Recession fears may be overblown

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If a recession is brewing in the US, this will be news for Doug Johnson.

President marion manufacturing co. In Cheshire, Connecticut, Johnson is enjoying some of the best times in the company’s 76-year history. Of course, he has heard negative rumours about rising prices, falling stocks and increasing risks from troubles overseas. He also saw polls showing that most Americans believe the economy is heading for a recession.

But when Johnson looks at his 30,000-square-foot business, all he sees is busy workers racing to keep up with new orders for a variety of vital steel and copper parts, including those for electrocardiograms and cable TV connections. His biggest problem is finding enough labor to handle all the metal bending jobs that are coming.

“There’s so much pent-up demand and everyone I talk to — our suppliers and our customers — says so,” he said. “We’re up 40% over last year and climbing. This month, we’re up 100% over last year. It’s incredible.”

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Johnson’s optimism contrasts with the deepening melancholy of more prominent figures. On Wednesday, JPMorgan Chase Chief Executive Jamie Dimon warned that “a hurricane” is sweeping the U.S. economy.

Tesla CEO Elon Musk and Lawrence SummersThe former finance minister, too, has warned of a looming Quinnipiac University A poll last month found that 85 percent of Americans believe a recession next year is “very” or “somewhat likely.”

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

However, the good fortune of Marion Manufacturing – echoed with continued strength expenditures And signals from Wall Street that this dire assessment could be wrong. On Friday, the Labor Department said the economy added 390,000 jobs in May, beating analysts’ expectations, while the unemployment rate held at 3.6%.

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

The Fed’s recent shift in monetary policy is the biggest source of recession fears.reassured investors several times over the past year inflation Jerome H. Powell, the chairman of the Federal Reserve, who will prove to be “temporary” this year, has steered the central bank on a path of interest rate hikes aimed at slowing economic growth and easing consumer price pressures.

The Fed’s shift is already bad news for financial markets. Raising interest rates from near zero caused investors to reconsider their portfolios, sent stocks tumbling and cemented the idea that something was seriously wrong with the economy.

But recent indicators suggest that the two-year expansion — albeit slowing from an unsustainable annual growth rate of nearly 7% late last year — shows little sign of reversing. The labor market is producing signs of “need for help” faster than employers are adding workers. Consumers and businesses are flush with cash. In some ways, the bond market doesn’t appear to be as worried about inflation as many experts are.

“Following a quick rebound from the pandemic, growth has to moderate a bit,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “But there is an important difference between a dovish and a recession. “

Economists describe a recession as a general drop in activity that affects output, income, industrial production and retail sales. The term is generally understood to refer to two consecutive quarters of declines in gross domestic product, although there is no official definition.

Despite the gloomy mood among Americans, economists polled by Bloomberg in May expect the economy to grow at an annual rate of 2.7% this year. That was down from the 3.3% forecast in April, but far from a recession.

In April, layoffs reached their lowest level since the Labor Department began tracking in 1999. The U.S. economy has added an average of 408,000 jobs a month over the past three months. Initial jobless claims, while up from an all-time low in March, are about half the average over the past 50 years.

Sustained economic strength is a double-edged sword. That means more people who want a job are likely to find it. But that raises the possibility that the Fed, which has already raised rates twice and signaled it plans to raise rates two and a half times, could raise rates too much and trigger a recession.

Summers, a Democrat who has been critical of the Fed, said during a Washington Post live event this week that interest rates need to rise faster than the central bank plans. Without “higher unemployment,” he said, inflation would not be contained.

Dean Baker, senior economist at the Center for Economic and Policy Research, said the Fed’s initial rate hikes are working. Financial markets are reacting to the Fed’s actions by further tightening financial conditions and potentially reducing the need for further rate hikes.

“I’m usually not a big optimist,” Baker said. “But things usually go in the right direction. I don’t see the basis for a recession.”

Even before the Federal Reserve started raising interest rates in March, financial conditions had grown tighter. First, banks started charging more for mortgages. The traditional 30-year home loan rate was 5.39 percent on Thursday, up more than two percentage points since January, according to the data. bank rate.

Then, the stock stumbled. The tech-heavy Nasdaq is down more than 20% this year, which could help slow economic growth as punished investors cut back on spending.

At least for now, investors also appear to be on the Fed’s side over Summers. Wall Street expects annual inflation of 2.76% over the next 10 years, down from more than 3% in late April, according to a popular market gauge derived from 10-year U.S. Treasury yields.

It’s a signal that investors believe the Fed will quell inflation before expectations of future price increases become a self-fulfilling prophecy. The central bank’s preferred inflation gauge, the core personal consumption expenditures price index, also fell for a second straight month.

“The road may be narrow. But we believe the Fed can still steer it towards a soft landing,” said Michael Pound, head of global inflation-related research at Barclays.

Americans are less optimistic. The University of Michigan’s monthly consumer confidence index in May was at an 11-year low.

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It’s not hard to see why consumers are dissatisfied. The retail price of gasoline appears to be $5 a gallon.persistent supply chain The headaches have left shoppers facing shortages of a range of products, including key items such as baby formula. Even where wages are rising, they are not keeping pace with prices.

The economy also faces an unusually complex mix of risks.

ukraine war That pushed up the prices of major global commodities, including wheat and oil, and raised the prospect of a recession in Europe. Meanwhile, China’s rigid zero-virus policy has sparked repeated lockdowns, disrupted factories in the world’s biggest exporter and shrouded global supply chains in uncertainty.

These geopolitical forces are immune to rising interest rates, which could embarrass the Fed if inflation remains high even after borrowing costs have risen sharply.

Further shocks from wars in Europe or a chaotic Asian production network could also drag the United States into recession.

But even as surveys show consumers and executives are worried about a recession, they seem to be spending as if they expect the good times to continue. In late May, Macy’s raised its profit forecast after reporting that its net income in the most recent quarter nearly tripled from a year earlier.

Although Americans have begun to tap their savings to support their spending, they still have more than $2 trillion in reserves. That should set the stage for growth, economists say.

“Barring a new negative shock, fears of a decline in economic activity this year will be exaggerated,” Goldman economists concluded in a May 30 client note.

At DHL’s North American supply chain division, CEO Scott Sureddin said he saw no signs of an economic downturn. The company has been adding new warehouses and addressing a tight labor market with autonomous forklifts and smaller package-grabbing robots. This year, it will spend hundreds of millions of dollars on such efforts.

“We’re still seeing good growth. We’re still making significant investments in technology,” he said. “There’s nothing stopping us from a slowdown in investment.”

In fact, the financial imbalances that usually precede recessions do not exist. For example, on the eve of the Great Recession in 2008, consumers were struggling to pay their bills, and they spent the largest share of their income in history on monthly loan and credit card fees. Americans now spend just 9.3% of their disposable income on debt service, according to the Federal Reserve, near a 41-year low.

The company’s debt load is also very light. Twenty years ago, interest payments consumed nearly 25% of nonfinancial corporate cash flow, according to Moody’s. Today, that number is less than 10 percent.

At Marion Manufacturing, Johnson has spent hundreds of thousands of dollars this year on new factory equipment to make various industrial parts from stainless steel and beryllium copper. He sees no reason to reconsider those plans.

“Our overall business has never been stronger,” Johnson said. “We are very bullish.”

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