At the end of the month what we had been waiting for for so many months was confirmed. The biggest world economy is in recession technique. But this recession looks very different from the last one, the global financial crisis of 2008-09 and perhaps there is data that can help us differentiate both... So today we are going to see with 5 data why this recession will affect our investment in stocks differently and why it is important.
1. Inflation.
Little by little it has been putting pressure on all regions of the world, and for investment in shares of the largest economy in the world it was not going to be any less. Inflation in the US has climbed to 8,5% over the last month. Currently close to a four-decade high. We are more than double the 2008 average (3,8%). Additionally, inflation was in negative territory for most of 2009, meaning consumer sectors were suffering.
Inflation is much higher today than during the 2008 crash. Source: BBC.
2. Employment.
The flip side of the current painful inflation situation is that the US labor market is going from strength to strength, with unemployment at 3,5% nationwide, close to a five-decade low. On the other hand, during the 2008 crash, unemployment doubled sharply, reaching 10% in 2009 and remaining at 8% until January 2013.
Unemployment is much lower today than during the 2008 crash. Source: US Bureau of Labor Statistics.
3. The health of consumer sectors.
The steady rise in the cost of living and the technical recession are weighing on consumer confidence today, but consumers are in much better shape than during the crash of 2008. A good way to measure consumer health is to look at the number of defaults on credit cards. Everything began to rise sharply in 2006 and 2007 and remained high for several years, even after the worst of the recession passed. Right now, it doesn't seem like we're facing the same situation.
The number of defaults on credit cards is very low today. Source: Board of Governors of the Federal Reserve System (US).
4. Housing.️
It goes without saying that the current situation of the real estate market is very different from that of the 2008 crash, especially since the crisis was caused in part by the collapse of the real estate market. Back then, house prices began to fall in early 2006. Today we are seeing some weakness in demand in housing, but so far the large national measures of house prices have not started to fall .
Real estate market prices remain strong today. Source: MHVillage.
5. Scarcity.
In both recessions there was an event that marked the beginning; scarcity, but in very different ways. During the 2008 crash, the world was basically plagued by lack of liquidity. The situation collapsed as customers went bankrupt, banks ran into trouble, and some governments could not meet their financial obligations. Today it is different, there is a shortage of materials to produce, from the semiconductor sector to the energy sector.
What does all this mean for the recovery in stock investment prices?
The differences between the current recession and that of 2008 are the big implications on the part of the Federal Reserve. The Federal Reserve, for its part, has two responsibilities, keeping employment high and inflation low and stable. During the 2008 crash, unemployment and inflation skyrocketed, the latter even going negative for most of 2009. That means the Federal Reserve had the ability to cut interest rates to stimulate the economy without worrying about feed inflation.
The situation is totally different for US interest rates. Source: TradingEconomics.
Today, the situation has not affected investing in stocks in the same way. Unemployment is at the lowest level in nearly half a century, while inflation remains near the four-decade highs it hit this summer. This ties the Fed's hands, forcing it to continue aggressively raising interest rates until inflation catches up. So, while the Fed's rate cuts during the 2008 crash helped stimulate the economy and fight the recession, the US central bank is doing the opposite during the current technical recession. And those higher interest rates could exacerbate the economy's current slump. The issue is aggravated by the shortage of materials to produce. High interest rates are effective in cooling inflation caused by strong consumer demand, but they do little to combat inflation caused by supply shortages, especially shortages of oil and natural gas that drive up energy sector prices. they shoot.
Types of problems in supply chains. Source: Dave Poland.
That is, the Fed's tools are not as effective in dealing with the current economic situation. This contrasts with the 2008 crisis, where there was a liquidity shortage back then, and the Fed's actions (lowering rates and buying huge amounts of bonds) helped to tackle it by flooding the economy with liquidity (that is, money ).
In the midst of the 2008 crisis was when the US began to flood the economy with liquidity. Source: Forbes.
The positive side is that today's low number of credit card defaults, together with property market prices remaining stable, mean there is little risk of a repeat of all the credit defaults that occurred during the financial crisis. 2008, which almost led to a collapse of the financial system worldwide.