St. Louis Fed President James Bullard forecasts a ‘pretty good second half of the year’ despite economic headwinds.
Wall Street is increasingly convinced that the Federal Reserve is going to drag the economy into a recession with its war on inflation.
Bank of America, Deutsche Bank, Wells Fargo and Goldman Sachs are among the most notable firms forecasting the possibility of a downturn within the next two years, as the U.S. central bank moves to aggressively tighten monetary policy in order to cool consumer demand and bring inflation back down to its 2% target.
There are growing signs the banks may be right, although recessions are notoriously difficult to predict.
A man shops at a Safeway grocery store in Annapolis, Maryland, on May 16, 2022, as Americans brace for summer sticker shock as inflation continues to grow. (JIM WATSON/AFP via Getty Images / Getty Images)
Here is a closer look at some signs the economy is beginning to splinter.
GDP unexpectedly shrank in the first quarter
Economic growth in the U.S. is already slowing.
The Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly shrank in the first quarter of the year, marking the worst performance since the spring of 2020, when the economy was still deep in the throes of the COVID-induced recession.
GDP contracted by 1.4% on an annualized basis in the three-month period from January through March, according to the government’s first reading of the data. That was sharply below Refinitiv economists’ expectations for growth of 1.1%, and suggested that dark clouds are looming on the horizon.
“The shock drop in GDP is a wake-up call that the economy isn’t as strong as we all thought,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “It’s possible that GDP gets revised higher next month, as this is just the first release and there will be two revisions, but it is a warning sign.”
Traders work on the floor of the New York Stock Exchange (NYSE) on May 18, 2022, in New York City. (Spencer Platt/Getty Images / Getty Images)
Recessions are technically defined by two consecutive quarters of negative economic growth and are characterized by high unemployment, low or negative GDP growth, falling income and slowing retail sales.
Market tumbling
Markets have gotten obliterated in a widespread sell-off this month as high inflation, rising interest rates and the risk of a recession have rattled investors.
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The benchmark S&P 500 tumbled more than 20% this year, officially entering a bear market on Friday afternoon for the first time since March 2020, at the start of the COVID-19 pandemic. The Nasdaq Composite, meanwhile, is already deep into its own bear market, while the Dow Jones Industrial Average has also plunged for nine consecutive weeks.
Fed tightening
The Federal Reserve is hoping to achieve the rarest of economic feats as it moves into full inflation-fighting mode: cooling consumer demand enough so that prices stop rising, without crushing it so much that it throws the country into a recession.
Although Fed policymakers are counting on finding that elusive sweet spot — known as a soft landing — history shows that the U.S. central bank often struggles to successfully thread the needle between tightening policy and preserving economic growth.
Recent research from Alan Blinder, a former Federal Reserve board vice-chairman and a Princeton economist, identified 11 tightening cycles since 1965, of which eight were followed by recessions. Still, that doesn’t mean a severe recession is guaranteed: There were five instances of either very mild recessions in which GDP fell less than 1% or there was no economic decline at all.
Fed policymakers hiked the benchmark federal funds rate by a half point earlier this month, and Chairman Jerome Powell has all but promised that two, similarly sized increases are on the table at the forthcoming meetings in June and July. He has echoed that sentiment as the Fed races to catch-up with runaway inflation and bring it back down to the 2% target, promising the Fed will raise rates as high as needed to cool prices.
In this Jan. 29, 2020 file photo, Federal Reserve Chair Jerome Powell pauses during a news conference in Washington. (AP Photo/Manuel Balce Ceneta, File / AP Newsroom)
“What we need to see is inflation coming down in a clear and convincing way and we’re going to keep pushing until we see that,” he said Tuesday during a Wall Street Journal live event. “If that involves moving past broadly understood levels of neutral we won’t hesitate at all to do that.”
Hiking interest rates tends to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut back on spending.
“The Fed is attempting to thread the needle while wearing boxing gloves and a mouth guard, which reduces its degrees of freedom to act without causing damage to the real economy,” said RSM chief economist Joe Brusuelas, who has questioned whether the central bank will be able to achieve a soft landing.
Inflation
The closely watched April consumer price index was supposed to show that sky-high inflation had peaked and that prices were starting to moderate.
Instead, prices actually rose more than expected in April, suggesting that inflation will persist at elevated levels for some time: While the Labor Department reported that the headline inflation figure did in fact moderate for the first time in month, the gauge still soared by 8.3%, a markedly fast pace that is close to a 40-year high.
Fruit is displayed inside a store on May 12, 2022, in New York City. (Spencer Platt/Getty Images / Getty Images)
At the same time, a different gauge that measures prices excluding food and energy – more volatile measurements – jumped by 0.6%, exceeding all estimates.
“This is another upward inflation surprise and suggests that the deceleration is going to be painstakingly slow,” said Seema Shah, chief strategist at Principal Global Investors. “The focus will soon start shifting from where inflation peaked to where it plateaus, and we fear that it will plateau at an uncomfortably high level for the Fed.”
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
