The US economy is going down the toilet (ANALYSIS)

New York (CNN Business) – An economic hurricane is coming, says Jamie Dimon, CEO of JPMorgan Chase. Tesla’s Elon Musk says he has a “very bad feeling” about the recession. Companies lower their earnings expectations. Oh, and we’re in the midst of a bulge and a power crunch, and stocks have been flirting with a bear market.

It’s easy to feel miserable about the economy. And it turns out that most Americans feel this way: Only 23% of the American public say economic conditions are “fairly good” or better, according to a recent CNN poll by the SSRS.

However, these same Americans continue to spend crazy, because almost everyone has a job. We just got another strong jobs report on Friday: The US added 390,000 more jobs in May.

To put that into context, that’s more than double the average of 186,000 jobs the US economy was creating each month during the Trump administration before the pandemic, you know, a few years ago when Americans were very excited about the economy.

So who is right?

The Fed is pressing the brakes

If you feel the US economy is slowing down, you are not alone. In fact, this slowdown is intentional.

The Federal Reserve has been giving the economy a sugar rush since March 2020, buying billions of dollars in government bonds and corporate debt each month and keeping interest rates near zero for two years.

The Fed’s bid boosted the economy, and inflation rose to its highest level in four decades. In March 2022, Federal Reserve Chairman Jerome Powell finally said “no more” and the central bank raised interest rates. In May, the Fed issued its largest rate hike in more than 20 years, and vowed the strikes would continue until sentiment improved.

The steady stream of big interest rate increases and a rapid contraction of the Fed’s balance sheet should help cure the economy’s addiction to free money: By slowing the economy, the Fed hopes to rein in inflation. But it may plunge the economy into a recession.

Dollar strength hurts multinationals

I know what you’re thinking: What does this mean for giant corporate giants with a huge global footprint?
Well, Timmy, that’s not good news. Microsoft this week lowered its profit and sales forecast for the quarter due to the strength of the dollar.

Yes, we now have one more thing to worry about: Thanks to the Federal Reserve, your money may be too much.

Higher interest rates are helping to boost the value of the dollar, which is close to parity with the euro for the first time in two decades. That’s good news if you go abroad and bad news if you’re a large US company making profits overseas (Microsoft gets just under half of its revenue from abroad), because suddenly the tools you sell abroad will cost your customers more than the ones you sell in the old US.

Before you say: “Stop!” Remember, these companies are paying a lot of people a lot of money, they are going to spend it, etc. etc. You must have studied Economics 101. Here’s the thing: It’s another thing that’s not very good for economics.

The economy may correct itself

The Fed isn’t the only one helping slow the economy. Inflation is starting to wear down consumers and retailers. Walmart, Target and a host of other big box stores said last month that customers are shrinking, focusing on buying only what’s essential. Retail traders have been lowering their earnings expectations as those dark clouds on the horizon are closing in and getting dark.

The US housing market is also showing signs of running out of steam: mortgage rates are much higher than they were a year ago (well, that’s the Fed’s fault too), which has caused some potential homebuyers to leave the market. US existing home sales declined for the third consecutive month in April.

Job growth is also starting to slow a bit. While adding nearly 400,000 jobs a month is a nice thing, historically it’s less than the 450,000 to 650,000 jobs the US added each month last year. Total jobs for May were the lowest since April 2021. We still haven’t regained all the jobs we lost in the early days of the pandemic. As the economy continues to fill this gap, the pace of employment may slow, because we are reaching full employment and the labor market is naturally decreasing.

Meanwhile, inflation itself is easing a bit. Consumer prices were still 8.3% higher in April 2022 than they were in April 2021, but that’s lower than the 8.5% annual inflation rate in March! So this is something.

everything else

The problem with the theory that a slowing economy can tame inflation is that government stimulus (both those nice stimulus checks and the Federal Reserve’s monetary policy) isn’t alone to blame for the mess we’re in.

Russia is shutting down the gas tap in some European countries, as Europe seeks to leave Russian oil behind. This resulted in some power shortages, which drove prices up dramatically. The Federal Reserve can’t do anything about it, unless it’s sitting on an oil well (Narrator: Not so).

The ongoing Russian invasion of Ukraine has pushed up commodity prices, causing a global food crisis. At the same time, China has been locking down its major cities to prevent the spread of Covid, decimating the world’s second largest economy and exacerbating shortages that have helped drive up prices for just about everything.

And the labor shortage in America continues to raise wages and exacerbate the shortage of goods… eh. Suffice it to say that these are problems that do not have easy solutions.

So what are these pessimists talking about?

None of this is great news. At the same time, a natural slowdown is okay, if not welcome. The economy is on a fever pitch, and the only prescriptions are higher interest rates and more cow bells, in that order.

RSM’s Joe Brusolas was encouraged by Friday’s jobs report showing signs of a slowing economy. Jefferies’ Anita Markowska told CNN that more employment will be needed to curb inflation, because wages continue to rise, which leads to more inflation.

Why all this pessimism?

Critics of economics seem to be pointing out the same thing: we may face a painful situation in the future if we don’t take the right steps to avoid it.

Labor Secretary Marty Walsh told CNN Friday that there was “no doubt” that a difficult economic period could occur, and said it was necessary to move “step by step.” Dimon said an economic “hurricane” is coming, but the question remains whether it will be heavy rain or a superstorm.

As my colleague Julia Horowitz pointed out in her newsletter before the bell on Friday: The data is messy, and we rely on the Federal Reserve, which has limited ability to control the causes of inflation and a miserable reputation for predicting when to stop raising interest rates. . rates before plunging the economy into a recession.

Or, in my less elegant words: Maybe the economy is on its way to the toilet, and we can’t help but pray that no one pulls the lever.

CNN’s Matt Egan contributed to this report.

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