Recession fears may be exaggerated

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If there is a recession in the US, it will be new news for Doug Johnson.

president Marion Manufacturing Company In Cheshire, Connecticut, Johnson is enjoying some of the best times in his company’s 76-year history. Sure, he’s heard negative chatter about rising prices, sinking stocks, and growing risks from problems abroad. Watch polls show that most Americans think the economy is headed for collapse.

But as Johnson looks at his 30,000-square-foot operation, all he sees are busy workers racing to keep up with new orders for a variety of vital steel and copper components, including those used in electrocardiograms and cable TV connections. His biggest problem is finding enough labor to handle all the metal bending work that comes his way.

“There is a lot of pent-up demand, and everyone I talk to — our suppliers and our customers — is saying the same thing,” he said. “We’re up 40 percent from last year and going up. This month, we’re up 100 percent compared to last year. It’s unbelievable.”

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Johnson’s optimistic outlook stands in stark contrast to the profound melancholy of leading figures. On Wednesday, Jamie Dimon, CEO of JPMorganChase, warned that a “hurricane” was affecting the US economy.

Tesla chief Elon Musk and Lawrence SummersThe former Treasury secretary also warned of an impending recession. At Quinnipiac University In last month’s poll, 85 percent of Americans agreed that a recession was either “extremely” or “somewhat likely” next year.

President Biden on June 3 delivered remarks on the May jobs report while acknowledging that “many Americans remain concerned” about inflation. (Video: The Washington Post)

However, Marion’s good fortune to manufacture – resonates in the continued strength of Consumer expenses And signals from Wall Street – that such dire assessments may be wrong. The Labor Department said Friday that the economy gained 390,000 jobs in May, topping analysts’ expectations, while the unemployment rate remained at 3.6 percent.

“I’m not sure what’s driving all the recession talk,” Johnson said. “There is a lot of unfounded negativity.”

The Fed’s recent change in monetary policy is the biggest source of recession fears. After repeatedly reassuring investors in the past year inflation It may prove “temporary,” Fed Chairman Jerome H. The central bank this year is on a rate hike path designed to slow the economy and relieve pressure on consumer prices.

The Fed’s change of position was already bad news for financial markets. Raising interest rates from zero has caused investors to rethink their portfolios, driving down stock prices and cementing the idea that something in the economy has gone seriously awry.

But recent indications are that the two-year expansion – while slowing from an unsustainable pace of annual growth near 7 per cent late last year – is showing little sign of slipping into the opposite direction. The labor market outputs “help needed” signals faster than employers can add workers. Consumers and businesses are full of money. By some measures, the bond market appears less concerned about inflation than many experts.

“After a rocket-like recovery from the pandemic, there should be some moderation in growth,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “But there is an important difference between moderation and stagnation.”

Economists describe recessions as a widespread decline in activity that affects production, income, industrial production, and retail sales. The term is generally understood to include two consecutive quarters with declining GDP, although there is no official definition.

Despite Americans’ bad mood, economists polled by Bloomberg in May expect the economy to expand at an annual rate of 2.7 percent this year. That’s lower than the 3.3 percent projected in April, but far from stagnant.

In April, layoffs reached their lowest level since the Labor Department began tracking them in 1999. The economy has added an average of 408,000 jobs in each of the past three months. And first-time jobless claims, while up from an all-time low in March, are at nearly half their average over the past 50 years.

Continued economic power is a double-edged sword. This means that more people who want to work are more likely to find it. But it does increase the odds that the Federal Reserve, which has already raised rates twice and signaled plans for an additional half-point increase, will overdo it and lead to a recession.

Summers, a Democrat who criticizes the Fed, said at a Washington Post Live event this week that rates need to rise faster and higher than the central bank plans. He said inflation would not be brought under control without “high unemployment”.

