JPMorgan Chase CEO Jamie Dimon says an economic hurricane is coming. Tesla’s Elon Musk says he has a “super bad feeling” about a recession. Companies are revising their earnings forecasts downwards. Oh, and we’re in the midst of an energy and inflation crisis, and stocks have flirted with a bear market.
It’s easy to feel unhappy about the economy. And it turns out most Americans do: Only 23% of the American public say economic conditions are “fairly good” or better, according to a recent CNN poll conducted by SSRS.
And yet these same Americans continue to spend like crazy because almost everyone has a job. We just got another fairly robust jobs report on Friday: America added another 390,000 jobs in May. To put that into context, that’s more than double the average 186,000 jobs the US economy was creating every month under President Donald Trump’s administration before the pandemic – you know, just a few years ago when the Americans were very enthusiastic about the economy.
So, who is right ?
If you feel the US economy is slowing down, you are not alone. In fact, this slowdown is intentional.
The Federal Reserve had been giving the economy a sugar rush since March 2020 by buying billions of dollars in government bonds and corporate debt every month and keeping rates near zero for two years.
The economy soared on the Fed’s supply and inflation hit its highest level in four decades. In March 2022, Fed Chairman Jerome Powell finally said “no more,” and the central bank raised rates. In May, the Fed issued the biggest rate hike in more than 20 years and promised the hits would continue until sentiment improved.
A steady stream of historically large rate hikes and a rapid reduction in the Fed’s balance sheet should help remedy the economy’s dependence on free money: by slowing the economy, the Fed hopes to bring inflation under control. But it could also push the economy into a recession.
I know what you’re thinking: what does this mean for giant megacorporations with a large global footprint?
Well, Timmy, that’s not good news. Microsoft (MSFT) this week lowered its earnings and sales forecasts for this quarter due to the strong dollar.
Yes, now we have another thing to worry about: thanks to the Fed, your money can be worth it too a lot.
The rate hikes are helping to boost the value of the dollar, which is close to parity with the euro for the first time in two decades. That’s good news if you’re traveling overseas and bad news if you’re a giant American corporation making money overseas (Microsoft brings in just under half of its revenue overseas ), because the widgets you sell overseas will suddenly cost you more for your customers than the widgets you sell in the good old United States of America.
Before you say, “Stick it to the man!” remember that these companies pay a lot of money to a lot of people, who are going to spend it, etc. etc
The Fed is not alone in contributing to the slowing economy. Inflation is beginning to affect consumers and retailers. Walmart (WMT), Target (TGT) and a slew of other major stores said last month that customers were cutting back on purchases, focusing on necessities. Retailers have lowered their earnings outlook as they expect those clouds on the horizon to come closer and darker.
The U.S. electric housing market is also showing signs of lack of spark: Mortgage rates are massively higher than a year ago (OK, that’s also a bit of the Fed’s fault), driving away some potential buyers. of the market. Sales of existing homes in the United States fell for the third consecutive month in April.
Employment growth is also starting to slow down a bit. While adding nearly 400,000 jobs in a month is great, historically it’s less than the 450,000 to 650,000 jobs America was adding each month last year. May’s job total marked the lowest since April 2021. And we still have not made up for all the jobs lost at the start of the pandemic. As the economy continues to close this gap, the pace of hiring may slow as we reach full employment and the job market naturally falters.
Meanwhile, inflation itself is slowing somewhat. Consumer prices were still 8.3% higher in April 2022 than they were in April 2021, but hey, that’s less than the annual inflation rate of 8.5% in March! So it’s something.
The problem with the theory that a slowing economy can bring inflation under control is that government stimulus (both those soft, sweet checks and the Fed’s monetary policy) isn’t solely responsible for the mess we find ourselves in.
Russia cuts gas in some European countries while Europe seeks to move beyond Russian oil. This created energy shortages, causing prices to skyrocket. The Fed can’t do anything about it unless it’s sitting on an oil well (narrator’s voice: It’s not).
Russia’s continued invasion of Ukraine has driven up commodity prices, creating a global food crisis. Meanwhile, China has locked down its major cities to prevent the spread of Covid, turning the world’s second-largest economy south and exacerbating shortages that have helped drive up the prices of almost everything.
And the labor shortage in the United States continues to drive up wages and has further exacerbated shortages of goods…is. Suffice it to say that these are problems with no easy solutions.
None of this is good news. At the same time, a natural slowdown is fine, if not welcome. The economy is feverish, and the only prescriptions are more rate hikes and more cowbells, in that order.
RSM’s Joe Brusuelas said he was encouraged by Friday’s jobs report for showing signs of an economic cooling. And Aneta Markowska of Jefferies told CNN even more contracts would be needed to bring inflation under control, as wages continue to rise, further fueling inflation.
So why all this catastrophizing?
Economic naysayers seem to be hinting at the same thing: we could face a dire situation down the road if we don’t take the right steps to prevent it.
On Friday, Labor Secretary Marty Walsh told CNN there was “no doubt” that tough economic times were possible and said action needed to be taken “step by step.” Dimon said an economic ‘hurricane’ is coming – but the question remains whether it will be a rainstorm or a superstorm.
As my colleague Julia Horowitz noted in her Before the Bell newsletter on Friday: The data is messy, and we rely on the Federal Reserve, which has a limited ability to control the causes of inflation and an infamous reputation for predicting when stop raising rates before pushing the economy into a recession.
Or, in my less elegant words: the economy may be flushing down the toilet, and we can only pray that no one pulls it.
– CNN’s Matt Egan contributed to this report.