Inflation, Recovery and the Predictions for the US: A Critique of the OPEC+ Decay and the Biden Administration
“There is a lot of people who think that we will likely head into a recession in the United States at some point next year,” said Rubenstein. “But nobody knows for certain.”
“Inflation has probably peaked but it may not come down as quickly as people want it to,” said Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research.
“But you know, having said that, I think we have a fighting chance of getting through the next year without an economic downturn.” He cites inflation “coming in here pretty quickly, consumers still have cash and middle- and high-income consumers are spending and businesses are reluctant to lay off workers because their number one problem is finding and retaining workers.”
The US economy still has so much strength that it could weather another housing downturn like it did during the Great Recession.
Powell concedes that the path has gotten narrower as the Fed has had to raise rates in order to get inflation under control.
Summers on Thursday specifically cited the OPEC+ decision to dramatically cut its oil output targets as a risk to the US economy. This news from the organization is not good. It increases the risks when dealing with inflation. It increases the risks with respect to recession,” he said.
The group of major oil producers, which includes Saudi Arabia and Russia, said Wednesday that it will slash oil production by 2 million barrels per day, the biggest cut since the start of the pandemic, in a move that threatens to push gasoline prices higher just weeks before US midterm elections.
The Biden administration criticized the OPEC+ decision in a statement on Wednesday, calling it “shortsighted” and saying that it will hurt low and middle-income countries already struggling with elevated energy prices the most.
Why the U.S. Economy is Growing Strongly in the First 6 Months of the 2022 Exponential: An Analysis by Gad Levanon
Editor’s Note: Gad Levanon is the chief economist at the Burning Glass Institute. He’s the former head of The Conference Board’s Labor Market Institute. The opinions expressed in this commentary are his own.
While GDP declined at an annualized rate of 1.1% in the first half of 2022, the US economy added 2.3 million jobs in the last six months, far more than in any other six-month period in the 20 years prior to the pandemic.
Why has employment growth remained so strong? First, the US economy is holding on better than many expected. While the economy is growing slower than it did last year, we are still not in a recession, according to the Atlanta Fed. When the demand for goods and services strengthens, so does the demand for workers producing these goods and services.
Second, despite the slowing of the economy and the growing fears of recession, layoffs are still historically low. Initial claims for unemployment insurance, an indicator highly correlated with layoffs, were 219,000 for the week ended October 1 – higher than the week prior, but still one of the lowest readings in recent decades. After years of increasingly traumatic labor shortages, many employers are reluctant to significantly reduce the number of workers even as their businesses are slowing. That’s because companies are worried that they will have trouble recruiting new workers when they start expanding again.
Third, many industries are growing faster than normal because they are still recovering from the pandemic. Convention and trade show organizers, car rental companies, nursing homes and child day care services, among others, are all growing fast because they are still well below pre-pandemic employment levels.
Next year, however, will look very different. Many of the industries that are still recovering from the pandemic will have reached pre-pandemic employment levels. The industries may shift back to slower hiring because of the high demand. Job growth is unlikely to be pushed into negative territory by this alone. What will do that is monetary policy.
Reducing demand for workers or increasing labor supply is one way to bring the labor market under control. But it’s hard to engineer a boost in labor supply. That takes the kind of legislative action needed to increase immigration, drive people into the labor force or grow investment in workforce training. This will be hard to find in today’s political environment.
The Fed’s fight against high inflation has been getting tougher, stoking worries that the rapid fire of aggressive interest rate hikes will lead to a downturn. Executives and professional investors have begun issuing more somber warnings.
“Our CEOs are overwhelmingly bracing for a recession — both in the United States, and in Europe,” says Steve Odland, the head of the business trade group.
Before he became The Conference Board’s CEO, Steve Odland ran Office Depot, and he said companies want to do everything they can to cut back on overhead before a recession hits.
Meta’s Mark Zuckerberg has reportedly told his staff to expect layoffs in the near future. The CEO of FedEx warned of a global recession as his company announced it would close stores and cut deliveries.
David Rubenstein, the co- founder of The Carlyle Group, and author of “How to Invest: Masters on the Craft”, does not think there will be a Great Recession.
Wages are heating up, gas prices have fallen and the jobs market is historically strong, which suggests that the Fed may not hike rates any time soon.
Almost half of those surveyed said that they plan to hire more people in the next 12 months and 85% of them said that they planned to raise their pay.
The group went into the recession, and that’s the first time that has ever happened. “Typically, you would hear that they’re cutting back. That that they are not going to increase wages.”
