Inflation, consumer grief, raises concerns that the recession is already here

Steak tray is for sale in the meat section of a supermarket in McLean, Virginia, June 10, 2022.

Saul Loeb | AFP | Getty pictures

The case that a recession threatens the United States intensified on Friday, as strong inflation and historic lows in consumer sentiment painted an increasingly bleak economic picture.

As if the 8.6% increase in the consumer price index was not bad enough news, that release was followed later in the morning by the University of Michigan Index of Consumer Sentiment.

The widely followed measure of optimism recorded a paltry 50.2, the lowest in survey data dating back to 1978. It is lower than the depth of the Covid outbreak, lower than the financial crisis, lower even than the last inflation peak back in 1981.

Overall, the data pose a prospect that is not good for those hoping that the US can bypass its first recession since the brief pandemic downturn in 2020.

“I would not be surprised if it started in the third quarter of this year,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “You can say that we are in the middle of it right now, in the start-up phase. Only in retrospect will we know for sure, but that should not surprise us at this point.”

How long it will take to get to the official recession is a matter of debate that only time will solve. However, the latest data suggest that the accounting moment may be closer than many economists are willing to admit.

Although consumption spending remains robust, it comes at the expense of a savings rate that has fallen to its lowest level since September 2008, the month Lehman Brothers crashed to trigger the worst financial crisis.

Households’ net worth in the first quarter fell slightly, the first decline in two years, according to Federal Reserve data released earlier this week. This was when household debt rose 8.3%, the largest annual gain since 2006.

The Atlanta Fed tracks second-quarter GDP growth of just 0.9%. Following Q1’s decline of 1.5%, a further deterioration in the current period will trigger a common rule of thumb for a recession – two consecutive quarters of contraction.

A strong labor market has been the main firewall against a decline, but even that has shown some chops lately: Last week’s wage statistics from May outside farms represented, although better than expected, the smallest gain since April 2021. And Thursday’s weekly report for unemployed for last. week showed the highest level since mid-January.

Winding on the edge

Nevertheless, the prevailing feeling on Wall Street is that the economy can still manage to avoid an actual recession.

“If you look at these numbers, there’s pretty much nothing the Fed would say, ‘This is good news,'” said Michael Kushma, Morgan Stanley’s chief investment officer for global interest-bearing income. we flirted with recession, but it’s not likely to get there yet. “

Kushma even acknowledges that “the investment landscape is negative on almost every front.”

In fact, Wall Street ends the week in the middle of a stream of sales that includes stocks and bonds, indicating both a likely path for higher interest rates going forward and a bill that the relatively rosy outlook for corporate earnings is unlikely to hold up.

Target has served as a canary in Wall Street’s coal mine, offering two recent adjustments to the outlook to reflect a weakened customer, growing inventories and thus falling price strength. Should these trends escalate, it is unlikely that the consumer spending pillar that supports nearly 70% of the US $ 24 trillion economy will hold.

“More and more business announcements and results releases (or warnings) reflect a consumer who is now in a terrible mood given the decline in net disposable income, and consequently these consumers are dramatically reducing consumption behind it,” wrote Rick Rieder, BlackRock’s CIO for Global Interest Rates. .

Rieder worries that the biggest risk to consumer spending and job creation is that the current wave of high inflation will pressure central banks such as the Fed to tighten policies too much “and essentially fall into a damaging policy error.”

“We are in a technical recession”

However, it is a feeling elsewhere that the damage has already been done.

“We are in a technical recession, but just do not realize it,” wrote Bank of America’s investment strategist Michael Hartnett before the inflation and sentiment reports hit. He noted the Atlanta Fed’s GDP estimate, saying the United States is just “a few bad data points away from the ‘recession’.”

Fed officials have expressed confidence that they can continue to raise interest rates without overturning the increasingly fragile economy.

According to the Inflation Report, the markets priced at least three consecutive half percentage point interest rate increases – in June, July and September – and a fairly good chance of another in November. However, central bankers are unlikely to commit so far, hoping that the work they do over the summer will be enough to slow down the pace of price increases and the need for more draconian policy tightening.

“Consumers on the margin will not be able or willing to continue paying these prices. Therefore, we believe it introduces greater stagflation risk,” said Phil Orlando, chief stock market strategist for Federated Hermes, referring to the term stagnant. growth combined with high inflation. “From a temporal point of view, we do not have a recession on the table for this year. Our models suggest that 2024 is the most likely timetable for recession.”

Still, Orlando said investing in the current environment is going to be tough. Federated expects that more damage will be done before a possible turnaround operation in late summer or early autumn.