Ep. 188 – Andrew Opedyke – The Economic Update For 2022
Looking for an Update for what’s been happening during 2022 and what’s going to happen in 2023? How about inflation and recession? Will we see a recession in 2023? What has the Federal government been doing? When interest rates rise, does the economy absorb it?
The Federal government has raised interest rates very quickly this year. What about the coming year? How are the elections affecting our economy?
In this episode of the Secure Your Retirement podcast, we have a fan favourite, Andrew Opdyke, a Certified Financial Advisor, Economist at First Trust Advisor. Listen in to learn the primary reasons why the present and future economy can be less stressful in your retirement plan.
In this episode, find out:
● Learn how the prices we see today are not as they seem.
● Is the peak of interest rates going to get even higher?
● Have we seen a recession and if so, what is the future going to look like?
● What leads to the slowdown of the economy?
● How was the economy affected by Covid and will it change?
● “Inflation is the name of the game and when can they stop reacting to it”– Andrew Opdyke
● “What is the federal government going to do to get us back to normalcy and how long is that going to take?”– Murs Tariq
● “A central theme for 2023 is going to be bear market rallies” -Andrew Opdyke
If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!
To access the course, simply visit POMWealth.net/podcast.
Here’s the full transcript:
|Radon Stancil:||Welcome, everyone to our Secure Your Retirement podcast. We are very excited to have back with us our economist, Andrew Opedyke. I claim you, Andrew, as you’re ours. And so, we appreciate very much you coming back on to chat with us today, so thank you.|
|Andrew Opedyke:||Absolutely. We got a lot to talk about.|
|Radon Stancil:||Very good. This has been a pretty boring year so far. Not a lot going on. I don’t know if you’ve got any topics that you want to talk about or not, but I’m sure people at home are thinking this has just been a simple year, no big deal. Could you give us some idea of what’s happened this year and where we are?|
|Andrew Opedyke:||Yeah. It’s been a ride in the park, if your park is haunted and all the stuff’s overgrown and you’ve got… Yeah, it’s been a heck of a year so far, and it’s been a combination of factors. We’ve got everything from the Fed doing a complete, complete about face on inflation. Going back a year ago, they said, “Hey, 2022, don’t expect a lot from us.” You go back a year ago right now, and the Fed was saying, “Maybe next year we’re going to have to raise rates by a quarter of a percent.”|
|Now they’re saying four plus percent. They have done a complete about shift on inflation. That was brought about by geopolitical events. We’ve got Russia and Ukraine. The ongoing crisis that’s taking place out there impacted energy prices, impacted food prices. And as you think about it, energy is so interconnected into so many things we do.|
|It’s part of the transportation, it’s part of the production. There’s very few industries that aren’t being impacted by that. And then recently we’ve got the elections, which is going to, certainly, if nothing else, bring with it a big jump in emotion around what is taking place. And now the elections didn’t know on election night what the results were.|
|We’re still, a week later, trying to figure out exactly who controls the house. The Senate is basically sort of determined. The Democrats at least didn’t lose seats. They may get an extra one with the midterm elections. The house is looking like it’s leading towards the Republican side. But at the end of the day, here’s the thing, as we get past the midterm elections, as we’ve gotten further along with Russia, Ukraine, as we’ve progressed throughout this year, it has become very clear, inflation’s the name of the game. What is the Fed going to do? When can they stop reacting to it? And I think that’s going to remain the story through the holidays into next year. Fed is center stage. The floor is theirs, now can they navigate things?|
|Murs Tariq:||Yeah, it seems like all of this year has been all around the Fed kind of driving the sentiment in the markets. And then you’d get the break from the Fed was the other issues like Russia, Ukraine. That was a break from the Fed, but eventually the focus came back to the Fed, then China, Taiwan, then the elections. But it’s all been about what is the Fed going to do to kind of get us back to some type of normalcy and how long is that going to take?|
|So in say a week ago or so, we had some CPI numbers, inflationary type numbers that came out and said, “Hey, it looks like things may be starting to curb a little bit and get back under control based off of what the Fed is doing.” So what is your opinion on that? Is that something that is… does it seem realistic that we are starting to hit that bell curve and it’s going down now and is the Fed going to ease up? What are your thoughts on all this now?|
