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Is the economy's big comeback starting to fade? – USA TODAY

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Biden: US needs to reimagine economy and our future

President Joe Biden pitched his proposed investments in families and education at an Illinois community college on Wednesday, telling residents of the swing district that what’s good for families is also good for the economy. (July 7)

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Are the economy’s post-pandemic fireworks already fading?

Some top economists have lowered their blockbuster forecasts for this year amid lingering supply-chain bottlenecks, rising inflation and the rapidly spreading of the COVID-19 variant. Toss in a couple of wild cards too: Uncertain prospects for more government stimulus and a Federal Reserve that suddenly seems inclined to raise interest rates sooner than expected.

“Risks to the outlook have intensified,” says Barclays economist Jonathan Millar.

No need to panic. Economists still expect the U.S. to record its fastest growth since the early 1980s as Americans flush with an extra $2.5 trillion in savings — from government stimulus checks and spending cutbacks during pandemic-induced lockdowns – splurge.

For months, experts figured the recovery from the COVID recession would peak midway through the second quarter, or in May, as households spent their latest round of stimulus checks, amounting to $1,400 for individuals. But recent economic reports “reveal a somewhat sharper pullback in U.S. growth and faster inflation rate than expected,” Scott Anderson, chief economist of Bank of the West, wrote in a note to clients.

Vehicle sales fell to 15.4 million last month from 17 million in May as a result of low inventories, rising prices and a slowdown following stimulus-fueled purchases, according to TD Economics and Barclays. Housing sales and mortgage applications have slipped because of soaring prices and limited supplies. And indexes of both manufacturing and service sector activity have softened, largely due to the supply chains snags.

Anderson has trimmed his economic growth forecast to 8.7% annualized in the second quarter from 9.6% a month ago and to 7.4%, down from 7.7%, in the current quarter. For the entire year, Oxford Economics expects growth of 7% at an annual rate — which would still be the fastest pace since 1984 — down from its prior 7.7% estimate.

The disappointing indicators, and the prospect of somewhat slower growth and inflation, have helped push down 10-year Treasury yields to about 1.36% from 1.7% in mid-May and made for a more volatile stock market.

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Those factors, along with the delta variant of COVID, have increased risks that the economy could slow even further in 2021, though probably by no more than a couple of percentage points, Millar says.

Here’s a look at why the economy could slow more than projected:

Supply chain snarls and inflation

Although consumer demand has surged as the economy reopened, businesses don’t have many of the products and workers they need to keep pace. Many workers at factories, warehouses, ports and restaurants are still caring for children, wary of contracting COVID or reluctant to give up generous unemployment benefits. And trucks and shipping containers are in short supply.

Analysts had expected the shortages to ease by this summer but now say they could last through the end of the year, curtailing economic activity.

“There’s lots of strong demand but it’s a challenge to bring the goods and services to households,” Millar says. “At the end of the day, that’s what GDP (gross domestic product) is all about.”

The crunches are also contributing to a big pickup in inflation, which had been dormant for years. In May, the consumer price index was up 5% from a year earlier, the largest increase in 13 years. Average unleaded gasoline prices hit $3.15 a gallon Monday, up from $2.20 a year ago, according to AAA.

The effects could be limited if consumers believe the price increases are temporary, as leading Fed officials have argued, but could be more pronounced and dampen spending if they think the higher costs will stick around, Millar says.

The COVID delta variant

The fast-spreading strain of the virus is triggering a jump in COVID cases, which averaged 19,455 per day over the past seven days, a 47.5% increase from the previous week, according to Johns Hopkins University. The variant could lead some states to reinstate business restrictions, particularly in the South and West, where vaccination rates are low, says Anderson and Mark Zandi, chief economist of Moody’s Analytics.

Already, the variant seems to have affected job growth in states with low vaccination rates, economist Ellen Zentner of Morgan Stanley wrote in a note to clients.

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Uncertainty about more stimulus

President Biden has announced a $1.2 trillion bipartisan plan to rebuild the nation’s infrastructure and another bill that could cost even more to upgrade a variety of social service programs, such as childcare, home caregiving and free college tuition. The latter could be passed with a simple Democratic majority in the Senate. But both blueprints may be downsized significantly as the White House struggles to satisfy Republicans as well as moderate and progressive Democrats, Millar says. That would temper growth projections in coming years.

Fed concerns about inflation

The Fed has promised to keep its key interest rate near zero until the economy returns to full employment and annual inflation tops its 2% target for “some time.” But with both growth and inflation rising, Fed officials’ forecasts at a June meeting showed two rate hikes in 2023, pushing up the timetable for the first increase from 2024.

Millar says the central bank’s shift has spooked some investors. Higher inflation could prompt the Fed to raise rates sooner than anticipated, further constraining the recovery.

