Economy
Opinion | The Vibes in the Economy Are … Weird. Really Weird. – The New York Times
The economy is the story of what people do — how we spend money and time, the quantitative and the qualitative aspects of our existence. When that story becomes too noisy to interpret, people begin to expect the worst. Conflicting narratives about the state of the economy are colored by conflicting interpretations of those narratives, and discerning what is actually happening in the economy becomes near impossible. What people expect can soon end up happening, and right now, with worsening data, many people’s expectations have come together to expect a recession. And those expectations could very well lead to one.
Gross domestic product shrank in the second quarter of 2022, continuing a downturn from the quarter before. These G.D.P. figures were the icing on the cake of bad news — a 9.1 percent surge in the Consumer Price Index, skyrocketing home prices and a softening labor market, as evidenced by an increase in jobless claims.
Economic indicators are a Jackson Pollock painting of data points and trends. If you think hard enough about all of them, they begin to make a bit of sense, but there’s a lot to interpret. Economists have baseline theories about what the economy should do, but a pandemic, a war and supply chain woes have widened the gap between the “reality” of economic data and people’s experiences of that reality. If we’re not careful, flawed assumptions — what John Maynard Keynes called “animal spirits” or what the economist Fischer Black called “noise” — will fill that gap and fulfill our worst expectations.
Around 70 percent of G.D.P. is consumer spending, which is largely driven by consumer sentiment. How you, I and everyone else feel about the state of the economy determines what and how much we buy. Recent consumer confidence metrics have been weak, with the Conference Board’s Consumer Confidence Index falling to the lowest level since February 2021. According to the Bureau of Labor Statistics’ figures from last week, inflation-adjusted wages have fallen 3.1 percent in the past year, and as prices increase, purchasing power continues to fall. The housing market is nearly impossible to break into, as home prices have soared 40 percent over the past two years. Broadly speaking, consumers don’t feel great right now about their ability to afford anything.
Many blame inflation on corporate price gouging, and there is definitely a kernel of truth to that. However, many corporations’ earnings expectations are plummeting as they also struggle with higher production costs. Several retailers are entering an environment where their inflation becomes deflationary as the excess inventory they ordered to battle supply chain uncertainty is now marked down in an attempt to sell it.
A budget constraint to both consumers and corporations is a lack of necessities like natural gas and oil. When energy prices go up, everything has to go up in price, and that can result in a double cost impact for consumers.
The Federal Reserve, the ultimate vibe setter in both good times and bad, is going full “Fast and Furious” mode to try to battle inflation. The Fed’s main tool now is to worsen the overall vibes — managing demand by raising rates and making it more expensive for people to buy things.
People’s perceptions shape the economy, but those perceptions are shaped by the Fed. The risks of moving too fast are especially high now, as the slump in G.D.P. and other economic indicators show that the economy is already slowing down. If the Fed hikes rates too high in this environment, it risks a recession.
The Fed is doing everything it can to achieve a “soft-ish landing,” which comes with risks. As we all know, the Fed can’t plant corn. It can’t make boats go faster. Essentially, Federal Reserve Chair Jerome Powell’s tool kit is lowering his glasses and sternly saying, “Hey, stop buying so much stuff,” in an attempt to normalize the forces of supply and demand.
The problem is, demand doesn’t need to slow down even further; that’s already happening. Instead, we need supply-side changes — more workers, more goods and more services — which require more than just monetary policy.
The vibes in the economy are … weird. That weirdness has real effects. A recent study found that broader vibes do indeed drive what people do, with media narratives about the economy accounting for 42 percent of the fall in consumer sentiment in the second half of 2021.
Indicators like G.D.P. are important, but much of the time, the root of economic problems lies with expectations. When we think about things like inflation, financial conditions and monetary policy, it’s best to frame them through people. And people are of course, silly and messy. Far too many economists and experts forget that the economy is really a bunch of people “peopling” around and trying to make sense of this world.
When policy is more focused on indicators that might not fully reflect reality, and not on the silly and messy people whom the policy is meant to serve, we enter dangerous territory.
There is no recession yet. Right now we are in a “vibe-cession” of sorts — a period of declining expectations that people are feeling based on both real-world worries and past experiences. Things are off. And if they don’t improve, we will have to worry about more than bad vibes.
Kyla Scanlon (@kylascan) founded the financial education company Bread and produces newsletters and videos about the economy. Before starting her own company, she worked at Capital Group and an education start-up.
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Nigeria’s economy, which ranked as Africa’s largest in 2022, is set to slip to fourth place this year and Egypt, which held the top position in 2023, is projected to fall to second behind South Africa after a series of currency devaluations, International Monetary Fund forecasts show.
The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.
(Bloomberg) — The International Monetary Fund expects OPEC and its partners to start increasing oil output gradually from July, a transition that’s set to catapult Saudi Arabia back into the ranks of the world’s fastest-growing economies next year.