|Andrew Opedyke:||Yeah, and that’s the billion dollar question. I will say one data point does not a trend make. I’m always a little cautious about looking at one month data, particularly when, and as an economist, we dive deep into this data. When you look at CPI, the report that we got where the numbers came in a little weaker, you noticed it came from things like medical. And at first that seemed odd. Medical spending prices dropped to the lowest level we’ve seen in 50 years. Well, you dive in, it’s because they did some revisions on how they’re running the calculation.|
|It’s not necessarily that any prices that we see day-to-day actually changed. They just changed how they were calculating it. And for me, okay, I’m not as convinced that that’s a sustainable shift. We’re going to have to see in the months ahead. What we do, we strip out food, we strip out energy, we look at everything else. And housing is the core function in there. The housing prices that, remember, according to the Fed’s metrics, housing pricing barely moved in 2020 into 2021 because they don’t look at home prices, they look at things like rentals. And when we had the moratorium on evictions, when we had the stoppage on foreclosures, we saw a massive slowdown in rental prices. They kind of locked in place.|
|Well now that shifting and even though the home price gains look like we’ve kind of plateaued, that thing’s flattening out. It takes time for these other numbers to come through. So here’s what I expect. The movement from eight towards five, and we went from eight, now we’re closer to seven. Is the peak behind us? My best guess is yes, okay, but it came earlier this year.|
|But the movement from eight to five, I think is going to prove to be the easier part. And then we’re going to get to this area where they’re trying to get from five down towards two, which is where the Fed wants an over time. That is going to be trickier. That is not something I see happening in the next six months. I think it’d be very hard in the next 12 months. I think we’re looking more 18, 24 months out to get to that point.|
|What the Fed’s going to look at though is say, “Hey, it’s trending in the right direction.” So in terms of their actions, how quickly are they raising rates? Are they raising rates further? They’re reaching a point where they can slow that down, slow the pace of rate hikes, potentially pause in rate hikes and watch and see what happens. And that’s exactly what Powell was talking about at their last press conference.|
|Radon Stancil:||So I know that this kind of segues right in there because you’ve mentioned it a couple times about this idea of all this activity that the fed’s doing and one of the things that the Fed has talked about, I think that the media is talking about, this is something everybody asks is, I guess first, are we in a recession? Has the recession started? And if it hasn’t started, are we going to see one in 2023? And on top of that, based on what they’ve done thus far, how bad of a recession are we looking at? I think that’s the thing that’s worrying people right now to a degree, is this action is going to lead to some economic issues. What’s that going to look like? And I know I’m asking you to guess, probably, on what your opinion is.|
|Andrew Opedyke:||Yeah. So let’s start with the first question. Have we seen a recession yet? Let’s go back to that because people earlier this year, first half of this year, we did get two back-to-back quarters of negative GDP, which, go back to your macro 101 classroom. If you took any economics courses, this was probably the definition you heard for a recession. And that’s kind of the rule of thumb. It’s the textbook definition of a recession. There is only one group in the world who can officially determine if we were in a recession. It’s a group called the NBER, the National Bureau of Economic Research. It’s a bunch of economists that sit around and debate this stuff. I’m sure they’re an absolute hoot to hang out with, but they are not focused on back-to-back quarters. What they care about are six different metrics, three of which have to do with employment.|
|One has to do with consumer spending, one has to do with incomes. And then that last one has to do with production. And when you looked at the numbers, 500,000 jobs per month average during the first six months of this year, production up at a 6% annualized rate. The income numbers were one area where they might have looked because the income numbers had basically only been growing at the pace of inflation, but spending was still strong. So based on those numbers, I would say we have not had a recession yet, but will we have one, right?|
