June 27, 2024

Downturn?

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By Peter Bower

Can the U.S. economy avoid a downturn? At first, there was anecdotal evidence of economic slowing and now it is starting to show up in some of the broader measures of activity. Clearly, business activity is off the boil. Is this just a normal moderation of the frenzy from the reopening after the pandemic? Yes, it is, but momentum sometime begets momentum and moderation can turn into outright decline.

The key to whether that happens is the Federal Reserve and its current high interest rate policy. If the Fed begins to soon reduce interest rates, our economy should stabilize and continue to grow at a modest pace. If not, we may be looking at something worse than moderation. Remember, monetary policy operates with lags. The sooner the better.

This concern is why stock market investors waver so radically between investing styles. One day they are pessimistic and continue to target those few companies that seem immune from the business cycle. The next, some official makes a remark that interest rates may be coming down soon, and then other investors scoop up the cheap cyclical stocks believing the economy will avert a serious downturn.

We will soon find out. If we continue to get statistics that point to a declining inflation rate, then our Federal Reserve may act in time. Otherwise, as investors, we may have to prepare for worse. The PCE (Personal Consumption Expenditure) number today will tell us a lot. Stay steady my friends; either way there is an investing way forward.