June 2025 | Quarterly Letter

At midyear we find the U.S. economy facing a number of uncertainties. Tariff uncertainty is the greatest of these. Also, slower growth is the consensus expectation for the remainder of the year, with a minority of forecasters predicting a recession. For perspective we turn to Austan Goolsbee, former Chair of the Council of Economic Advisors and current president of the Federal Reserve Bank of Chicago.

“The U.S. economy is like a rubber ball—when it hits a downturn, it bounces back fast, powered by deep consumer markets, innovation, and a flexible work force.”

A recession occurring soon is by no means a foregone conclusion. But even if one does occur, Goolsbee suggests that it may be a relatively short one due to the inherent strength of the U.S. economy and the resources it can draw on. Over the last couple of years, we have not been predicting a recession, but we have warned repeatedly of some of the issues that the economy faces that could lead to a recession. Throughout this process, when the economy did not succumb to a recession, we learned a simple and important lesson: it is very difficult to derail the U.S. economy. This lesson has important implications for investment, which we will discuss later. For now, let’s look briefly at Goolsbee’s three points about economic resilience.

DEEP CONSUMER MARKETS. Let’s face it: Americans love to buy. And they can buy because most of the time anyone who wants a job can have one. This is the first step. Be sure most of the people are working and receiving compensation which they can use to buy things with. Then, keep inflation low so wages can grow faster than inflation, thereby advancing standards of living, which ensures a continually increasing capacity for consumption. This self-reinforcing process of employment and spending is the dynamic that, in large part, creates growth in the economy. In the makeup of Gross Domestic Product (GDP), consumption dominates at almost 70%. Ours is a consumption-based economy.

Our simple explanation of growth through consumption highlights one of the advantages that our economy enjoys. It enjoys the benefit of an independent Federal Reserve (Fed), whose job is to manage interest rates in such a way as to keep employment high and inflation low. Their job is not easy, especially at this moment. They find themselves potentially having to deal with threats to their dual mandates at the same time. They are forecasting slow growth for the rest of this year, implying the potential for recession, which would suggest an easing policy of lower interest rates. At the same time, they are forecasting inflation from tariffs, which would suggest a tightening policy. For now, they have chosen to maintain policy at current levels until the uncertainty of the tariffs is resolved. Regardless of their near-term actions, the point is that we have an independent Federal Reserve that can pull interest rate levers to support full employment and low inflation, two key underpinnings of economic prosperity. Of course, the Fed, staffed by humans, is not infallible. Policy errors occur. Yet, with various monetary tools at their disposal, ultimately, they can effectively guide the economy to a favorable landing with strong consumption markets. If a recession occurs, we can be sure the Fed will quickly reduce interest rates to facilitate recovery. 

INNOVATION. To innovate means to introduce changes and new ideas in the way something is done or made. This is a pretty good summary of what drives capitalism. To figure out how to do something better or faster is to get ahead in the competitive business environment of a capitalist economy. And our economy has proven time and again to be the leading innovator in the world. Think about Intel and the invention of the first microprocessor and the discovery of Moore’s law and all the technological developments throughout the years that followed. These advances have provided immensely improved access to information in a way that boosts productivity. Silicon Valley gives no signs of relinquishing its world-leading position as it pushes forward on the development of Artificial Intelligence (AI).

Innovation in our economy is not restricted to the technological sector. Business has innovated in terms of just-in-time inventory management, same day delivery of products, the development of e-business, and many more. All these innovations contribute to a more dynamic and flexible economy, one that can react to changing conditions that threaten recession or assist in the rebound process from one, helping to keep it shorter.

FLEXIBLE WORK FORCE. In our discussion of consumption we pointed to the importance of keeping as many of our economic participants employed as possible, thereby ensuring vibrant consumption. Flexibility plays a role in full employment. Our participants have demonstrated a tendency as well as a willingness to move from job to job and even from one region to another as job opportunities develop. The fact that the economy occupies such a large geographic space is an advantage as regional conditions produce varied opportunities for employment and may provide diversification in terms of vulnerability to recession. Flexibility and adaptability are related, as flexibility can provide the ability to be adaptable. So it is in economic terms. During Covid our workforce quickly transitioned to work-at-home, keeping the economy moving and hastening its recovery. There are many elements in the U.S. economy that distinguish it from other economies, providing it with the ability to weather changing economic circumstances, including recessions.

