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The economy, inflation, and why it feels like a recession is coming –



Elon Musk recently told Tesla executives he has a “super bad feeling” about the economy, so he wants to pause hiring and cut the company’s workforce. This is perhaps not the best way to run a business, but it is indicative of the current mood — a lot of people have a sense that something’s just off in the economy, or it’s about to be. There’s this nagging sentiment that we’re in a precarious spot, that there’s some economic boogeyman lurking just around the corner.

This sense of dread is so pervasive that it might surprise you to hear that many aspects of the US economy are generally in good shape right now. The unemployment rate is low, and the labor market is strong. Job openings are at near-record levels, and many workers who want to find something better are doing so. Household and corporate balance sheets are strong. Business profit margins are coming down some but are not disastrous. The stock market is faltering, but the worst troubles seem to be concentrated to the high-flying tech sector that was bound to cool off a bit. Stock market investors are still much wealthier than they were five, 10 years ago.

The elephant in the room is, of course, inflation, which is high and, for most consumers, just incredibly annoying. Rising prices are cutting into wage gains for workers. The average price of gas nationally was $4.91 as of June 7, climbing just as many Americans get ready to hit the road for the summer.

“Everything else is going swimmingly, but the inflation is painfully high. People can’t get around that, psychologically,” said Mark Zandi, chief economist at Moody’s Analytics. Add to inflation over two years of a pandemic, war in Ukraine, mass shootings, and political dysfunction, and it makes it hard to say you feel good about anything, including the economy. “It’s just a noxious brew that’s come together and is weighing very heavily on the collective psyche at this point.”

The Federal Reserve is tightening monetary policy to try to combat inflation, which could push the economy into a recession. Regardless, the breakneck pace of the recovery from the pandemic recession is slowing down.

The economy isn’t terrible, but a combination of factors make it feel like it is — and that it’s only going to get worse, even though that’s not at all a foregone conclusion.

Inflation, not fun

Inflation in the US is at levels the country hasn’t seen in decades, and people, frankly, hate it. A recent poll from FiveThirtyEight and Ipsos found that over half of the country says inflation is the most important issue facing the country, well ahead of issues such as political extremism, gun violence, and climate change. Pew found that 70 percent of Americans say inflation is a very big problem, with no other issue coming very close.

Inflation can be really painful for consumers, especially on items such as food and gas that they can’t really skip buying. It’s also always staring them in the face in a way that other facets of the economy are not, at least not so obviously.

If you have gotten a raise over the past year — and many people have — it was likely a one-time thing. “It’s not like every week your boss is like, ‘Hey, we gave you another raise.’ With inflation, it’s a constant creep,” said Nick Bunker, economic research director at Indeed. Gas prices, in particular, are almost unavoidable, even if you’re not filling up your tank. “How many goods and services do we have where the price is prominently displayed on large signs?”

The inflation issue weighs heavily on how people perceive everything else to be going. Many members of the public appear to believe the country is already in a recession. That is very unlikely to be the case, though the economy did shrink in the first quarter of the year.

The way people say they feel about the economy doesn’t necessarily align with how you might expect them to if the country were in a dire economic situation. Consumers are still spending, though more appear to be dipping into their savings to do so (and it’s not clear if they’re taking home less due to inflation). In late 2021, a survey from the Fed found that Americans were reporting the highest levels of financial well-being since the survey began in 2013, even though their perceptions of the broader economy declined. The Atlantic’s Derek Thompson recently named the scenario a sort of “everything is terrible, but I’m fine” situation.

The University of Michigan’s consumer sentiment index in May fell to its lowest level since August 2011, driven down by how consumers feel about conditions for buying houses and durable goods and their outlook about the future of the economy because of inflation.

“We’re at levels that would be consistent with a bigger recession,” said Claudia Sahm, a former economist with the Federal Reserve. “There is no way, given the labor market, given consumer spending, that right now we are in a recession.”

