Major Recession Ahead? Not Likely, According to Analyst

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A major recession is not likely, according to John Rothe, President of the Rothe Financial Group in McLean, Va.

Every recession since 1913 has followed an increase in rates by the Federal Reserve

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With the U.S. stock markets down from their recent high, oil prices breaking $80 per barrel, and a major housing slump, are we on the verge of a major recession?

Not likely, according to John Rothe, President of the Rothe Financial Group in McLean, Va. “Every recession since 1913 has followed an increase in rates by the Federal Reserve,” notes Rothe. “However, most economists expect the Fed to lower rates next week.”

Additionally, Rothe explains that the housing market is an interest rate sensitive industry, and historically has almost always reacted negatively to an increase in rates. “However, the current housing market problems are not due to an increase in rates,” he says, but rather to the over expansion caused by low interest rates between 2001 and 2004, and the prevalence of subprime mortgage loans. These low rates and subprime loans caused a boom in the housing market as buyers were able to buy homes with lower monthly payments. “While the media has portrayed this as a problem affecting all homeowners,” Rothe adds, “in reality, these subprime loans make up less than 10 percent of all mortgages.”

“Interest rates are still historically low and a cut next week to help ‘fix’ this subprime loan mess might not be the best thing for the economy in the long run,” Rothe says. “Unfortunately, if the Fed does lower rates, they will lock in current inflationary pressures and we will pay for it with higher rates in the future.”

Regarding the U.S. stock markets, Rothe adds, “The current subprime issue and housing slump has caused a decline in the stock market due to investors’ worries about a looming recession. This decline is creating a buying opportunity in the U.S. markets, especially for large cap companies. We are in a global growth cycle, and most large cap companies have a global presence and therefore are not as affected by what goes on in the U.S. housing market.”

As for high oil prices, Rothe says, “Consumers are still traveling, filling up their gas tanks, and spending on consumer goods. High gas prices continue to have little effect on their spending.”

Rothe does offer one bit of caution to the U.S. investor: “I would start to worry about a recession when the Fed begins a new tightening cycle to slow growth in the U.S. economy.”

John Rothe is President of the Rothe Financial Group, based in McLean, VA. For more information visit http://www.therothefinancialgroup.com.

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