End of housing, student loan aid

The government suspended foreclosures on homes with government-backed mortgages and on rental evictions, and allowed Americans to put off mortgage and student loan payments, Zandi says. After several extensions, the foreclosure and eviction moratoriums are set to expire at the end of the month and the deferral of the payments, and September, he says. Although a declining number of Americans are at risk, Zandi says the deadlines pose a “meaningful threat to my optimistic baseline outlook.”

Unlike some other economists, however, Zandi believes the risks to a historic recovery will likely be no match for a massive wave of pent-up household demand.

“The economy’s prospects are strong, and it would take a lot to derail it,” he says.              

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China's economy didn't bounce back in the second quarter, China Beige Book survey finds – CNBC

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China’s exports surged by 16.9% in May from a year ago, two times faster than analysts expected. Pictured here on June 15, 2022, are workers in Jiangsu province making stuffed toy bears for export.
Si Wei | Visual China Group | Getty Images

BEIJING — Chinese businesses ranging from services to manufacturing reported a slowdown in the second quarter from the first, reflecting the prolonged impact of Covid controls.

That’s according to the U.S.-based China Beige Book, which claims to have conducted more than 4,300 interviews in China in late April and the month ended June 15.

“While most high-profile lockdowns were relaxed in May, June data do not show the powerhouse bounce-back most expected,” according to a report released Tuesday. The analysis found few signs that government stimulus was having much of an effect yet.

Shanghai, China’s largest city by gross domestic product, was locked down in April and May. Beijing and other parts of the country also imposed some level of Covid controls to contain mainland China’s worst outbreak of the virus since the pandemic’s initial shock in early 2020.

In late May, Chinese Premier Li Keqiang held an unprecedentedly massive videoconference in which he called on officials to “work hard” — for growth in the second quarter and a drop in unemployment.

Transportation, construction companies aren’t telling you they’re getting new products. They’re telling you they’ve slowed investment, their new projects have actually slowed.
Shehzad H. Qazi
Managing Director, China Beige Book

Between the first and second quarters, hiring declined across all manufacturing sectors except for food and beverage processing, according to the China Beige Book report.

The employment situation likely won’t start to improve until China stimulates its economy more in the fall, China Beige Book Managing Director Shehzad H. Qazi said Wednesday on CNBC’s “Squawk Box Asia.”

So far, there’s been little sign that stimulus has kicked in, especially in infrastructure, said Qazi who is based in New York.

“Transportation, construction companies aren’t telling you they’re getting new products,” he said. “They’re telling you they’ve slowed investment, their new projects have actually slowed.”

Inventories surge, orders drop

Unsold goods piled up, except in autos. Orders for domestic consumption and overseas export mostly fell in the second quarter from the first. Orders for textiles and chemicals processing were among the hardest-hit.

The only standout domestically was IT and consumer electronics, which saw orders rise during that time. Orders for export grew in three of seven manufacturing categories: electronics, automotive and food and beverage processing.

“Weak domestic orders and expanding inventories indicate the presumed second-half improvement will be unpleasantly modest,” the report said.

The authors noted the services sector saw the greatest reversal. After accelerating in growth in the first quarter, services businesses saw revenue, sales volumes, capex and profits drop in the second quarter.

Across China, only the property sector and the manufacturing hub of Guangdong saw any year-on-year improvement, the China Beige Book said.

Official second-quarter gross domestic product figures are due out July 15. GDP grew by 4.8% in the first quarter from a year ago.

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U.S. Economy Shrank Worse-Than-Expected 1.6% Last Quarter As Recession Fears Grow – Forbes

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Topline

The economy last quarter posted its worst annualized showing since the pandemic-induced recession in 2020, the government said in an updated release Wednesday, blaming an unexpected decline in economic activity on the omicron variant of Covid-19 and decreased government assistance.

Key Facts

The U.S. economy shrank at an annual rate of 1.6% in the first quarter of 2022—the first decline since the second quarter of 2020, the Bureau of Economic Analysis reported Wednesday in a worse-than-expected update to last month’s figure, which showed a decline of 1.5%.

The update primarily reflected softer-than-expected spending on business inventories and residential investments, which was only partially offset by an uptick in consumer spending, the government said.

In the first quarter, a record wave of Covid-19 cases spurred by the omicron variant resulted in continued restrictions and business disruptions, while government assistance programs including forgivable loans to businesses and social benefits to households expired or tapered off—further preventing growth, according to the release.

Broad declines in exports, government spending and business inventories, along with increased imports, spurred the overall decline, the government said.

The overall drop stands in stark contrast to the economy’s better-than-expected growth of 6.9% in the fourth quarter, the fastest rate in nearly 40 years, thanks in part to a jump in exports and increased inventory investments by car dealers.

What To Watch For

Economists are widely calling for a return to growth this quarter, thereby avoiding the two consecutive quarters of negative GDP growth that constitute a technical recession, but a growing wave of experts have warned odds of a recession next year are growing. In a research note on Monday, analysts at S&P Global Ratings said aggressive Federal Reserve policy to combat ongoing price spikes will usher in low economic growth this year and potentially risk a recession, warning: “What’s around the bend next year is the bigger worry.” S&P put the odds of a recession in 2023 at 40%—more than the 35% odds Morgan Stanley issued last week.

