Financial markets fell again on Thursday, a day after the Dow Jones industrial average suffered its worst decline of the year. The S&P 500 slid further into bear market territory — defined as a 20% decline from its most recent high — after Wednesday’s selloff wiped out more than 4% of its value.
“Recession risks are high — uncomfortably high — and growing,” said Mark Zandi, chief economist at Moody’s Analytics. “For the economy to get through without suffering a downturn, we need very slick policy from the Fed and a bit of luck.”
Nations move to fight inflation, increasing risk to global economy
Just this week, former Goldman Sachs CEO Lloyd Blankfein warned of a “very, very high risk” of a recession; Wells Fargo CEO Charlie Scharf said there was “no doubt” the US economy was headed for a slowdown; and former Fed Chairman Ben Bernanke warned that the country could be on the verge of “stagflation” – a slowing economy combined with high inflation.
The concerns come amid a handful of data that point to an economic cooling, particularly in interest rate-sensitive sectors that are already bearing the brunt of the Fed’s promise to continue to tighten monetary conditions. Construction of new homes slowed in April. Demand for mortgages continues to decline.
Some of the country’s largest and most influential retailers reported disappointing sales and profits this week due to rising costs and issues with excess inventory, designed to avoid supply chain disruptions, triggering a stock market crash. Walmart stock plunged more than 11% on Tuesday, its worst one-day loss in 35 years. Target shares fell 26% on Wednesday, following a staggering 52% plunge in quarterly profits, which executives attributed in part to cooling demand for big-ticket items such as TVs, kitchen and outdoor furniture.
Fed hikes rates half a percentage point to fight inflation
“While we anticipated a post-stimulus slowdown in these categories…we did not anticipate the magnitude of this change,” said Brian Cornell, Target’s chief executive said during an earnings call Wednesday. “When we talk to our clients, they often express concern about a host of rapidly changing conditions, from geopolitics to persistently high inflation that they are experiencing.”
Goldman Sachs this week lowered its forecast for U.S. economic growth in the second quarter to an annualized rate of 2.5%, citing higher prices and continued supply chain disruptions. This follows a unexpected contraction in the first three months of 2022, when the economy contracted at a rate of 1.4%, mainly due to a trade imbalance and a drop in inventory purchases.
Economy shrinks 1.4% in the first 3 months of the year, raising fears of a recession
Global turmoil, including a risk of recession in Europe and China, is clouding the outlook for the US economy. And a strengthening U.S. dollar — as rate hikes make investing in dollars more attractive — could dampen exports, increasing the risks of a technical recession in which the economy shrinks for two quarters in a row.
This fear of a deteriorating economy along with shifts in consumer spending habits amid a pandemic has led some high-flying tech darlings, including Netflix and Peloton, to announce layoffs in recent weeks. Twitter and Meta have suspended hiring plans, while Amazon executives recently said the company was “overstaffed” after months of rapid hiring. National jobless claims hit 218,000 last week, a four-month high though still near historic lows.
Meanwhile, inflation, which remains near 40-year highs, has become a central challenge for the economy and the Biden administration. Higher prices for basic commodities like food, energy and housing are straining Americans’ budgets and clouding their view of the economy. Gasoline prices hit a new all-time high this week, with average prices hitting $4.57 a gallon nationwide. A closely watched consumer confidence index from the University of Michigan shows that Americans’ views on their current finances and future expectations have fallen sharply over the past year.
Despite this bleak outlook, Americans continue to spend lavishly. Clothing, car and furniture sales all rose in April, contributing to a 0.9% increase in overall retail sales from the previous month, according to Commerce Department data released this week.
“In the near term, the U.S. economy is holding up pretty well despite the headwinds overseas and high cash prices,” said Beth Ann Bovino, chief U.S. economist for S&P Global, who said there was a 35% recession risk in the next. year. “People are spending, companies are always trying to hire. But there are certainly challenges ahead. The Fed’s actions will slow the economy, but the question is whether they could also topple the apple basket.
A day after warning that slowing growth and inflation are “having stagflationary effects,” Treasury Secretary Janet L. Yellen said Thursday she was optimistic the central bank could contain inflation without provoking of recession. But she acknowledged that the ability to do so was far from clear.
“I think it’s conceivable that there could be a soft landing. It takes both skill and luck…I hope it does, but it’s a very difficult economic situation. “Yellen told reporters in Germany, citing the economic shocks of the war and the sanctions against Russia. “There’s a lot going on. … It’s not a simple question.
Yellen warns of global risk of ‘stagflation’ linked to gas and food prices
Even if the United States avoids a near-term recession, some economists say the very pace of inflation, with prices up 8.3% over the past year, and the continuing imbalances in the supply and demand caused by the pandemic, and the political responses to it, could snowball into an even more severe crisis down the line.
“Consumers are spending like crazy, businesses are going to have to restock and many workers are still returning to the workforce,” said Jason Furman, an economics professor at Harvard University who served as an adviser during the ‘Obama. administration. “But all of this makes me worry in one, two or three years, because it could mean the Fed has to raise rates even more, and it could mean you create an even bigger recession down the road.”
Moody’s Zandi said rising gas and commodity prices due to supply chain groans related to the pandemic and conflict in Ukraine added to the specter of an economic slowdown. He now puts the odds of a US recession in the next 24 months at around 50%.
“We are traveling very close to the edge,” he said. “The housing market is the next thing that will rock; the question is how much.
New home construction fell in April, led by a slowdown in single-family homes. Building permits, which offer a glimpse of future construction, have also fallen, the data shows. released this week by the Census Bureau and the Department of Housing and Urban Development.
“Homebuilder sentiment fell to a two-year low in May,” Yelena Maleyev, an economist at Grant Thornton, said in an analyst note. “Builders are seeing less foot traffic and expecting sales to be weaker as we enter the busy home buying season.”
Mortgage rates rise, but hot housing market slow to cool
This easing is already having an impact on the economy. The nation’s major mortgage lenders, including Wells Fargo and Better.com, have laid off thousands of people in recent weeks due to falling demand for home loans and refinancing.
In Alexandria, Va., mortgage lender Kevin Retcher said there was noticeable nervousness among potential buyers. Refinancings began to fall late last year, around the time the Fed began signaling upcoming rate hikes. In the months that followed, a combination of rising mortgage rates – now at 5.3% for a 30-year fixed-rate mortgage, nearly double levels at the start of 2021 – and skyrocketing property prices began to deter buyers, he said. At least three clients had “cold feet” and pulled out of ratified contracts in the past two weeks, he added.
“There’s an extreme sense of nervousness there,” said Retcher, president of First Meridian Mortgage. “It’s rare for people to win contracts and then walk away, but that’s what happens.”
Other types of small businesses also say they are seeing a decline in consumer demand as customers grapple with rising costs. Aaron Mulherin, owner of a window repair business in Marion, Iowa, said if homeowners keep paying for necessities like fixing broken windows, they’re starting to think twice about spending for luxury products such as personalized showers.
“Average middle-class consumers are starting to balk,” Mulherin said. “Everything gets more expensive, so they get an estimate and then postpone it.”
Jeff Stein and Taylor Telford contributed to this report