June 17, 2022 | 13:48
U.S. Economy: Slip Slidin’ Away
Fed Chair Powell cited a resilient economy as a supplementary reason for pulling the 75-bp trigger for the first time in 28 years. But this week’s data suggest broad fissures are already opening up, even in the tight labour market. Although new jobless claims slipped last week, layoffs have been tracking higher (and likely not just in the imploding crypto space) since hitting all-time lows in April. While claims remain low, they are now perched above pre-pandemic levels. Job openings are retreating from March’s record highs, with those tracked by Indeed.com sagging through early June. More layoffs are likely on the way as businesses start battening down the hatches. Over 60% of CEOs expect a recession to occur in the next 18 months, according to the Conference Board, up from 22% late last year. And the survey was taken before the Fed’s jumbo rate move. Small business optimism (NFIB) wilted further in May, nearing shutdown lows. The share of respondents expecting the economy to improve fell to a record low and very few think it's a good time to expand. High inflation is the biggest complaint followed by labour quality. Manufacturers are also on the defensive, with production dipping in May (albeit after three strong gains) and likely falling further in June according to regional Fed surveys.
Battered by soaring prices and borrowing costs, shrinking equity portfolios, and now fearing layoffs, households are starting to spend more cautiously. While lower retail sales in May reflect some shift toward in-person services, consumers appear to be retrenching even here. Restaurant outings stalled in May, and more recent data on indoor dining flag a pullback in June. Yes, a stockpile of savings has numbed most households from the inflation pain. But if PCE inflation persists at 6.3% y/y for another year, it will chew through a trillion dollars of purchasing power, or just under half of the estimated current excess savings of $2.3 trillion.
No sector is cooling faster than the most interest sensitive: housing. A near-doubling in 30-year mortgage rates since November to 13-year highs of 6.0%, together with the record 20% surge in home prices in the past year, has led to the worst affordability since the 2006 boom. No wonder the housing metrics out this week were uniformly bad. Housing starts plunged 14% in May and building permits 7%, while home builder confidence (NAHB) hit 2-year lows in June. Weekly new mortgage applications are down 23% so far this year. Released next week, existing home sales likely skidded for a fourth straight month to below pre-pandemic levels.
Mechanically tallying the stream of bad data, the Atlanta Fed’s Nowcast model of real GDP growth lays a giant goose egg in the second quarter. We aren’t quite that bearish, but we did trim our call to 2.6% annualized, which looks to mark the high point for a while. With interest rates likely to rise the fastest since the 1980s, we now expect the economy to stall at the turn of the year before growing just 1.0% in 2023. This is well below long-run potential and the current consensus view, both around 1.8%. In economics lingo that’s called a growth recession, which will send the jobless rate marching back above 4% next year. And, if the inflation winds don’t start breaking the Fed's way, even that may prove optimistic. To paraphrase Paul Simon, the nearer your destination (price stability), the more you're slip slidin' away (from maximum employment).