Dean Baker, chief economist at the Center for Economics and Policy Research, said initial Fed rate increases are paying off. The financial market response to the Fed’s actions is further tightening financial conditions and may reduce the need for additional interest rate increases.

“I’m not usually the big optimist,” Becker said. But things are generally going in the right direction. I see no basis for stagnation.”

Even before the Fed started raising interest rates in March, financial conditions were getting tighter. First, banks are starting to charge more fees on mortgages. On Thursday, the traditional 30-year home loan rate was 5.39 percent, up more than two percentage points since January, according to the Bank.

Then the stock faltered. The tech-rich Nasdaq is down more than 20 percent this year, which could help slow the economy as struggling investors slash spending.

For now at least, investors also seem to be on the Fed’s side over the summer. Wall Street expects annual inflation of 2.76 percent over the next 10 years, down from more than 3 percent in late April, according to one popular market measure derived from 10-year US Treasury yields.

This is a sign that investors believe the Fed will dampen inflation before expectations of future price hikes become a self-fulfilling prophecy. The central bank’s preferred measure of inflation, the core PCE price index, has also fallen for two consecutive months.

“The path could be narrow. But we think the Fed can still point that needle into a soft landing,” said Michael Bond, global head of inflation research at Barclays.

Americans are less optimistic. The University of Michigan’s monthly consumer confidence reading for May is at an 11-year low.

The spread of the war in Ukraine and its repercussions on weak countries such as Tunisia

It’s not hard to see why consumers are so upset. The retail price of gasoline appears to be heading toward $5 per gallon. persistent Suppliers The headache caused shoppers to face an alternating series of product shortages, including important items such as infant formula. And even when wages go up, they don’t keep up with prices.

The economy also faces an unusually complex mix of risks.

war in ukraine It drove up the prices of major global commodities, including wheat and oil, and increased the chances of a recession in Europe. Meanwhile, China’s strict policy of not spreading the coronavirus has caused repeated shutdowns that have disrupted factories in the world’s largest exporter and left global supply chains shrouded in uncertainty.

These geopolitical forces are immune to rising interest rates, which could leave the Federal Reserve in a crunch if inflation remains high even after a significant increase in borrowing costs.

Further shocks from the European war or faltering Asian production networks could push the US into recession.

But even as surveys show consumers and executives worried about a recession, they spend as if they expect the good times to last. In late May, Macy’s raised its earnings forecast after it reported that net income in the fourth quarter nearly tripled compared to the same period last year.

Even though Americans are starting to dip into their savings to support their spending, they still have reserves of more than $2 trillion. Economists said this should put a floor on growth.

“Fears of a decline in economic activity this year will be exaggerated unless new negative shocks materialize,” Goldman Sachs economists concluded in a note to clients on May 30.

In DHL’s North American supply chain unit, DHL CEO Scott Sorriden said he’s not seeing any sign of a downturn. The company was adding new warehouses and working around the tight job market by filling it with autonomous forklifts and smaller package-grabbing robots. This year, hundreds of millions of dollars will be spent on these efforts.

“We are still seeing good growth. We are still making big investments in technology,” he said. “There is nothing slowing us down to stop investing.”

Indeed, the fiscal imbalances that precede a recession are often absent. On the eve of the Great Recession of 2008, for example, consumers were struggling to pay their bills, allocating the largest share of their income in history to their monthly loans and credit card fees. Today, US debt service payments consume just 9.3 percent of disposable income, close to a 41-year low, according to the Federal Reserve.

Corporate debt burdens are remarkably light. Two decades ago, interest payments devoured nearly 25 percent of nonfinancial businesses’ cash flow, according to Moody’s. Today, the number is less than 10 percent.

At Marion Manufacturing, this year Johnson is spending several hundred thousand dollars on new plant equipment to convert stainless steel and beryllium copper into a variety of industrial parts. He sees no reason to reconsider those plans.

“Our business as a whole has never been as strong as it is now,” Johnson said. “We are very optimistic.”