August 22, 2022 – The US economy enters the second half of the year with more questions than answers. Foremost is the tension between extraordinarily robust job growth – and wage growth—and declining economic activity in sectors impacted by the interest rate rise engineered by the Federal Reserve. With another 100-150 bps in Fed Funds rate increases likely for Q3 and Q4, it seems difficult to imagine the US economy growing much faster than 0% in coming months. No less an authority than Fed Chairman Powell has said that he expects very little economic growth in 2022. Yet, despite the negative economic growth in the first half of the year, considerably attributable to inventory drawdowns, there is great reluctance to identify this as a recession. It is even challenging to call this “stagflation”; the rate of inflation is far too elevated for anyone’s taste, especially the Fed, but consumer and business balance sheets are largely healthy and the unemployment rate sits comfortably at 3.6%.
It may be that the bills will shortly start coming due. Literally. The seemingly wild abandon with which the American public has thrown itself into summer vacation is going to leave everyone considerably poorer in September. Business profit margins are being eroded by labor costs, energy prices and the inflated cost of capital goods, although American business often proves itself remarkably adept at managing margins even in environments this challenging. Housing prices have not come down much, despite the sharp reduction in affordability in many markets (and rents are rising), yet it is fair to wonder how much longer this can continue, especially if employment begins to weaken. If employment responds with even a modest negative adjustment, it is highly likely that 2022 will be identified as a recession year—and thoughts will turn to the recovery that will follow.
Slowing global growth, including a threatened recession in various European economies dealing with the impact of the Ukrainian War and Russian sanctions, raises further questions about the ability of the US to avoid an economic downturn. An exceptionally strong US dollar contributes to the difficulties of American exporters, slightly mitigated by overseas demand fueled by robust labor markets –the very same, unusual combination of negative economic trends and high job growth as seen in the United States. Central bank monetary tightening is also a common theme. China is a brighter picture as it recovers from COVID-induced lockdowns and India is projected to robustly expand, although both countries will grow at a slower pace than once anticipated. The IMF has repeatedly lowered its forecast for world economic growth in 2022 and 2023 and voiced concerns over a global recession.
The single most important thing to be achieved in the remainder of 2022 is success, however minor, on the global inflation-fighting front. In the US, it will be difficult for the CPI to drop below 5% any time soon, but progress may be made in various areas, including energy and housing. The US economy has shown signs of adjusting quite rapidly to the Fed monetary tightening begun in March, and that will be sufficient to set up a transition from this difficult year—best understood as a continued reverberation from the pandemic disruptions of 2020 and 2021—to a new year and a new economic environment of more stable, modest growth, declining inflation and higher but manageable interest rates.
Jeanette Garretty is Chief Economist of Robertson Stephens Wealth Management, LLC, a wealth management firm striving to provide comprehensive and innovative investment solutions and wealth strategies to its clients through an intelligent digital platform. Investing entails risks, including possible loss of principal. Additional important information available at www.rscapital.com/disclosures.