When the United States is experiencing negative growth, it is a good indication that the economy is in a recession. But it is actually up to a non-profit group not tied to the government, the National Bureau of Economic Research, to officially determine that the economy is, in fact, in a recession. It could take months for that determination.
What the Financial Markets Did Before the Bell: Why the Fed and Main Street Shouldn’t Have a Constant Interest Rate Policy: An Analysis of How the Federal Reserve Left the Real Economy Forever
A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? Right here you can sign up. You can listen to an audio version of the newsletter by clicking the same link.
What does it mean? A decade of free-flowing money from the Federal Reserve to banks has created two economies, argues Nomi Prins, a former managing director at Goldman Sachs and author of “Permanent Distortion: How the Financial Markets Abandoned the Real Economy Forever.” The low rates of the past provided a boost to businesses and stock prices while Main Street suffered from low wages and little support. There is a permanent distortion, where market behavior and economic prosperity have nothing to do with each other.
What’s happening: The stock market has always been unpredictable. Analysts and economists try to prognosticate or apply some type of rational explanation to market moves, but the reality of it is that it’s often conjecture (strong, educated guesses but still guesses).
The Fed has a third unofficial mandate which is to boost markets, but it is mandated that unemployment and prices be kept in check. She said that they have seen that over the last 14 years. Beginning in 2008, interest rates for overnight bank borrowing in the United States were set low, near zero, and Fed officials pursued an aggressive monetary easing policy, where they infused money into the financial system by purchasing Treasury securities from the US Government. She noted that the stock market would go up no matter what.
The bulk of this stimulus flowed upwards into markets and not outward into the economy at large and created a world where investors became dependent on the Fed while the larger economy suffered, said Prins.
The credibility problem is caused by how important the credibility is when the Federal Reserve raises rates. If the Fed is to succeed, they said, Americans would need to believe that the central bank is steadfast in its fight to bring down prices.
But investors don’t believe it, says Prins. They think a policy shift is coming even though the Fed says it isn’t. They understand, says Prins, that eventually the Fed will return to its long-term policy of aiding markets.
Meanwhile, she says, it’s Main Street, not Wall Street, that’s feeling the brunt of these interest rate hikes, through increased mortgage and borrowing rates and a slowing jobs market.
The high inflationary environment has resulted in price hikes by companies — 52% of respondents said the prices their firms charge were up in the third quarter — but the latest survey indicates that some prices are starting to come back down. A total of 9% of respondents indicated prices were falling, the largest share reported since January 2021.
According to the survey, shortages of raw materials and labor are a problem for businesses. A record amount of respondents reported shortages.
Rishi Sunak: The Problem of Managing a Failing Economy and How It Affects Its Families, Families and Businesses
Rishi Sunak, Britain’s third prime minister in seven weeks, will face the huge challenge of projecting stability after a period of historic political and financial market chaos. But his other task — shepherding the country through a recession — is poised to be just as daunting, reports my colleague Julia Horowitz.
Sunak campaigned for the job over the summer with promises to help households tackle the rising cost of living, which is causing many to pull back spending. He said he would cut taxes, but only once price pressures eased.
Market turmoil unleashed by the plan to slash taxes, as well as government borrowing, has worsened the economic outlook.
▸ Coca-Cola
(KO), UPS
(UPS), Raytheon
(RTN), Twitter
(TWTR) and GE
(GE) report third-quarter earnings before the bell.
Plus: The Conference Board is expected to release October Consumer Confidence which measures the level of confidence consumers have in the economy at 10 a.m. ET.
While investors, business leaders and some economic models continue to warn a recession is imminent, Wall Street’s most powerful investment bank remains cautiously optimistic.
But Goldman Sachs pointed out the transition to more sustainable — but still positive — economic growth “has already occurred, and it looks durable.” The bank expects gross domestic product growth of about 1% over the next year.
Goldman Sachs concedes that there has been “much less progress” on the price side. Inflation metrics have mostly stopped getting worse but they also haven’t really got any better either.
In the case of a bad economy, delaying big purchases, such as new cars, TVs, and appliances, is the only way to keep some dry powder, according to Bezos. Meanwhile, small businesses may want to avoid making large capital expenditures or acquisitions during this uncertain time, Bezos added.
The business leader offered his starkest advice yet on a faltering economy in an exclusive sit-down interview with CNN’s Chloe Melas on Saturday at Bezos’ Washington, DC, home.
The Rise and Fall of the Economy: Economist Advice from Elon Bezos after the Trump-Cartan Wall Street Summit
The New York Times reported Monday that Amazon plans to slash its workforce, laying off 10,000 workers, the largest reduction in the company’s history. It is in addition to a hiring freeze for its corporate workforce. The company has more people working in the United States than Walmart.