“We are assuming the full reversal of cuts is happening at the beginning of 2025,” Amine Mati, the lender’s mission chief to the kingdom, said in an interview in Washington, where the IMF and the World Bank are holding their spring meetings.
The view explains why the IMF is turning more upbeat on Saudi Arabia, whose economy contracted last year as it led the OPEC+ alliance alongside Russia in production cuts that squeezed supplies and pushed up crude prices. In 2022, record crude output propelled Saudi Arabia to the fastest expansion in the Group of 20.
Under the latest outlook unveiled this week, the IMF improved next year’s growth estimate for the world’s biggest crude exporter from 5.5% to 6% — second only to India among major economies in an upswing that would be among the kingdom’s fastest spurts over the past decade.
The fund projects Saudi oil output will reach 10 million barrels per day in early 2025, from what’s now a near three-year low of 9 million barrels. Saudi Arabia says its production capacity is around 12 million barrels a day and it’s rarely pumped as low as today’s levels in the past decade.
Mati said the IMF slightly lowered its forecast for Saudi economic growth this year to 2.6% from 2.7% based on actual figures for 2023 and the extension of production curbs to June. Bloomberg Economics predicts an expansion of 1.1% in 2024 and assumes the output cuts will stay until the end of this year.
Worsening hostilities in the Middle East provide the backdrop to a possible policy shift after oil prices topped $90 a barrel for the first time in months. The Organization of Petroleum Exporting Countries and its allies will gather on June 1 and some analysts expect the group may start to unwind the curbs.
After sacrificing sales volumes to support the oil market, Saudi Arabia may instead opt to pump more as it faces years of fiscal deficits and with crude prices still below what it needs to balance the budget.
Saudi Arabia is spending hundreds of billions of dollars to diversify an economy that still relies on oil and its close derivatives — petrochemicals and plastics — for more than 90% of its exports.
Restrictive US monetary policy won’t necessarily be a drag on Saudi Arabia, which usually moves in lockstep with the Federal Reserve to protect its currency peg to the dollar.
Mati sees a “negligible” impact from potentially slower interest-rate cuts by the Fed, given the structure of the Saudi banks’ balance sheets and the plentiful liquidity in the kingdom thanks to elevated oil prices.
The IMF also expects the “non-oil sector growth momentum to remain strong” for at least the next couple of years, Mati said, driven by the kingdom’s plans to develop industries from manufacturing to logistics.
The kingdom “has undertaken many transformative reforms and is doing a lot of the right actions in terms of the regulatory environment,” Mati said. “But I think it takes time for some of those reforms to materialize.”
©2024 Bloomberg L.P.
(Bloomberg) — The head of the International Monetary Fund warned the US that the global economy is closely watching interest rates and industrial policies given the potential spillovers from the world’s biggest economy and reserve currency.
“All eyes are on the US,” Kristalina Georgieva said in an interview on Bloomberg’s Surveillance on Thursday.
The two biggest issues, she said, are “what is going to happen with inflation and interest rates” and “how is the US going to navigate this world of more intrusive government policies.”
The sustained strength of the US dollar is “concerning” for other currencies, particularly the lack of clarity on how long that may last.
“That’s what I hear from countries,” said the leader of the fund, which has about 190 members. “How long will the Fed be stuck with higher interest rates?”
Georgieva was speaking on the sidelines of the IMF and World Bank’s spring meetings in Washington, where policymakers have been debating the impacts of Washington and Beijing’s policies and their geopolitical rivalry.
Read More: A Resilient Global Economy Masks Growing Debt and Inequality
Georgieva said the IMF is optimistic that the conditions will be right for the Federal Reserve to start cutting rates this year.
“The Fed is not yet prepared, and rightly so, to cut,” she said. “How fast? I don’t think we should gear up for a rapid decline in interest rates.”
The IMF chief also repeated her concerns about China devoting too much capital and labor toward export-oriented manufacturing, causing other countries, including the US, to retaliate with protectionist policies.
China Overcapacity
“If China builds overcapacity and pushes exports that create reciprocity of action, then we are in a world of more fragmentation not less, and that ultimately is not good for China,” Georgieva said.
“What I want to see China doing is get serious about reforms, get serious about demand and consumption,” she added.
A number of countries have recently criticized China for what they see as excessive state subsidies for manufacturers, particularly in clean energy sectors, that might flood global markets with cheap goods and threaten competing firms.
US Treasury Secretary Janet Yellen hammered at the theme during a recent trip to China, repeatedly calling on Beijing to shift its economic policy toward stimulating domestic demand.
Chinese officials have acknowledged the risk of overcapacity in some areas, but have largely portrayed the criticism as overblown and hypocritical, coming from countries that are also ramping up clean energy subsidies.
(Updates with additional Georgieva comments from eighth paragraph.)
©2024 Bloomberg L.P.
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