Key Background

Though the economy quickly bounced back after the Covid recession in 2020, the Fed’s withdrawal of pandemic stimulus measures, Russia’s invasion of Ukraine and lingering Covid restrictions have heightened market uncertainty this year. Last quarter, the stock market posted its worst showing since the market crash in early 2020, with the S&P falling 5% and the tech-heavy Nasdaq 9%. “Recession risks are high—uncomfortably high—and rising,” Mark Zandi, chief economist at Moody’s Analytics, said in a recent note. “For the economy to navigate through without suffering a downturn, we need some very deft policymaking from the Fed and a bit of luck.”

Crucial Quote

In an email after April’s initial report, which estimated a 1.4% decline despite expectations for 1% growth, Bankrate analyst Mark Hamrick said the lackluster performance serves as a reminder of the “volatile and complicated times in which we live,” but that the contraction is “less worrisome” because key drivers of economic growth, such as consumer and business spending, have been holding up despite the widening trade deficit and big swings in business inventories.

Further Reading

Cathie Wood Claims Economy Already In A Recession—Warns Inflation And Inventories Pose ‘Big Problem’ (Forbes)

Unemployment Will Rise And ‘Extreme’ Price Pressures Continue As Fed Hikes Risk Recession, S&P Warns (Forbes)

Major Bank Is First To Forecast A Recession—More Could Follow (Forbes)

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Sudan’s economy dominated by military interests: Report – Al Jazeera English

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C4ADS report says crackdown on patronage networks was a contributing factor to last October’s coup.

The Sudanese military and security forces have a sprawling monopoly over the country’s economy, a system that must be tackled to restore the country’s transition to democracy, a report has concluded.

The report, by the Center for Advanced Defense Studies (C4ADS), was published on Wednesday alongside a database that identifies 408 entities controlled by security elites, including agricultural conglomerates, banks, and medical import companies.

Under Sudan’s former civilian-military transitional government, which was tasked with guiding Sudan’s transition towards democracy, an anti-corruption committee was formed to confiscate assets from figures who made a fortune under the former President Omar al-Bashir.

Observers have argued that the confiscations struck at the core of the military’s patronage networks and played a significant role in compelling senior officers to topple the civilian administration in a coup last October, which has been followed by months of protests.

But C4ADS said that countries that seek to support democracy in Sudan have the tools to weaken the country’s “deep state”.

“Governments, non-governmental organizations (NGOs), and private companies have a role in dismantling Sudan’s deep state through economic sanctions, de-risked aid, and increased due diligence around private investments,” the authors of the report said.

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Economic Monopoly

The report zoomed in on two major banks, Omdurman National Bank (ONB) and Khaleej Bank, which the military and security forces use to access global financial networks, respectively.

The military – through a web of front charities – owned 86 percent of the shares in the former, according to the report.

Khaleej Bank, meanwhile, was controlled mainly by joint ventures that belong to the United Arab Emirates and the Rapid Support Forces (RSF) – two players that have strong political and economic relations.

The latter is a paramilitary force that evolved out of tribal militias that rebel forces called the Janjaweed, which committed massacres in the western province of Darfur.

The report estimated that the family of RSF leader Mohamad Hamdan Dagalo – better known as Hemeti – controls 28.35 percent of the shares in Khaleej Bank.

The report also reviewed Zadna International Company for Investment Ltd, a majority-army-owned agricultural conglomerate, on whose board of directors Hemeti’s brother, Abdel Rahim Dagalo, sits.

The company has run numerous irrigation schemes and leased out plots of land to private investors, according to Suleiman Baldo, an expert on the predatory economy in Sudan and the founding director of the Sudan Transparency and Policy Tracker.

“The story about Zadna is that it was a public company that was simply taken over by the military, which is monopolising its revenue and not giving the ministry of finance access to any of it. That’s the problem with Zadna,” Baldo said.

Reputational Damage

The spokesperson for Sudan’s military, Nabil Abdullah, denied accusations that the army has a monopoly over civilian sectors in the economy, and said that Sudan’s former civilian administration was unwilling to assume partial control of military-owned companies.

“[The army] has no economic control [of the country]. This is a lie and misleading,” Abdullah told Al Jazeera.

The report by C4ADS said otherwise. The nonprofit followed policy experts, rights groups, and United States officials in calling for targeted sanctions on enterprises owned by the military and the RSF.

Baldo acknowledged that such a move could unintentionally hurt everyday civilians who are already struggling to survive after billions of dollars worth of development assistance and debt relief were halted in response to the coup.

He added that sanctions may not be necessary since the US has already released a business advisory that warns of reputational risks to Western companies that try to partner with military enterprises in Sudan. The findings published by C4ADS could further deter foreign companies and institutions from conducting business in the country.

“Even without the sanctions, the deterrence effect that sanctions cause already exists,” Baldo said.

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