“The economy is strong,” Powell told reporters at a press conference on May 4 after the Fed raised its target interest rate for overnight interbank loans by 0.5 percentage points, the largest since 2000. Vulnerable to recession” he contrasted with what he told Marketplace Public Radio on Thursday: “The question of whether a soft landing can actually be implemented may really depend on factors beyond our control.” Chairman Powell cited geopolitical events (war in Ukraine) and supply chain bottlenecks (China’s Covid-19 shutdown).
The day Powell pointed out his lack of confidence in such a short period of time and the Senate approved a four-year term of 80-19 is not a criticism of Powell or his colleagues. When it comes to leading the economy in difficult times, they are often ridiculed for being behind. Rather, it highlights how quickly the economy is deteriorating.
As we know, the economy contracted at an unexpected annual rate of 1.4% in the first quarter. It was the first contraction since the early days of the 2020 pandemic. Economists are increasingly convinced that the recession is not unusual. A monthly survey of more than 70 economists released by Bloomberg News on Friday lowered its forecast for annual growth in gross domestic product (GDP) to 2.7% from 3.3% in April and 3.6% in March. In 2022, it was 3.9%. You don’t need a mathematician to conclude that trends aren’t the friend of the economy.
If that’s not worrisome enough, economists also see a 30% chance of a recession within a year. If it seems manageable and not such a risk, consider that it is almost double the average of 17% between late 2009 and early 2020. A single data only confirms the bearishness. The US freight industry is struggling. Cass Information Systems Inc. said this week that April shipments declined for the second straight month, down 3.5% seasonally compared to March. “After nearly two years of spikes in cargo volumes, the cargo cycle has thumped down,” Cass said in a statement.
Consumers have no reason to believe that the decline in shipments will soon rebound if it’s just a reference. The University of Michigan on Friday said the US Consumer Sentiment Index fell to its lowest level since 2011 for May. Nearly half of respondents expect their incomes to keep pace with inflation over the next 12 months. This, as always, is a clear signal that consumer spending, which accounts for about two-thirds of the economy, will shrink, according to Bloomberg Economics.
This tally comes ahead of retail sales data for April and is expected to reduce discretionary spending as inflation shifts purchases to necessities like food and gas. As soaring prices pressure real wages, Americans are cutting unnecessary purchases and relying heavily on credit cards.
Nevertheless, despite weakness in the economy and financial markets, where investors have lost trillions of dollars in stocks, bonds and cryptocurrencies this year, Powell and his fellow policymakers have repeatedly stressed the need for at least two additional rate hikes. If you want to start pulling inflation back from its current 8.3% level to its 2% target, percentage points each at its next two policy meetings in June and July. Cleveland Federal Reserve Bank President Loretta Mester said on Friday that “unless there are big surprises, it would be appropriate to raise rates by another 50 basis points each at the next two meetings.”
It’s not all bad news. Consumers and businesses are probably in the best financial position, which will help them weather the recession better. According to the Fed, consumers have deleveraged in the years following the financial crisis and are saving between $1.6 trillion and $4.6 trillion at the end of 2019. The previous high for this indicator before the pandemic was $1.41 trillion. Goldman Sachs Group Inc. in a report this week revealed that the company’s balance sheet holds one of the strongest positions in the past two decades. Despite the recession, the company said it still expects a very small default rate of 1.9%, well below the long-term average of 4%.
So, unlike the painful recessions of 2001 and 2008-09, as Bloomberg Opinion colleague Allison Schrager explained this week, there is every reason to believe that the next recession will be mild and hardly noticeable. There is reason to believe the Fed may not need to continue raising rates throughout the year and perhaps through 2023. Tom Porcelli, chief US economist at RBC Capital Markets, said in a study note this week: “Unemployment losses (just a month’s worth) and inflation has slowed considerably. What do you think this will mean for the Fed? The hike cycle will end.”
A recession brings uncertainty, restructuring and layoffs. They also often cause political upheaval. It’s very likely that the next match will go unnoticed, but it’s getting bigger and bigger, as Powell suggests, a recession is inevitable. More from other authors in Bloomberg Opinion:
• Recession won’t be as scary as it sounds: Allison Schrager
• A strong dollar is taking a toll on US exporters: Gary Shilling
• The Fed needs to be serious about rates: Bill Dudley
This column does not necessarily reflect the views of the editorial board or Bloomberg LP or its owners.
Robert Burgess is the editor-in-chief of Bloomberg Opinion. He previously served as the global editor for financial markets at Bloomberg News.
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