Last month, Bezos tweeted a warning to his followers on Twitter, recommending that they “batten down the hatches.” Bezos said in the interview that the advice was meant for business owners and consumers.
Many may be feeling the pinch now, he added, but argued that as an optimist he believes the American Dream “is and will be even more attainable in the future” — projecting that within his own lifetime, space travel could become broadly accessible to the public.
Business leaders have been communicating with the public about the economy recently. Tesla
(TSLA) and Twitter CEO Elon Musk last month admitted demand for Tesla
(TSLA)s was “a little harder” to come by, and noted that Europe and China are experiencing a “recession of sorts.” Musk also warned that Tesla
(TSLA) would fall short of its sales growth target.
In the past four meetings, the Fed increased their rates by threequarters of a percentage point. That followed two smaller rate hikes earlier this year. The central bank’s key short-term interest rate, which sat at zero at the beginning of the year, is now at a range of 3.75% to 4%.
Traders are betting on just a half-point increase. Federal funds futures on the Chicago Mercantile Exchange show an 80% probability of a half-point hike.
It may not be that simple. Over the past year, the producer price index rose 7.4%. That was a bit higher than the expected rate of 7.2% but a marked slowdown from the 8% increase through October.
The November Consumer Price index data is due on Tuesday, the same day as the Fed announcement. CPI rose 7.7% year-over-year through October.
The economy has only been affected by the Fed’s rate hikes so far. Mortgage rates have spiked, but the job market is still strong, even though demand for housing has fallen. Consumers are still spending even though wages are growing. That can’t go on forever.
Wednesday: Fed meeting; EU industrial production; UK inflation; earnings from Lennar
(LEN) and Trip.com
(TCOM)
Truist Advisory Services’ co-chief investment officer said that a pivot or pause was not a cure-all for the market. It could be too late for rate cuts. The risks of a recession are still high.
Economists are actually forecasting a small dip of 0.1% in retail sales from October. But it’s important to put that number in context. Retail sales jumped 1.3% from September to the same period last year.
So it’s possible consumers were simply getting a head start on holiday shopping. Inflation has an effect on the numbers too, since retail sales have been impacted (positively) by the fact that people have to spend more money for stuff.
Everybody is talking about inflation this year. The CEO of Comgest Global Investors stated that disinflation will be more of a priority in the future.
Wall Street Crashes: What Do You Think about Investing in High-Energy and High-Priced Real Estate?
What do you think that means for investors? Cosserat said people should be looking for companies that are able to maintain their profit margins and still have pricing power. Two stocks that his firm owns that he said fit that bill: Luxury goods maker Hermes
(HESAF) and cosmetics giant L’Oreal
(LRLCF).
Friday: Eurozone PMI; UK retail sales; earnings from Accenture
(ACN), Darden Restaurants
(DRI) and Winnebago
(WGO)
The chance that the Federal Reserve would push the economy into recession was raised after a lackluster retail sales report in November.
The weak report means that spending did not pick up until the holiday season was over, which is a critical moment for retailers to get rid of excess inventory. The investors were not happy about that.
Target shares fell by 3.2%, Macy’s lost 3.5%, and the price of a toy was down by more than 4%.
The entire sector took a blow — the VanEck Retail ETF, with Amazon
(AMZN), Home Depot
(HD) and Walmart
(WMT)as its top three holdings, fell by 2.2%. All S&P retail stocks were down in the S&P Retail Exchange Traded Fund.
Morgan Stanley economist Ellen Zentner warned that consumers are going to be more conservative this winter due to the backdrop of the past year.
“Households are increasingly relying on their savings to sustain their spending, and many families are resorting to credit to offset the burden of high prices. These trends are unsustainable, and the current credit splurge is a true risk, especially for families at the lower end of the income spectrum,” said Gregory Daco and Lydia Boussour, economists at EY Parthenon.
American bank accounts are still quite robust, but they’re beginning to dwindle. In the third quarter of 2022, credit card balances jumped 15% year over year. That’s the largest annual jump since the New York Fed began keeping track of the data in 2004.
“Against this backdrop, we expect consumers will rein in their spending further in coming months,” said Daco and Boussour. “Real consumer spending should see modest growth in the final quarter of the year, but we expect it will barely grow in 2023.”