Sahm pointed out that last time consumer sentiment was so low, the US was in the midst of the debt ceiling crisis and still climbing out of the Great Recession, and there was turmoil in Europe. Essentially, a lot of things were bad. Now we’re in a similar scenario — people feel bad about a lot of things, which translates into how they’re feeling about the economy. Consumers are “just really pissed off about the world,” Sahm said. There’s still Covid, there is again turmoil in Europe, there’s growing anger over politics. Practically no one says they’re happy about the direction of the country. “When we think about the world, the economy, it’s not so separable.”

A recession isn’t for sure looming, but it feels like it is

In early June, JPMorgan Chase CEO Jamie Dimon warned an economic “hurricane” is on the horizon, citing the Fed shrinking its balance sheet and the Russia-Ukraine war’s impact on commodities prices in his reasoning. “Right now, it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle this,” he said. “That hurricane is right out there, down the road, coming our way. We just don’t know if it’s a minor one or Superstorm Sandy.”

Like Musk’s “super bad feeling,” Dimon is tapping into the current mood — many consumers, economists, and investors think there could be a recession on the horizon. In May, a Bloomberg survey of economists found there’s a 30 percent probability of a recession over the next year. Many of the stock market’s recent troubles can be tied back to recession fears and concerns that the Fed, in its attempts to fight inflation, will cause the economy to falter.

“Markets went from being like, ‘Oh, yeah, soft landing, oh, yeah, the Fed’s got this,’ to ‘Oh, my god,’” Sahm said.

Despite some of the doomsaying, a recession isn’t guaranteed — there’s a joke in finance that the stock market has predicted nine of the past five recessions. The Fed could get the economy to a “Goldilocks” state, where everything’s just kind of fine. There are signs the hot economy could be settling, such as a slowdown in the housing market and some moderating wage growth.

Zandi still thinks there’s a possibility of dodging a recession in the near term. “We need a little bit of luck on the pandemic and the Russian invasion and some deft policymaking by the Fed,” he said.

Whether or not a recession does hit, the economy is in a moment of transition. The recovery from the pandemic recession was super-fast; it’s going to slow down.

“We’re going through a very volatile period, so the nature of the economic expansion is changing. We just went through the pandemic recession and we had a very rapid rebound, and that’s giving way to the normalization of growth rates,” said Ataman Ozyildirim, senior director of economics at the Conference Board. “It’s a time of adjustment, and of course, people don’t like change, so it makes people very nervous, and rightfully.”

As Dimon’s comments note, the “hurricane” on the horizon may not be as broadly devastating as recent history might make you think. A potential 2022 or 2023 recession won’t look like 2008 or 2020, as Matt Zeitlin recently laid out in Grid. It could be a more garden-variety recession, and one more people are better poised to navigate — though, of course, some groups are much better set up to navigate downturns than others.

Heading into the 2008 recession, Americans had much more debt than they do today, explained Damon Jones, associate professor at the University of Chicago’s Harris School of Public Policy. Still, the prospect of any recession is scary. “Nobody wants to go through a recession, and different people experience deeper recessions, so the topline unemployment rate can mask much higher rates for certain subgroups,” Jones said.

The Black unemployment rate consistently runs higher than the white unemployment rate in good times and bad. Households with higher incomes and higher savings are often more adept at weathering a storm than low-income people without savings.

Jones also pointed out that if a recession does hit, the federal government will likely not come to the rescue in the way it did during the Covid recession. Workers might be instinctually aware that if they lose their jobs, extra unemployment benefits aren’t coming. “If we have a slowdown and unemployment and it gets harder to find jobs, is that going to come back again? In the presence of the inflation that we have?” Jones said.

On the bright side, employers could be more hesitant to lay off workers this time around, though there have been layoffs in the tech sector already. “Employers are probably keeping in mind that they went quickly from letting people go to hiring them, and they had a hard time rehiring people,” Bunker said.

He added that in a strange way, some of the current economic pessimism could actually wind up helping. If people don’t expect their wages to go up, then that helps to avoid a wage-price spiral that becomes a sort of doom loop of inflation. “It’s a bad vibe, but it might be good for the macroeconomic outlook,” he said.

