Mixed messages on the economy raising questions about recession risks

Americans are super gloomy about higher prices, but they’re still spending. That’s the result of two new snapshots of the economy released on Friday that reinforce that inflation remains the main concern in the economy, leaving plenty of work for policymakers looking to lower prices.

Consumer confidence remained near record lows in June, according to new data from the University of Michigan. However, retail sales rose 1% that month, according to a separate Commerce Department benchmark also released on Friday.

The benchmarks reflect the buoyant economy, which already became evident when inflation hit 9.1% for the 12 months ending in June, thanks in large part to rising energy prices.

The pandemic, along with war in Ukraine and looming uncertainties in China, is weighing heavily on the national economy, which in recent weeks has become a cauldron of mixed messages. Hiring is slowing but remains very strong. Inflation is at its highest level for 40 years but does not prevent families from paying. Many Wall Street economists and analysts are now predicting a recession later this year or next.

“The reality is that the latest data tells us what we already knew, that inflation has persisted for too long and even when it calms down it may not cool down enough,” said Diane Swonk, chief economist at the financial company Grant Thornton. “Words like ‘pain’ and ‘higher unemployment’ have seeped into Fed messaging, meaning they know they will likely have to raise the unemployment rate to a level consistent with a recession.”

Rising costs are changing consumer spending habits and forcing many families to spend more of their family budget on necessities like rent, gas and groceries. In June, the largest increase in monthly spending occurred at gas stations, where Americans spent 3.6% more than in May. People also spent more at grocery stores, restaurants and bars, but skimped at clothing stores and department stores.

There is “a shift in what people spend, with much of the growth being driven by essential products where consumers have no choice but to accept higher costs”, said Neil Saunders , chief executive of analytics firm Global Data. “Put simply, consumers didn’t buy more product in June. They bought less product but paid more for it.”

The higher retail sales numbers aren’t adjusted for inflation, so the numbers could reflect higher prices overall for goods people are already buying. But financial markets soared after the numbers came out on hopes the Federal Reserve won’t work as aggressively in late July to stifle inflation later this month.

By Friday’s close, the Dow Jones industrial average had climbed more than 650 points, or 2.1%, while the broader S&P; 500 was up 1.9% and the high-component Nasdaq index technology, added 1.7%.

“We’re at that weird moment where you kind of want the economy to slow down. You just don’t want it to reverse,” said Jason Furman, an economics professor at Harvard University. “There are a lot of unusual uncertainties that we don’t usually see.”

The question is whether the economy shrank again in the second quarter of 2022, after contracting unexpectedly in the first three months of the year. The next set of gross domestic product figures will be released on July 28.

“After flying well above cruising altitude last year, the inevitable decline in economic growth is clearly underway,” Wells Fargo economists wrote in a research note Thursday. “The tight policy stance coupled with still high inflation suggests that a recession is more likely than not next year.”

There is a mix of signals in the business world. On Thursday, two of the nation’s biggest banks, JPMorgan Chase and Morgan Stanley, reported lower earnings in part due to fewer mergers and IPOs on Wall Street. Wells Fargo followed suit on Friday, reporting a 48% drop in net profit for the second quarter.

Both JPMorgan and Wells Fargo are putting funds aside to protect against losses in the event of a downturn. Still, JPMorgan chief executive Jamie Dimon said Americans are better positioned to weather a recession than they were before the financial crisis.

For many families across the country, the economy seems tougher. Americans face higher prices for basic necessities like housing, food and gasoline. Inflation figures released on Wednesday showed consumer prices have climbed 9.1% over the past year, beating expectations and putting renewed pressure on the central bank to take action. aggressive measures to cool the economy.

There are also growing fears that a sharp move by the Fed could tip the economy into recession. “It’s hard to find a lot of encouraging news in the latest inflation report,” said Karen Dynan, an economist at Harvard University and a former Fed economist.

“This was the most important data point the Fed would get ahead of its meeting later this month, and it will likely need to intervene more aggressively than it had hoped in order to restrain demand. And that is also increasing the odds are that they can’t get there without slowing down,” Dynan said.

The searing inflation report raised questions about whether Fed officials would act even more aggressively to tame inflation at their next policy meeting. Inflation hit a new high last month, dashing any hope that rate hikes by the central bank so far were driving prices down.

For weeks, policymakers have leaned toward another three-quarters of a percentage point hike, mirroring the increase they passed in June. But it was unclear whether they would start showing support for a full percentage point hike ahead of their July 26 policy meeting. So far, Fed officials appear to be sticking to their original message. And on the contrary, they warn against reacting too suddenly to a bucket of data.

Fed Board of Governors Christopher Waller said Thursday that while the latest consumer price index report was “a major disappointment,” there were risks in making policy decisions. “You don’t want to overdo rate hikes,” Waller said. “A 75 basis point hike is huge. Don’t think that because you’re not going to 100, you’re not doing your job.”

James Bullard, president of the Federal Reserve Bank of St. Louis, said the central bank has a lot of work to do on rates this year. But the exact configuration of the hikes matters a little less. “It probably doesn’t make too much difference to make 100 bps here, and less in the other three games this year, or to make 75 bps here and a little more in the other three games of the year” , Bullard said on Friday. .

Mary Daly, president of the Federal Reserve Bank of San Francisco, said Thursday that while she expected a sharp inflation report, she still favored a three-quarters percentage point hike. One outlier is Raphael Bostic, president of the Federal Reserve Bank of Atlanta, who has no vote this year. Asked about the possibility of a full percentage point hike on Wednesday, Bostic told reporters “it’s all on the line.”