There is one worrisome issue with our workforce that needs discussion. One of the strongest elements of the overall labor force has been its historical superiority in the growth of new entrants. A growing work force combined with productivity enhancements is the engine of economic growth. This growing work force is supplied by the domestic birth rate and immigration. Our demographics are still producing growing numbers of workers, although the rate is slowing. Immigration, however, the other part of labor force growth, is currently running very low relative to prior periods. It is estimated that immigration by year end will total some 500,000, down from 2.5 million in 2024. This trend is a long-term threat to the economy’s overall growth path, and in turn reduces the dynamism of our labor force. It remains to be seen if immigration restrictions are a permanent factor or if policies will change in the future. Our economy needs a healthy supply of immigrants to be able to continue to grow at an attractive pace. Despite this negative element in the picture, our labor force remains inherently flexible, a valuable trait in avoiding or recovering from recessions.

INVESTMENT IMPLICATIONS. Thus far our discussion has focused on the economy’s ability to stay on track by avoiding recession or recovering rapidly when one does occur. The good news is that recessions are rare. In the entire post-war era, there have been only 13 recessions, on average once every six years. The latest was the Covid recession of 2020 which lasted only two quarters. Excluding this “special situation” recession, which occurred because of non-economic forces, we have not had a normal economic contraction since 2008-2009, a period of 16 years. This is a tribute to the economy’s sustainability. Some might say this means we are due for a recession. We would not be surprised if one were to occur soon, but the main point of this discussion is that our economy’s natural condition is to expand. If that is the case, don’t bet against it. And a naturally expanding economy provides companies with a rich and supportive environment within which to run their businesses. 

It is not our intention to make it sound too easy. While the overarching formula is a good one, not every company is able to take advantage of an expanding economy. The failure rate is higher than one would expect from corporate America, and the list of companies that have been able to provide sustained, above-average business performance is not that long. We define those who have been able to do such as high quality, and that is where we invest. We want the strongest and the best.

THE DISCIPLINE DIVIDEND. We did not invent this term, but we like it, mainly because it incorporates so much of how we invest. Rather than refer to a dividend from a stock, it refers to the benefits that one receives from being a disciplined investor. It means not trying to time the market, rather staying invested for the long term and enjoying the compounding of earnings and dividends. And it means being loyal to an investment philosophy that can guide one’s investment actions consistently. Our discipline goes beyond these general benefits because it requires an unflinching focus on the quality found among consistent dividend payers. 

We do not know when the next recession will occur. However, when it does, we believe our disciplined approach will serve us well in protecting value on the downside but will also allow us to participate nicely in the recovery period. This is what it is designed to do.

Disclosures:

Crawford Investment Counsel (“Crawford”) is an independent investment adviser registered under the Investment Advisers Act of1940, as amended. Registration does not imply a certain level of skill or training. More information about Crawford, including our investment strategies, fees, and objectives, can be found in our Form ADV Part 2and/or Form CRS, which is available upon request.

This material is distributed for informational purposes only. The statements contained herein reflect opinions, estimates and projections of Crawford as of the date hereof, and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forecasts, estimates, and certain information contained in this commentary are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Any projections herein are provided by Crawford as an indicator of the direction Crawford’s professional staff believes the markets will move, but Crawford makes no representation such projections will come to pass. Crawford makes every effort to ensure the contents have been compiled or derived from sources believed reliable, and contain information and opinions that are accurate and complete; however, Crawford makes no representation or warranty, express or implied, in respect thereof; takes no responsibility for any errors that may be contained herein or omissions; and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Crawford reserves the right to modify its current investment strategies and techniques based on changing market dynamics or individual portfolio needs.
 
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