|And this is the thing. Historically, the Fed wishes they had a clear guide. The Fed wishes that they could make an action, raise interest rates, and immediately see the response, immediately tell how significant that was going to flow through the rest of the economy. But it doesn’t. Monetary policy operates with a lag. When they raise interest rates, the economy absorbs it. And think about it. Here’s one of the things I think about. If you’re a company, when the Fed raises interest rates, it becomes more expensive for you to borrow and invest in people in products, in projects. Now when you have your equipment, you’re a manufacturing company, you got equipment on the line, you’re not replacing the equipment every day, every week, every month, but maybe you’re doing maintenance, maybe you’re bringing new stuff in every six months, 12 months, 18 months.|
|As we hit those points where the higher rates cost some companies to say, “You know what, maybe we’re going to pause on this for a little while. Maybe we’re going to slow some new investment.” That’s ultimately what leads to the slowdown in the economy. We don’t have the same level of investment. We’re not seeing the purchases of the inputs that go into products. And it can have a big impact. It can be like the late 1970s into the early 1980s. Paul Volker said, “I have no idea how high we need to go, so I’m going to just jack rates knowing I’m probably going to overdo it.” Then it has a dramatic impact. What I think we’re likely to see, and I don’t have a crystal ball, but what I think we’re likely to see this time around is a more measured pace.|
|They’re not going to double digits on the federal funds rate. In fact, right now, they’re looking to kind of slow the pace of hikes. My best guess is that in 2023, mid year-ish, we do officially go into a recession. Unemployment starts to rise, not like ’08, ’09. We’re not talking a jump to 10% unemployment, but maybe 5%, five and a half percent.|
|We do see growth slow for two, three quarters, but it’s not a precipitous drop. It’s a slowdown where things basically go flat to slightly negative. You want to look at one period in time that I would most compare this to. It’s 1990, 1991, which was a milder recession. Now the Fed could change that. Geopolitical events. If China invades Taiwan, throw that out the window. If we see some really truly unexpected event, it could change that. But my best guess right now, based on who’s the moving factors, who were the groups that are most impacted, where is GDP most impacted? I would say recession second half of 2023, milder recession. And then we get through it and we get back to sustained growth.|
|Murs Tariq:||Gotcha. So on that topic, let’s talk about layoffs or impeding layoffs that we’re hearing about all the time, like Facebook, Meta. They just said last week that they’re going to lay off 10% of their employees. I mean, that’s a large number for a company as big as they are. But in 2020 and 2021, a lot of companies, a ton of companies had some major, major growth and I think that they hired ahead of that growth thinking that it was going to be very sustainable. So do you think some of these layoffs are coming because companies are actually hurting or is it because they just over hired for what should have been the growth that they were going to, the path that they thought they were on.|
|Andrew Opedyke:||It’s a combination of both, I think. One is that some companies priced themselves to pandemic perfection. And Zuckerberg came out and said it. He said, “Look, we were seeing increased engagement. We were seeing people, because they were home, because they were more online, they were engaging with this content more frequently. They were engaging with ads.” So they invested in it. They said, “Hey, maybe this is a bit of a shift in terms of how people are operating, how they’re spending their time, how they’re spending their money.” And some of that did prove to be temporary. I mean, a classic case of this is think about a Peloton, and I’m not talking about the investability of the company, but just think of the product. And when we went into COVID, people were like, “Everybody’s going to buy a Peloton.” You couldn’t go to the gym. So people are, now their home, they’re going to work out from the house and everybody’s going to buy the subscription package. And this is starting a new regime on how we work out.|
|And then six months later, they were making nice towel racks. But a lot of people had priced in that this company had changed the way we operate. In the short term, that was one of the factors. And I do think companies, Amazon was a similar one. Amazon had to hire massively because when you couldn’t go to the hardware store down at the corner, you needed them to bring things to you, so that increased direction, that increased movement towards purchasing from them, it did necessitate in that short-term, intermediate term, more people.|