Premarket Stocks Trading: The First Time in History a Fed-Rate Mortgage Rate Has Tumbled in the Last Three Months
The 30-year fixed-rate mortgage averaged 6.31% in the week ending December 15, down from 6.33% the week before, according to Freddie Mac. My colleague Anna Bahney says that the 30-year fixed rate was 3.12% a year ago.
That’s a sharp reversal from the upward trend in rates we’ve seen for most of 2022. Those increases were spurred by the Federal Reserve’s unprecedented campaign of harsh interest rate hikes to tame soaring inflation. But mortgage rates have tumbled in the last several weeks, following data that showed inflation may have finally reached its peak.
The bad news for the housing market is that recent decreases in rates have led to a stabilization in purchase demand. “The bad news is that demand remains very weak in the face of affordability hurdles that are still quite high.”
The US allowed unprecedented access to the audits of Chinese companies after threatening not to sell shares in the tech giants unless they got the data.
The announcement marks a breakthrough in the dispute over how to regulate Chinese companies on Wall Street. It will come as a huge relief for these firms and investors who have invested billions of dollars in them, reports my colleague Laura He.
“For the first time in history, we are able to perform full and thorough inspections and investigations to root out potential problems and hold firms accountable to fix them,” Erica Williams, chair of the Public Company Accounting Oversight Board, said in a statement Thursday, adding that such access was “historic and unprecedented.”
Source: https://www.cnn.com/2022/12/16/investing/premarket-stocks-trading/index.html
Chinese companies are afraid of the economic downturn: Self-fulfilling prophecies for the low-density market and the impending economic crisis
It was reported by the US securities regulator that more than 100 Chinese companies were at risk of delisting in just a few years if they didn’t hand over their financial statements.
There are more than 260 Chinese companies listed on US stock exchanges, with a combined market capitalization of more than $770 billion, according to recent calculations posted by the US-China Economic and Security Review Commission.
There is a chance that consumers and business owners will end up with a self-fulfilling prophecy when they hunker down in the face of an economic downturn.
“You get into this kind of self-reinforcing negative cycle,” he told CNN’s Early Start. “So when sentiment is this bad and starting to feed on itself, we run the risk of talking ourselves into one.”
The word recession would be out of my vocabulary if I didn’t watch business shows or read the Wall Street Journal.
“It may just, in an odd kind of way, help things out because if everyone’s so nervous about recession, they are cautious,” he said. They do not take big risks. They don’t have a lot of debt. They do not go out and make huge expansions so that inflation can be brought down so that the Fed does not have to raise rates as much.
Jamie Dimon has expressed concern about an impending recession due to higher interest rates and consumers spending less money on their savings.
The risks for 2023 are high because inflation is at an all time high, and central banks are raising interest rates.
The U.S. Economy is Growing Strongly in a Slow Recession, Not in an Imbalanced Year Before the Great Wall Wall
He expects economic activity and the job market to slow as we move into next year. Hopefully we don’t lose faith and run for the bunker and go into recession.”
Recession fears helped make 2022 the worst year for US stocks since 2008. According to CFRA Research, the S&P 500 had its fourth- largest drop since 1945 when it plunged 19.4% last year.
New numbers published last week show first-time applications for unemployment benefits edged up to 225,000. That’s still low historically and almost exactly where jobless claims were a year ago, long before recession fears emerged.
After spiking above $5 a gallon for the first time ever in June, gas prices have plunged. The national average for regular gasoline recently dropped to $3.10 a gallon, an 18-month low, though it has crept higher in recent days to about $3.22 a gallon.
But that trend has begun to reverse, at least when measured on a monthly basis. Real wages have been growing faster than consumer prices, a significant shift that could give consumers firepower to keep spending next year.
The fear is that the Fed will eventually overdo it, raising rates so high and keeping them there for so long that it causes a recession — if the Fed hasn’t already done that.
Federal Reserve Chairman Jerome Powell has made it clear the Fed isn’t anywhere near ready to hit the gas on the economy by cutting rates. The removal of its foot from the brake would be a positive.
Moody’s said in a slowcession — a phrase coined by Zandi’s colleague Cristian deRitis — economic growth “comes to a near standstill but never slips into reverse.” Unemployment would rise, but not spike.
Retailers are the heartbeat of the economy in recession and the heartbeat of the economy that skirts a downturn. The firewall is sure to get under pressure, particularly when low-income households are struggling, but it should hold.
Zandi also pointed to relatively strong fundamentals in the US economy, including profitable businesses, healthy consumer balance sheets and a banking system that is “on about as strong financial ground as it has ever been.”
The economy is free of troubling imbalances that were seen before previous recessions, including overbuilt real estate markets or massive asset bubbles.