Economic Outlook - July 2022
- The Consumer Price Index advanced 8.6% in May from a year ago, the highest increase since December 1981. Soaring inflation has depressed consumer sentiment and impacted spending behavior. The Commerce Department revised its report on personal spending in the first quarter sharply lower. Outlays on goods and services rose at an annualized pace of 1.8% vs. 3.1% in the previous estimate. Demand cooled further in May, as household spending was up just 0.2% (down from 0.9% a month earlier). Some prominent retailers like Target and Walmart issued profit warnings in June due to significantly higher inventory levels, which they will now be forced to discount.
- The manufacturing sector showed further evidence of cooling in June. The Institute for Supply Management said that its index of manufacturing activity fell to 53.0 in June from 56.1 in May, the lowest reading since June 2020. Recent readings have been trending lower, but above 50. Readings below 50 indicate a contraction of US manufacturing.
- Expectations for corporate earnings have been edging down as supply chain challenges, inflationary pressures, and US dollar strength continue to create headwinds. Consensus earnings estimates for 2023 currently stand at $240 and will likely continue to trend lower.
- Persistently high inflation levels have caused market expectations for interest rate hikes to shift dramatically. At its policy meeting in mid-June, the Federal Open Market Committee (FOMC) voted to raise the Federal Funds rate by 75 basis points. The Federal Reserve and the European Central Bank have both signaled greater openness to aggressive rate hikes. Strategists now expect the federal funds rate will increase another 100 to 150 basis points in 2022.
- Economic data in recent weeks has been disappointing and is pointing to a mild recession. On the plus side, the labor market is strong and loan delinquencies are at low levels. However, it is indisputable that economic data has deteriorated recently. For one thing, money supply is no longer the strong support to GDP that it was during the pandemic. The money supply was lifted by stimulus checks, the monetary policy of quantitative easing, and low interest rates. Now, money growth is slowing significantly as federal outlays are declining, the Fed has shifted to a policy of quantitative tightening, and interest rates are rising. This is putting downward pressure on asset prices and, with a lag, nominal GDP growth. The Atlanta Fed’s GDPNow model shows second quarter GDP contracting 2.1%. Coupled with the first quarter’s decline of 1.6%, the back-to-back declines would fit the technical definition of a recession.
Sources: Bloomberg, FACTSET, U.S. BEA, U.S. BLS, Federal Reserve, Instit. For Supply Mgmt, ISI, IBD, Yardeni Research
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