It just kind of seems like nothing in the world will ever be better

It’s impossible to tell anyone how to feel about the economy, or about anything, really. And the way we feel about the economy isn’t always logical. (See: how partisan opinions of the economy shift depending on who’s in the White House, or the wealth effect, where people feel better about spending when their investments are doing well.)

The White House would probably very much like to beat the drum that actually, things are not that bad. But if suddenly it costs you double or triple what it used to to fill up your gas tank, it’s not a message that resonates.

There is also the simple fact that we’re coming off of a tumultuous two years, and it feels a bit hard to believe there’s really any reprieve on the horizon. The pandemic is still happening; everyone’s angry about politics. The recent news cycle, from mass shootings to impending Supreme Court decisions, has been awful.

To a certain extent, of course it feels like the economy is about to fall apart. So does everything else.

While Musk and Dimon are singing a pretty gloomy economic tune, their fellow rich guy — former Goldman Sachs CEO Lloyd Blankfein — has taken a different route. Earlier this month on Twitter, he basically told everyone to relax. “Dial back a bit the negativity on the economic outlook. If I’m managing a big company of course I’m prepping for the worst. But the economy is starting from a strong place, with more jobs than takers, and is adjusting to higher rates,” he wrote. We’re in “riskier times,” he added, but maybe it will be okay in the end.

It’s not a bad sentiment. It’s also probably slightly easier to have if you’re worth a billion dollars.

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Britain's Battered Economy Is Sliding Toward a Breaking Point – BNN



(Bloomberg) — Britain under Prime Minister Boris Johnson is running into the biggest headwinds it’s faced since the 1970s, heaping pain on an economy still reeling from Brexit and the pandemic.

After suffering from unprecedented shocks in recent years, the nation is succumbing to more intractable problems marked by plodding growth, surging inflation and a series of damaging strikes.

The result is a plunge in consumer confidence that analysts warn may lead to a recession. Railway workers walked off the job in anger that their living standards are slipping, and teachers, doctors and barristers may be next.

The malaise is a far cry from the boom and “cool Britannia” reputation that Tony Blair’s government enjoyed through the early part of this century.

The headline figures make grim reading. The economy is on track to shrink in the second quarter, raising the possibility that the UK is already in a recession. Even when the outlook appeared brighter, officials estimated that growth would settle at a below-par 1.8% a year, with no end in sight to the feeble productivity that has blighted the country for over a decade.

While growth is on track to lag most major economies next year, inflation is also on the rise. Consumer prices surged by 9.1% in the year through May, the most for 40 years. 

The Bank of England expects inflation to accelerate again when energy bills are allowed to rise in the autumn, reaching more than 11%. 

It’s a blow for the UK, which led the world in growth after the pandemic, and recalls the dark days of the 1960s and 1970s when commentators and politicians identified Britain as the “sick man of Europe” because of its performance.

Those figures overshadow deeper structural problems hobbling the UK. Chief among them is productivity growth, which slowed to a crawl after the financial crisis in 2008 and 2009. Only Italy put in a worse performance.

How much a worker can produce is important because it drives the long-term potential of the economy. Low productivity limits the pace at which output can grow and depresses wage packets. Real wages took years to recover to their 2007 levels after the financial crash.

An hour of work in the UK generates around $60, according to the OECD. The figure is over $70 in the US and about $67 in France and Germany. Economists and policy makers debate the causes of the malaise but say that fixing it is crucial if Britain is to get out of the slow lane.

The gaps in performance within the UK are equally stark, with London consistently outpeforming other regions, in part due to the concentration of financial services in the capital city. Johnson came to to power in 2019 on a pledge to “level up” poorer parts of the country, but there are few signs that the policy is working.

One explanation for the productivity gap is a lack of investment. British companies spend less on things like plant, machinery and technology than those in most other major economies.

Chancellor of the Exchequer Rishi Sunak says the tax system is one of the problems and is working on a way to improve allowances companies can claim for making investments. 

Brexit uncertainty also seems to have unsettled executives, with investment flat-lining since the 2016 public vote to leave the European Union. Had they continued to spend as they did before the referendum, investment would be around 60% higher today.

