Boom, recession, or both: The US and global economies are a complex mix


WASHINGTON (Reuters) – The Conference Board’s chief economist Dana Peterson sees clear conclusions about the sharp drop in leading economic indicators for US corporate groups. Coming soon.

When I told Groundworks CEO Matt Malone about it, the reaction was far from recession. His housing foundation and water management company are still posting strong sales, pressing to fill hundreds of job openings and seeing consumers ready to spend.

“We’ve been talking about the impending recession for several quarters,” said Malone, whose Virginia Beach-based company operates nationwide. There’s a lot of confusion and complication… after all, we haven’t yet seen it affect our business.”

Three years after the onset of a devastating pandemic, a year and a half after a spike in inflation, and months after the forecast of a recession, the mysteries of the U.S., and increasingly global economy, look something like this. is. miss the mark

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Major central banks are raising interest rates at a pace many policymakers and economists thought would likely keep inflation in check, but at a high cost. Inflation has slowed a bit, but not fast enough for central bankers to feel the war has been won, and recent data shows progress is slowing.

Demand for goods and services has fallen in sectors that are highly sensitive to interest rates, such as housing and technology, and are probably the big winners of the pandemic that need to be adjusted. But across the economy, many of the recent surprises are on the upside as consumers continue to find ways to spend.

job market?

Companies like Malone don’t seem to get the memo.The US unemployment rate is at 3.4%, the lowest since 1969. At this point, Fed officials are more concerned about trends such as labor hoarding, which could lead to shortages of available workers and prevent a gradual rise in the number of unemployed in large numbers, rather than a recession. They feel the need for lower inflation.

Cleveland Fed President Loretta Mester said in an interview with CNBC on Friday that the economy will grow “well below trend” this year, but that it will still grow.

While some sectors are slowing, “we’ve had a little bit more potential strength this year than forecasters thought,” Mester said, adding that companies are “doing a lot to hire people.” “They’re trying to do everything they can to keep people employed.” With staff, they can have the staff they need after they get through this slowdown. ”

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Consumers are the “key”

Globally, similar dynamics have developed as a seemingly inevitable recession in the eurozone and the England It has been replaced by continuous slow growth.

Exceptionally warm weather and falling energy prices are helping. Personal consumption is also unexpectedly strong, and the outlook for the world is similar to the resumption of the Chinese economy from the strict lockdown caused by the new coronavirus.

Peterson admitted that it’s been a strange situation. people, and household and business spending is only slightly reduced.

“Companies are either continuing to hire or saying they have no intention of shrinking their workforces,” Peterson said. But ultimately, “the key lies with the consumer,” she added.

“How much money are consumers going to spend? From their income, their wealth, their credit cards? We may be getting to the point where consumers are tapped out.”

Beyond the Conference Board’s key US index, which has been issuing recession warnings for about a year now, there are warnings on the front.

In the bond market, short-term bond yields are higher than long-term bond yields. classic recession signal But one Fed official believes it is being distorted by inflation.

In a recent earnings call, Walmart Inc. (WMT.N) Executives pointed to signs of financially weakened households despite strong sales growth. For example, high-income consumers are shopping to beat inflation or delaying discretionary purchases.

“More resilient”

But if consumers keep spending, employers keep hiring, and the economy continues to expand, the dilemma for the Fed and other major central banks is whether inflation can continue to slow in such an environment.

It’s a vague proposal. In fact, the Atlanta Fed’s model currently shows US GDP growth in the first quarter running strong at his 2.5%.

The situation has moved financial markets closest to the Fed’s outlook since the US central bank began changing its monetary policy stance in late 2021 and began raising interest rates last March.

Markets have long been skeptical of the Fed’s decision, but the reason markets finally seem to agree with the US central bank is that the economy isn’t easily cracking and inflation isn’t slowing easily. This data indicates that This has thrown cold water on the idea that the Fed will “pivot” to cut rates.

Benson Durham, head of global asset allocation at Piper Sandler, said the recent rise in bond yields may not be such good news as the market is working more closely with the Fed. said to suggest

“Treasury yields have been rising,” Durham wrote, since the last Fed policy meeting. “But it would be premature to conclude that this has tightened financial conditions and left the Fed with less work to do…the Fed may punch harder now.”

February employment and inflation data, due out in the coming weeks, will see whether that happens as Fed policymakers gear up for their March 21-22 meeting. important in making decisions. and economic outlook.

US consumption and inflation data The report, released on Friday, appears to be pushing Fed policymakers to raise the estimated stopping point for policy rates above their December forecast of 5.1%. Personal consumption in January saw its biggest gain in nearly two years. The inflation tracking index that underpins the Fed’s policy accelerated during the month. Also, the revised numbers for the second half of 2022 showed that inflation was less contained than previously thought.

But some believe that developing markets’ prospects for rising inflation and rising interest rates may be just the flip side of an economy that continues to surprise with its strength, suggesting that Fed policymakers people still feel they can bring inflation down without it collapsing.

“The market overestimated a recession in the second half of 2022 and overestimated a recession in the first half of 2023,” St. Louis Fed President James Bullard told CNBC last week. “The U.S. economy looks more resilient than markets thought six to eight weeks ago,” he said.

Reported by Howard Schneider. Additional reporting by William Schomberg of his in London.Editing by Dan Barnes and Paul Simao

Our criteria: Thomson Reuters Trust Principles.

thomson Reuters

She has covered the US Federal Reserve, monetary policy, and the economy, graduated from the University of Maryland and Johns Hopkins, and has experience as a foreign correspondent, economics reporter, and field staff for The Washington Post.

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