|Now we’re seeing a shift from the good side back towards services, which from the tech side, you would think maybe they shouldn’t be as impacted. They’re more of a service based company. But think about if you’ve got a Facebook, if you’ve a tech company that relies on advertising, it’s one of the first things people pull back on in this environment, and that’s where those companies are really getting hit. So there is a combination of they over hired for the environment they were in, they priced in that movement happening for longer. And at the same time, now that things are shifting, there’s a slowdown in demand.|
|However, that demand is also still going other places. I’m seeing this when I’m on the road. I’m seeing it at the airports. I’m still seeing it at the hotels. I’m seeing it at the rental car centers. One of the big shifts I think you’re going to see over the next six, nine months is that those companies that have had such a hard time getting employees back because they went to the tech companies, because they went to the Walmarts and the Amazons who needed delivery drivers, they’re going to start to see a little bit of an easier time.|
|The employment numbers, broadly speaking, are still rising. It’s going to start to level off. Don’t forget that just because the big name companies, the high flyers, they get a lot of media attention, when they start to cut back, that is being offset in some other areas.|
|Radon Stancil:||So you touched on this situation with China and Taiwan earlier. I got a question. I mean, the Russia-Ukraine situation’s been going on for some time, way longer than probably anyone anticipated for it to go on. And there was issues, obviously, it created issues, but it’s kind of like from the rest of the world’s perspective, everybody’s just kind of still moving forward with this whole situation. Do you feel that the scenario, if China did invade Taiwan, that that’s a different type of deal than the Ukraine-Russia deal?|
|Andrew Opedyke:||I do think it would be a different deal. I think when you consider… let’s think about Russia-Ukraine for a minute. What percentage of revenues for US based companies, how much of our imports or our exports are tied to Russia, Ukraine? And the answer is it’s very small. Generally speaking, they represent a very, very small fraction of total revenue, total exposures internationally. Taiwan is so centrally critical from manufacturing on the semiconductor side. We keep moving towards a more tech-driven world and semiconductors are at the core of it. So there are more companies with a greater reliance on the production of a place like Taiwan that they will, I believe, if China does look to invade, they would act swifter, they would act more aggressively and it would be a greater global response among the major developed markets. Russia-Ukraine was going to impact energy, it was going to in impact fertilizer. But there’s other ways you can get that.|
|The semiconductors, which have been an issue already for the last year, year and a half, two years. We’re trying to resolve some of that. If you look around the United States, I was just the other week in Ohio, and in Columbus, they’re building a brand new, I think it’s a 20 billion dollar facility, but it takes years to get that in place. So in the meantime, that central component to the most profitable, largest growing industry in the United States, technology, it has a major artery that goes through Taiwan.|
|And so we noticed this with Biden, whatever the election results, whether it was Biden, whether it was Trump two years ago, whatever happened in the midterms, you are not hearing anybody, anybody in Washington say, “Maybe we should ease up on what we’re doing with China. Maybe we should ease up on restrictions. Maybe we should ease up on some of the diplomacy stuff.” No, everybody says this is critical. This is core in a way that Russia-Ukraine was not. I mean, do I wish Russia-Ukraine was already resolved? Absolutely. I wish that we got a peaceful ending to that, but China-Taiwan would be more economically impactful.|
|Murs Tariq:||So we’ll see how all that plays out, and I think it’s take some time to figure it all out. So I’ve got a little end of year best guess for you, and just maybe you could say, just talk about the S and P 500 with the CPI getting everyone excited. Midterms, historically our pretty decent in these years, and then we’ve got about a month-and-a-half, roughly left in the markets and sentiment’s going up in the markets. Where do you think things go from here? I know it’s a short period of time. Do we stay somewhat range bound or does it kind of break through positively?|
