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Jun 8, 2022
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The US economy is in the toilet – will they press the flush button?

Experts are warning Americans that an economic hurricane is coming. Tesla CEO Elon Musk has said he has a “super bad feeling” about the recession. Companies are lowering their earnings forecasts. Where do all these gloomy predictions come from?

The head of the US bank JP Morgan Chase Jamie Dimon (Jamie Dimon) warns that we are approaching an economic hurricane. Tesla CEO Elon Musk has said he has a “super bad feeling” about the recession. Companies are lowering their earnings forecasts. Oh, and we’re still going through an energy and inflationary crisis, and the stock market is gradually turning bearish.

Now there are all the prerequisites for falling into pessimism about the economy. And, as it turns out, many Americans actually do: according to a recent CNN poll, only 23% of Americans consider current economic conditions to be “pretty good.”

However, these same Americans continue to spend money like crazy – because almost everyone has a job. On Friday, we received another rather optimistic unemployment report: in May, another 390,000 new jobs appeared in America. That’s double the 186,000 new jobs that the U.S. economy, on average, added every month during the pre-pandemic period of President Donald Trump’s administration, just a couple of years ago, when Americans were very worried about the state of the national economy.

And who is right?

The Federal Reserve puts on the brakes

If you feel like the United States economy is slowing down, you are not alone. In fact, this slowdown is quite deliberate.

The Federal Reserve has been pumping up the economy since March 2020, buying up billions of dollars of government and corporate bonds every month and keeping rates near zero for two years.

Against the backdrop of such actions by the Federal Reserve, the American economy “fell high”, and inflation quickly reached a record high in the last 40 years. In March 2022, Federal Reserve Chairman Jerome Powell finally said “enough” and the central bank raised rates. In May, the Federal Reserve decided on a record rate hike in 20 years and promised that it would continue to do so until sentiment improved.

An unending string of historically large rate hikes and a rapid reduction in the Federal Reserve’s balance sheet should help cure the economy’s dependence on free money: by slowing the economy, the Fed hopes to slow inflation. However, it could also plunge the economy into recession.

A strong dollar hurts international corporations

I know what you’re thinking: what could this mean for giant mega-corporations with a global presence?

Well, that’s not good news for them. This week, Microsoft cut its earnings and sales forecasts for the current quarter because the dollar is too strong.

Well, now we have another problem to worry about: thanks to the actions of the Federal Reserve, your money is now worth too much.

The rate hike is helping boost the value of the dollar, which has come close to parity with the euro for the first time in two decades. This is good news if you love to travel abroad, and bad news if you’re a giant US company that makes money overseas (Microsoft gets just under half of its income from foreign countries), because the widgets you sell overseas suddenly will cost more to your foreign customers than the widgets you sell in the good old United States of America.

Before you say don’t give up, remember that these same companies are paying a lot of money to a huge number of people who then spend that money. In other words, this is another factor that has a negative impact on our economy.

Maybe the economy can even out on its own

It’s not just the Federal Reserve that can help slow the economy. Inflation is starting to get on the nerves of shoppers and retailers. In May, Walmart, Target and a number of other major retailers reported that their customers were cutting back on their purchases and focusing primarily on essential goods. Retailers have begun lowering their profit forecasts as they believe clouds on the horizon will continue to thicken for the foreseeable future.

The US housing market is also showing signs of decline, with mortgage rates much higher than they were just a year ago (okay, that’s partly the Fed’s fault, too). As a result, some potential home buyers are forced to abandon their plans. In April, sales of existing homes in the United States continued to decline for the third month in a row.

Employment growth is also starting to slow down gradually. While nearly 400,000 jobs added in just one month is great, it’s still less than the 450,000 to 650,000 jobs that were added monthly in America last year. The total number of jobs in May was the lowest since April 2021. And we still cannot compensate for all those jobs that were lost in the first weeks of the pandemic. As the economy continues to close this gap, hiring rates may slow because we are already reaching full employment and the labor market is naturally fizzling out.

Meanwhile, the rate of inflation is gradually declining. In April 2022, consumer prices were 8.3% higher than prices in April 2021, but still below the 8.5% recorded in March 2022. It’s already something.

Other factors

The problem with the theory that an economic slowdown can dampen inflation is that it’s not just government stimulus (including the Federal Reserve’s monetary policy) that’s causing the mess we’re in.

Russia is cutting off gas supplies to some European countries, and Europe hopes to cut off Russian oil supplies soon. This created a shortage of energy resources, which turned into a wild rise in their prices. The Fed can’t do anything about it, unless it’s sitting on an oil well (narrator’s voice: it’s not).

The ongoing Russian military operation in Ukraine has led to a sharp rise in commodity prices, which in turn has turned into a global food crisis. Meanwhile, China is locking down its major cities to prevent the spread of the coronavirus, turning its world’s second-largest economy southward and exacerbating shortages that have pushed up the price of almost everything.

And because of the shortage of labor in America, wages there continue to rise, which further exacerbates the problem of shortages of certain goods and so on. Suffice it to say that these are problems for which there are no easy solutions.

So, what are all these pessimists talking about?

None of this is good news. At the same time, there is nothing wrong with a natural slowdown in the economy. The economy is in a fever, and one of the few cures in this case can be new rate hikes.

RSM Chief Economist Joe Brusuelas said he was pleased with the content of Friday’s unemployment report as it shows signs of a gradual cooling in the economy. And Aneta Markowska of Jefferies said in an interview with CNN that some more cuts would be needed to slow down inflation because wages are rising, fueling inflation.

So where do all these gloomy predictions come from?

Apparently, all skeptics are hinting at the same thing: in the future, we may face a very difficult situation if we do not take the right measures to prevent it.

Labor Secretary Marty Walsh said Friday in an interview with CNN that there is “no doubt” that a difficult period in the economy is possible. According to him, we need to act “step by step”. Dimon said an economic “hurricane” is coming, but it’s unclear if it’s just a thunderstorm or a super storm.

On Friday, my colleague Julia Horowitz noted in her “Before the Bell” column that the data is mixed, and we are forced to rely on the Federal Reserve, which can not always control the causes of inflation and correctly predict the moment when it is necessary to stop raising rates, before the economy plunges into recession.

In other words, the United States economy may already be in the toilet, and we can only pray that no one pushes the flush button.

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