The pandemic has changed the way people lived, and for many, the way they lived. A new study found that working from home was a significant factor in this “big shift” and accounted for more than half of the sharp rise in house prices during the pandemic.
JPMorgan Chase CEO Jamie Diman says an economic hurricane is coming. Elon Musk of Tesla says he has “super bad feeling”About the recession. Companies are lowering their earnings forecasts. Ah, and we are in the midst of an energy and inflation crisis, and stocks are flirting with the bear market.
It is easy to feel unhappy in the economy. And it turns out that most Americans do: only 23% of the U.S. population say economic conditions are “somewhat good” or better, recent CNN poll conducted SSRS found.
And the same Americans keep spending like crazy – because almost everyone has a job. We just got another nice one reliable vacancy report Friday: In May, America added another 390,000 jobs. Putting this in context, it is more than twice the average 186,000 jobs the U.S. economy created each month during President Donald Trump’s administration before the pandemic – you know, just a few years ago, when Americans were very passionate about the economy.
So who is right?
The Fed is hitting the brakes
If you feel that the U.S. economy is slowing down, you are not alone. In fact, this slowdown is intentional.
Since March 2020, the Federal Reserve has given the economy sugar by buying billions of dollars in government bonds and corporate debt every month and maintaining rates around zero for two years.
The economy has strengthened since the Fed’s supply, and inflation has risen to a four-decade high. In March 2022, Fed Chairman Jerome Powell finally said “no más” and the central bank increased rates. In May, the Fed carried out the biggest rate hike in more than 20 years and promised that the beating would continue until morale improved.
A steady stream of historically large rate hikes and a rapid contraction in the Fed’s balance sheet should help cure the economy’s dependence on free money: by slowing the economy, the Fed hopes to curb inflation. But it also could plunge the economy into recession.
A strong dollar hurts multinational companies
I know what you think: what does it mean for giant megacorporations with big global footprints?
Well, Timmy, that’s not very good news. This week, Microsoft downgraded its revenue and sales forecasts for the quarter because the dollar is so strong.
Yes, now we have something else to worry about: thanks to the Fed, your money can be worth it too a lot.
Rising rates are raising the value of the dollar, which for the first time in two decades is close to par with the euro. This is good news if you are doing some international travel, and bad news if you are a giant American company that makes money abroad (Microsoft brings in just under half of its revenue from overseas) because the widgets you sell overseas will suddenly cost more for your customers compared to the widgets you sell in the good old US A.
Before you say, “Leave it to the man!” remember that these companies pay a lot of people a lot of money that goes to spend them, etc. etc. etc. You took the Econ 101. The thing is: it’s another thing that’s not very good for the economy.
Perhaps the economy is improving
The Fed is not alone in helping to slow the economy. Inflation is starting to affect consumers and retailers. Last month, Walmart, Target and a bunch of other major stores said customers have reducing their purchasesfocusing on essentials. Retailers were worsening their earnings forecasts as they expect the clouds on the horizon to approach and darken.
The electric housing market in America is also showing signs that the sparks are running out: mortgage rates are much higher than they were just a year ago (well, it’s also like the Fed’s fault), pushing some potential home buyers out of the market. Selling existing homes in the United States decreases for the third month in a row in April.
Job growth is also starting to slow down a bit. While adding nearly 400,000 jobs a month is great, historically it’s less than the 450,000 to 650,000 jobs that America added each month last year. The total number of jobs in May was the lowest since April 2021. And we yet did not compensate for all jobs lost in the early days of the pandemic. As the economy continues to close this gap, the rate of employment may slow down as we reach full employment and the labor market naturally ends.
Meanwhile, inflation itself is cooling down somewhat. Consumer prices remained 8.3% higher in April 2022 than they were in April 2021, but, hey, that’s less than 8.5% annual inflation in March! So that’s something.
All other things
The problem with the theory that a slowdown in the economy can curb inflation is that government incentives (and these sweet checks, and the Fed’s monetary policy) aren’t just responsible for the mess we’re in.
Russia is gas shutdown in some European countries while Europe is looking at go beyond Russian oil. This has led to energy shortages, sending prices through the roof. The Fed can do nothing about it unless it is sitting on an oil well (Narrator’s voice: That’s not true).
Russia’s invasion of Ukraine has led to rising commodity prices, sparking a global food crisis. Meanwhile, China was block your big cities to prevent the spread of Covid, turn the world’s second-largest economy to the south and exacerbate the deficit, which has helped raise prices virtually higher.
And the shortage of labor in America continues to raise wages and makes the shortage of goods even greater …e. Suffice it to say that these are problems that do not have simple solutions.
So what are those prophets talking about?
None of this is big news. At the same time, natural deceleration is good if not welcomed. The economy is feverish, and the only regulations are more tariff increases and more cow bellin that order.
Joe Bruceulas of RSM said he was encouraged by Friday’s job report showing signs of economic cooling. And Annette Markowska of Jefferies told CNN even more about contracting it would be necessary to curb inflation because wages continue to rise, contributing to rising inflation.
So why all the doom and gloom?
Economic skeptics seem to be hinting at the same thing: we may face a difficult situation in the future if we do not take the right action to prevent it.
Labor Secretary Marty Walsh told CNN on Friday “There is no doubt” that a severe economic period is possible, and they say that it is necessary to take measures “step by step”. Diman said an economic “hurricane” is coming, but the question remains whether it will be a downpour or a superstorm.
As my colleague Julia Horowitz noted in her newsletter “Before the Bell” on Friday: the data is messy and we are hoping for a Federal Reserve system that has limited ability to control the causes of inflation and poor reputation predict when to stop raising rates before it plunges the economy into recession.
Or, in my less elegant words: the economy may be going down the toilet, and we can only pray that no one drains it.
– Matt Egan of CNN contributed to this report.
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