|Andrew Opedyke:||Yeah, so here’s what I’m expecting, not just through the remainder of this year, but I think this is going to be a central theme of 2023, is bear market rallies. I think we can get events, we can get the midterm election, it’s finally behind us. Maybe that eases some concerns. We get a CPI number tomorrow morning, or at least when we’re recording, the producer price index is going to be coming out, and that one is another inflation check people are going to be looking at. We may get better news on Russia-Ukraine, we may get a number on the GDP. But I don’t think any of that can overcome what’s happening with inflation.|
|So as we see, right, it’s not going to overcome the Fed. We may get bounces on sentiment, but as the Fed keeps moving higher, they’ve got a meeting in December, they’ve got their meetings to start next year, that’s going to be the reality check.|
|I expect volatility’s going to be here. I’m not expecting a huge deviation sustaining in either direction up or down. I think we’re largely going to be range-bound until the Fed’s job is done. And when it’s done, when the Fed is done, when they can start looking at cutting and cutting for the right reason, because inflation is in check, then I think we can start some more sustained growth moving higher. But until then, I think it’s going to be a bit of a wild ride, so buckle up.|
|I mean, here’s the thing. We don’t know exactly when it’s going to happen. Nobody knows exactly what’s going to happen. Nobody knows what is that rate that the Fed needs to get to in order to appropriately control inflation. If anybody who’s listening to this knows it, please give me a call and also call Jerome Powell. He would love to know what that number is.|
|But there’s just too much unpredictability. I think right now your patience will be rewarded. If in a year, two years, three years, I can’t tell you exactly where things are going to be in six months, 12 months. But if I had to make a guess today on whether markets are higher or lower in two years, I would say I bet the markets are higher. And in three years and in five years and in 10 years. That’s been a relative, especially over a 10 year time horizon. It’s been a very safe bet historically. Why? Because we progress and we continue to come up with new innovations.|
|Times like this where the turbulence is there, there’s difficulty with energy. We’re going to find new ways to produce. We’re going to find new ways to create fertilizers to help with some of the supply chain issues. We will take the difficulty and we’ll make lemonade out of lemons. But right now we’re squeezing the lemonades and we got some cuts on our hand and it’s not the most enjoyable process, but we will progress. How long it takes, time will tell.|
|Radon Stancil:||Well, we like to always close out these discussions with you, Andrew, on a positive note. So if you had to think about 2023, while it’s been a lot of things here to deal with, has there been positives on this and maybe a positive for what you anticipate for next year?|
|Andrew Opedyke:||Yeah, I mean, I think the best news for 2023 is that while the Fed is kind of still moving, it’s not going to be as wild as it was this year, right? The Fed going from 0% interest rates to over four, which is their expectation by the time that we end this year, they’re not going to go 4% next year. So I think a lot of the negativity, a lot of the fear has been priced in. We might not see a huge surge higher, but I don’t think it’s going to be, it’s certainly not like the first half of this year. Barring some major thing that happens, let’s say with that China-Taiwan. But I think that’s a low likelihood event. So hopefully we start to see a little bit of easing. We know we’re closer to those clouds parting and the lights coming through.|
|And again, I strongly, strongly believe that over the next 12, 18 months, you’re going to see and hear about progress innovations, new things we’ve done because of this environment that we’re in. And those are the things that don’t go away when we’re out of this. Once Russia- Ukraine is solved and inflation is solved, the new productivity tools we take, the new production capacity that we bring is going to sustain and help us drive growth moving forward. That’s where I’m spending a lot of my attention, a lot of the focus, because that’s what drives us over time.|
|Murs Tariq:||Well, I think that all sounds great. So Andrew, thank you so much for coming on today. We know you are a very busy person spreading your knowledge and you’re on the road giving talks all the time and talking about your opinions on things. So we appreciate you taking some time out of your busy schedule to come in and hang out with us for 20 minutes or so and talk to our listeners and give them some really, really good perspective. Thanks a Lot.|
|Andrew Opedyke:||Thanks for having me join you guys. Always enjoy our conversations.|