Anna Wong, Bloomberg Economics’ Chief US Economist, forecasts a 70% chance that the US economy is either already in a recession or approaching one, largely due to weakening labor market conditions. Wong points to several critical factors driving this outlook, which wealth advisors and RIAs should monitor closely to adjust strategies for their clients.
A key indicator for Wong is the unemployment rate, which has been on a sustained rise. The Sahm Rule, which measures the change in the three-month moving average of unemployment, has reached 0.57%, surpassing the 0.5% recession threshold. Wong suggests that even a 0.33% increase in this metric would provide an equally reliable signal of a downturn.
Of particular concern is the decline in employment flows, the movement of people into and out of jobs. While an increase in people losing jobs isn’t necessarily alarming if they quickly find new employment, Wong notes that hiring has slowed. Job openings and hiring intentions are both on the decline, which could lead to longer periods of unemployment—a pattern often seen in previous recessions.
The implications of this could create a self-reinforcing cycle: as more people remain unemployed, firms face lower revenues and a reduced rate of employee attrition. Eventually, companies will have to resort to layoffs, a trend that Wong believes typically emerges two quarters into a recession.
For wealth advisors, this labor market data underscores the importance of being cautious with portfolios that are highly sensitive to economic cycles. Clients in sectors reliant on robust employment figures might need to reevaluate risk exposure, particularly if unemployment trends continue their upward trajectory.
Another critical component of Wong’s recession forecast involves consumer spending, which accounts for about two-thirds of US GDP. While spending remains strong in headline terms, Wong expresses skepticism about its sustainability. She highlights that the personal savings rate, currently at 2.9%, is near levels last seen during the Great Recession. This low savings rate implies that consumers may be stretching their finances to maintain spending levels, which could become problematic if economic conditions worsen.
Wong points out that the wealthiest 20% of Americans are driving much of the current spending boom, benefiting from high asset prices, particularly in housing and stocks. For these individuals, a healthy balance sheet has been bolstered by a decade of rising home values and record-breaking stock market gains. However, for the broader population, the spending surge is largely being propped up by credit card debt, which has reached alarming levels. According to Wong, credit card delinquencies have almost doubled since Q1 2022.
For RIAs advising high-net-worth individuals, this dynamic suggests that spending behavior could shift dramatically if asset prices fall. Wong warns that an equity market correction could have a direct impact on consumer confidence, leading to a rapid decrease in spending, especially among wealthier clients.
Wealth advisors should prepare clients for the potential consequences of a market pullback by reassessing asset allocations, especially in portfolios heavily weighted toward equities. Wong’s concern is that the current spending resilience has not been adequately tested, and if a correction occurs, it could expose vulnerabilities in even the most affluent households’ financial plans.
In summary, Wong’s outlook offers a cautionary perspective on both the labor market and consumer spending. For wealth advisors and RIAs, this means taking a proactive approach to client portfolios, focusing on strategies that can weather potential volatility. By staying ahead of these economic indicators, advisors can help clients navigate the uncertainties of a possible recession.
