It Depends on Who You Ask
By Joe Higgins, Quest 4 Quality
When I spoke about business outcomes last month with the Pac Rim Region, I called my presentation the 50/50 economy, meaning that half of the indicators were positive and half were negative. On the positive side, unemployment is at a historic low, consumer spending is robust and retail sales increased. Some negatives include inflation running at a 40-year high, the stock market is in correction territory and interest rates have risen 2.25% since March.
I think it is fair to say that change is happening in our economy at a very rapid pace. Usually, an economist can look at history when making predictions, but there is little in the past that can help us look forward in today’s pandemic-driven economy. The Fed has engineered slower growth by increasing interest rates at the fastest pace in 40 years. As a result, the U.S. economy has seen a definite slowdown in auto sales, home sales and manufacturing, three of the most critical sectors in our economy.
The Federal Reserve is trying to bring inflation back down to its target of 2% by raising interest rates while keeping the economy out of recession. Historically, this is not something Fed has excelled, so the outlook for a recession has increased exponentially. Even with all the work being done by the Federal Reserve, economists do not see inflation falling until sometime next year.
All this leads me to my subject today: Q2 Gross Domestic Product and our prospects for a recession either this year or in 2023. GDP dropped at an annual rate of 0.9 percent last quarter, making it two quarters in a row of negative growth in the first half. This is usually the signal that America is already in a recession. Still, given such substantial employment numbers and spending, it is not being called a recession because there is no firmly established rule determining a recession. You might wonder why.
In the simplest terms, it is not a recession until the National Bureau of Economic Research releases its conclusion about the state of our economy. Until they do, we are in a technical recession. We use such a method because recessions are quite complex; we need to measure economic indicators like consumer confidence, industrial production, consumer spending, retail sales, manufacturing output, housing, inflation, etc. Once they finish this work they declare an outcome. It is like determining the square footage of a house – I can go in and guess it is 4,000 square feet, but it will not be listed as such until someone comes in with a measuring tape.
The Q2 GDP report reflected consumers’ choice to buy goods or spend money on services. I have discussed this topic at length as we expect the consumer to move away from durable goods like appliances, electronics and furniture to services like travel, dining out and hotel stays. However, about 25% of consumers say they are not ready to travel, especially with the fear of Covid 19 and its most recent BA.5 variant; these consumers are continuing to spend on goods.
What about the second half of 2022 and next year?
The Federal Reserve has only two mandates: keep inflation low and have full employment. This may not feel good, but with inflation running at 9.1%, the Fed’s plans for our economy are working just as they have outlined. Mortgage rates recently dropped to 5.22%, but they are still elevated from a year ago. Auto sales are down and business spending has tanked. I have little confidence the Fed can pull off substantial rate hikes without causing a recession, but that is the goal.
Most economists are not worried about a severe downturn like we experienced during the Great Recession in 2008, and most banks like Well Fargo and JP Morgan Chase are not predicting a recession this year. Still, they do see one happing in 2023. Jobs are plentiful – there are two job openings for every American looking for work. The stock market could rebound as our largest corporations have reported record profits during this quarter’s earnings season.
Retail has been good, and consumer confidence, as measured by the Conference Board, is not as bad as it could be given the inflation levels in the economy. The price of gasoline has dropped 75 cents in the past month. Walmart and Target are cutting the cost of apparel due to excess inventory, and supply chains are getting marginally better as the traffic at the ports in California has improved. I hope to see the CPI and PPI plateau before year-end; that would be good news for our consumers.
This is a busy time for all of us as the economic winds are blowing as fast as I can ever remember; everything could change instantly. Inflation, jobs, wages, gas prices, the war in Ukraine, product shortages, food prices, housing, spending, interest rates, equities, 401k plans, labor shortages, manufacturing and COVID-19 are all in a state of flux. Where does it end?
I know consumers are desperately looking for stability. I will remind everyone that the U.S. economy is the most diverse, productive and resilient in the world; we have been through more challenging times in the past and will get beyond this current situation as well.
Joe Higgins is a 44-year veteran of GE and Whirlpool Corp. who brings his experience to bear as a business consultant, public speaker, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at www.q4qwithjoe.com.