker McCarthy has amplified the likelihood of a government shutdown.
Hatzius has expressed his concerns by stating, “With numerous policy disagreements still unresolved and a $120 billion gap between the parties regarding the preferred spending level for fiscal year 2024, it’s challenging to envision how Congress can pass the necessary 12 full-year spending bills before the funding expires on November 17.”
The Wall Street Journal points out that a partial government shutdown lasting five weeks in 2018 resulted in a 0.1% reduction in GDP for the fourth quarter of that year and a 0.2% decline in the first quarter of 2019. While it’s uncertain how applicable this guideline is to a similar shutdown in the current political climate, the absence of a speaker adds an extra layer of potential chaos to the government.
Brian Gardner, Stifel’s Chief Washington Policy Strategist, has raised concerns about how financial markets might react to governmental dysfunction.
Another pressing matter is the end of student-loan forbearance after three and a half years. When this relief measure was implemented in March 2020, approximately 11% of student loan balances were more than 90 days overdue, as reported by the New York Fed. While the 12-month “on-ramp” plan for the restart, which doesn’t immediately penalize late payments, is expected to mitigate the swift resurgence of delinquencies, some analysts believe an increase is only a matter of time.
In terms of the broader economy, the resumption of student-loan payments is anticipated to have a negative impact on consumer spending, which has exhibited resilience throughout the year.
Goldman Sachs has analyzed the potential cost to U.S. households, estimating it could reach around $70 billion per year. They further suggest that this could result in a 0.8-percentage-point decline in consumer spending growth for the fourth quarter, slowing it down to 1.4%.
Additionally, the renewal of loan payments is expected to negatively affect the personal savings rate, which had fallen to 3.9% as of July, among its historically lowest levels.
Another concern highlighted by the Wall Street Journal is the ongoing surge in oil prices, driven by production cuts by major producers. OPEC-plus initiated production reductions last year to bolster prices, and in July, Saudi Arabia announced an additional unilateral production cut of 1 million barrels per day. Russia followed suit with its own unilateral cuts of 500,000 barrels per day starting in August and an additional 300,000 barrels per day in the following month.
These production cuts pushed oil prices up by more than 20% over the third quarter, surpassing $90 per barrel, where they remain today. Some analysts now project that oil could reach north of $100 per barrel before the end of 2023.
One of the significant impacts of higher energy costs is their contribution to inflation. The headline annual consumer price index, which had been receding, suddenly accelerated in August, rising from 3.2% in July to 3.7%. This was largely driven by a 10.6% month-over-month increase in the gasoline index. If oil prices remain elevated or increase further, consumer price pressures, along with the challenges faced by the Federal Reserve, could intensify.
In summary, there are four economic risks, or “economic shocks” as described by the Journal, that could pose challenges for consumers and savers. Individually, each may not be overly concerning, but when considered collectively, they create a more complex economic landscape.
As Fed Chair Jerome Powell recently remarked, “It’s the strike, it’s the government shutdown, resumption of student loan payments, higher long-term rates, oil price shock… You’re coming into this with an economy that appears to have significant momentum. And that’s what we start with. But we do have this collection of risks.”
For some, navigating these economic risks as a collective challenge may be something we need to become accustomed to.
Analysts suggest that “Global Shocks Are a Persistent Reality.”
If any of us find ourselves surprised by the regular occurrence of economic shocks, perhaps we shouldn’t be, considering the long-term trends reflected in the World Uncertainty Index. Over the past two decades, the index has consistently shown an upward trajectory, particularly when compared to the relatively stable period from 1990 to 2000.
Between 1990 and 2000, the index experienced a 50% decrease. However, in the subsequent decade from 2000 to 2010, it witnessed a remarkable increase of over 200%. And in the extended period from 2000 to 2023, the index has surged by more than 400%.
In a Harvard Business Review article from the previous year titled “Visualizing the Emergence of Global Economic Uncertainty,” the creators of the uncertainty index suggested that a new era of global economic unpredictability has taken hold. Delving into the factors driving this shift, including “increased geo-economic fragmentation,” the authors made a bold assertion: “The presence of global shocks is now a permanent feature.”
In a rather striking evaluation, asset management giant BlackRock, in their “2023 Global Outlook” at the start of the year, described the current worldwide economic and geopolitical landscape as “the most complex global environment since World War Two, marking a clear departure from the post-Cold-War era.”
BlackRock further concluded that one of the outcomes of this heightened uncertainty would be a “new era of increased macroeconomic and market volatility, coupled with persistently elevated inflation.”
Another source of concern regarding the global economic system’s stability amid ongoing inflation challenges—and the corresponding response by central banks—came from J.P. Morgan CEO Jamie Dimon. In an interview with the Times of India, Dimon pondered whether the world would be “ready” for interest rates as high as 7%, adding that this could occur “with stagflation.”
Of course, whether the long-term projections of heightened uncertainty and volatility materialize remains to be seen. Nevertheless, even if we choose to be skeptical of such projections, we are acutely aware of four legitimate and potential economic shocks looming in front of us. These could pose significant challenges for the U.S. economy in the months ahead. In my opinion, they serve as a clear reminder that such shocks may always be lurking, emphasizing how little control we have over their timing.
Importance of investing in gold as a hedge against economic uncertainty:
In the midst of these economic uncertainties and potential shocks, many investors are turning to gold as a reliable investment strategy. Gold has long been considered a safe haven asset, and its value tends to rise during times of economic turmoil. This trend has sparked growing interest among gold stock investors who are looking to capitalize on the precious metal’s performance.
Gold’s intrinsic value and its historical role as a hedge against inflation and currency fluctuations make it an attractive choice for those seeking to diversify their portfolios. As the nation grapples with multiple economic challenges, including the risks mentioned in this article, investment in gold is emerging as a top trend among savvy investors, providing a sense of stability and security in an otherwise uncertain financial landscape. For more details visit goldinvestors.us