Life outside the EU has also had an impact on trade as importers and exporters contend with higher trade barriers.  Despite a sharp fall in the pound since the vote, there is little evidence to suggest the external sector has benefited from increased competitiveness. 

Analysis by Bloomberg Economics shows the UK lagged behind the trade performance of other big nations before the pandemic, and has failed to fully share in the global trade rebound since then.

What Bloomberg Economics Says:

“It’s been six years since the UK voted to leave the European Union and more than one since it established a new relationship with its main trading partner. From a 16% devaluation of the pound to an eye-watering slide in trade and investment, Brexit’s impact is plain to see. The data have only reinforced our view that life outside of the EU would leave the UK worse off.”

–Ana Luis Andrade, Bloomberg Economics. Click for the INSIGHT. 

The housing market is another constraint. Prices have risen almost without break since 1995, straining affordabilty for first-time buyers. Properties are in short supply in places like London that’s long been the engine driving the national economy. 

The expense and difficulty of moving limit labor mobility, depriving companies and public services of key workers, and leave consumers channeling more wealth into the property market than their peers abroad.

Housing is the most visible drain on consumers, but wages are lagging too. Real wages adjusted for inflation are now falling at the fastest pace in 20 years. In 2019, wages in the UK trailed far behind those in the US and Canada.

Workers are rebelling, with rail unions embroiled in the biggest work stoppage since 1989 and teachers, doctors and barristers are threatening to walk off the job. 

The strife recalls the 1970s, when Harold Wilson’s Labour government put industry on a three-day week because of an energy crisis and strikes by coal miners.

©2022 Bloomberg L.P.

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Key Indicator Shows China’s Economy Set For Further Slump – Forbes



Just when you thought China might be back on track, a key economic indicators suggests the opposite is coming down the pike.

Recently the price of iron-ore slumped, indicating that demand for this key ingredient in steel making is slipping as well. Recently one metric ton of the or would fetch $116, down more than 25% from almost $160 in early March, according to data from TradingEconomics. That’s quite a tumble.

As the largest maker of steel, China is also by far the largest buyer of iron-ore, and so when prices are slipping it strongly suggests that China isn’t buying as much iron-ore as it normally does. In 2020, the communist country produced 57% of all steel or around 1.1 billion tons, according to World Steel Association data. No other country comes close.

Typically when China’s steel production falls then its economy stalls. We saw this back in mid 2015 when its output of the metal dropped for the first time in more than three decades. The resulting fallout came in August when the Chinese stock market took a tumble and shook other securities markets around the globe.

The question now is what will happen next in China. Likely there’ll be further softness in the economy. If the the price of iron-ore remains soft or even falls further then its a clear sign that China isn’t planning on its usual output of steel.

That matters because steel has long been the lifeblood of that country’s economy. Teh huge real estate construction that has happened over the past two decades required steel for building skyscrapers, factories and dwellings across the massive Asian country. Steel has also been needed as feedstock for the country’s huge manufacturing industry which produces key components for automobiles across the globe.

What’s shocking here is that while China is in midst of undoing some of its recent COVID-19-related lockdowns that brought vast swathes of the communist country to an economic standstill. If those locked-down cities were now getting back to work, then why aren’t we seeing signs of an industrial resurgence?

So far, that’s not clear. If things were getting back to any form of normal then we should see demand for iron-ore creep up and along with it the prices of the mineral should rally. Investors in Chinese stocks or even those listed in Hong Kong should remain cautious until we see evidence of a real recovery.

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China's Economy Improves in June From Lockdown-Induced Slump – BNN



(Bloomberg) — China’s economy showed some improvement in June as Covid restrictions were gradually eased, although the recovery remains muted. 

That’s the outlook based on Bloomberg’s aggregate index of eight early indicators for this month. The overall gauge returned to the neutral level after deteriorating for two straight months.

Economic activity picked up in June after financial hub Shanghai lifted its lockdown, allowing businesses to restart and most residents to leave their homes. That can be seen in a rebound in small business confidence, which started growing again after contracting for two months. 

A survey of more than 500 smaller firms showed that “demand and production recovered strongly among manufacturing,” and export-oriented smaller firms outperformed, according to Hunter Chan and Ding Shuang, economists at Standard Chartered Plc. 

However, “the manufacturing recovery was more significant than services,” they said. Contact-intensive industries such as retail and catering continued to be a drag, while real estate, transport and information technology reported an acceleration in activity and construction jumped. 

Rising activity isn’t translating into higher demand for some building materials yet. More steel plants have been idled and inventory levels at major Chinese steel mills have climbed 10.7% in mid-June from earlier in the month, and are about 82% higher than the start of this year. Stocks of steel rebar, which is used in construction, rose slightly in June. 

Beijing has pledged to boost policy measures to support growth, with President Xi Jinping saying last week China would strive to meet its goals for the year. Stocks were up for a fourth week on optimism of stimulus and as lockdowns ended, with foreign inflows rising. 

However, the housing sector continued to be a drag on the economy. Property sales declined in the first three weeks of June in the top four cities in China, even though sales in Shanghai last week had mostly recovered to the level before the lockdown. 

An official index that tracks apartment and home sales has now declined for 11 straight months — a record since China created a private property market in the 1990s. The slump likely continued into June, with weekly sales in the top 50 cities contracting from the level last year.  

Read more: China’s Property Slump Is a Bigger Threat Than Its Lockdowns

The car market is making a gradually recovery after the lockdowns. Based on sales in the first two weeks of this month, more cars were sold in June than the same period in 2021. Sales fell in the past three months as Covid restrictions caused car plants and dealerships to shut and also prevented people across the country from leaving their homes to go shopping. 

Total retail sales also dropped in that period, with the economies of Beijing and Shanghai the worst hit.

The recovery in the services industry will likely take longer than for goods. Consumers are still unwilling or unable to go out as much as before since China’s strict Covid Zero policy means they face being quarantined for weeks if they’ve been in the same location as a positive case. 

The restrictions and factory closures of the past months have also curbed the incomes of many businesses and workers, even if they weren’t locked down. 

Read more: Even Without a Lockdown, Beijing’s Economy Struggled in May

The export sector likely supported demand in June, as companies ramped up shipments that had been delayed and ports worked to clear the backlog of containers. Although South Korean exports in the first 20 days of the month fell for the first time in more than a year, that was largely because of fewer working days this year than last. 

The daily average value of Korean shipments rose 11% in the period from the same time in 2021. Exports have been a strong driver for China’s economy and the strong growth continues to defy predictions that they would slow markedly or start to fall. 

Read more: Metals Haven’t Crashed This Hard Since the Great Recession

The outlook for those shipments in the rest of this year depends on whether rising concerns about a global recession are correct or not. The price of copper had its steepest weekly loss in a year last week as global recession fears mounted, damping the outlook for demand and battering commodities from oil to metals. The metal used in wires and cables extended its weekly loss to 7%, with prices hitting the lowest level since February last year following disappointing US business activity data that included an abrupt cooling in manufacturing. 

Early Indicators

Bloomberg Economics generates the overall activity reading by aggregating a three-month weighted average of the monthly changes of eight indicators, which are based on business surveys or market prices.

  • Major onshore stocks – CSI 300 index of A-share stocks listed in Shanghai or Shenzhen (through market close on 25th of the month).
  • Total floor area of home sales in China’s four Tier-1 cities (Beijing, Shanghai, Guangzhou and Shenzhen).
  • Inventory of steel rebar, used for reinforcing in construction (in 10,000 metric tons). Falling inventory is a sign of rising demand.
  • Copper prices – Spot price for refined copper in Shanghai market (yuan/metric ton).
  • South Korean exports – South Korean exports in the first 20 days of each month (year-on-year change).
  • Factory inflation tracker – Bloomberg Economics-created tracker for Chinese producer prices (year-on-year change).
  • Small and medium-sized business confidence – Survey of companies conducted by Standard Chartered.
  • Passenger car sales – Monthly result calculated from the weekly average sales data released by the China Passenger Car Association.

©2022 Bloomberg L.P.

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