(OPINION) Analysts increasingly see a recession looming in the US following the Federal Reserve’s biggest increase in interest rates since 1994 and signs of weaker consumer spending. The Fed hiked its policy rate by 75 basis points Wednesday to a range of 1.5% to 1.75%, as officials intensified their battle against inflation that’s remained stubbornly high.
According to Yahoo, Wells Fargo & Co. now forecasts a “mild recession” starting in mid-2023, as inflation becomes more entrenched in the economy and eats into consumer spending power — and as the Fed takes more aggressive steps to address it. Meanwhile, Moody’s Analytics said that chances of a soft landing are lower.
“The Federal Reserve is going to hike interest rates until policymakers break inflation, but the risk is that they also break the economy,” Ryan Sweet, Moody’s Analytics head of monetary policy research, said in a research note. “Growth is slowing and the effect of the tightening in financial market conditions and removal of monetary policy have yet to hit the economy.”
US retail sales fell for the first time in five months in May as higher prices hit consumer pocketbooks. Also on Wednesday, the Federal Reserve Bank of Atlanta cut its estimate for second-quarter growth to 0%. And Guggenheim Chief Investment Officer Scott Minerd said the US may already be in a recession, given the slowdown in consumer spending.
A growing number of economists have recently said a contraction next year would be difficult to avoid. In his note Wednesday, Wells Fargo’s Jay Bryson said he was expecting a soft landing just a week or so ago — but now his base scenario is for a mild recession.
A key source of US economic growth this year — consumer spending — is showing signs of losing steam, even before Wednesday’s round of Federal Reserve rate hikes kick in. Credit card data show that spending in May was just 10% higher from the same month last year, according to a Barclays report this week. For the rest of 2021, that monthly spending growth has averaged more like 20%.
That slowing growth, combined with weakening home sales and declines in wage growth, would mean that monetary tightening is already hitting the economy hard. The Fed may be able to tighten less aggressively in July, according to Barclays, which is forecasting just a half percentage point rate hike next month. Rates markets indicate a strong chance of a three-quarter percentage point hike.
The stock and corporate bond markets don’t reflect the risk of a weakening consumer, wrote Barclays strategists including Ajay Rajadhyaksha, Ryan Preclaw, and Hale Holden, in a separate Tuesday note. The slowing growth of consumer spending underscores how difficult the Fed’s job is now as it looks to contain inflation that’s running at a four-decade high, while trying to avoid tipping the economy into recession.
The softening only started in the last four to six weeks, but it was visible among both high- and low-income consumers, the strategists said, based on a sampling of Barclays credit card data. And it’s consistent with a report on Wednesday that showed retail purchases fell 0.3% in May from the month before, the first decline this year.
Amid surging layoffs in the real estate market, slumping homebuilder sentiment, soaring rates, and plunging mortgage applications, it is no surprise that analysts expected a drop in Housing Starts and Permits in May (-1.8% MoM and -2.5% MoM respectively). According to Zero Hedge,
Those numbers were destroyed as Housing Starts crashed 14.4% MoM and Permits plunged 7.0% MoM… This is the biggest drop in housing starts since the economy was shutdown by the government in April 2020. Starts have fallen to their lowest since April 2021 and Permits to their lowest since Sept 2021.
Meanwhile, The U.S. stock market rout that has put U.S. equities in a bear market isn’t just reducing the net worth of billionaires like Elon Musk and Jeff Bezos. It’s also taking a toll on Americans’ retirement savings, wiping out trillions of dollars in value.
The selloff has erased nearly $3 trillion from U.S. retirement accounts, according to Alicia Munnell, director of the Center for Retirement Research at Boston College. By her calculations, 401(k) plan participants have lost about $1.4 trillion from their accounts since the end of 2021. People with IRAs — most of which are 401(k) rollovers — have lost $2 trillion this year.
This year’s stock slump is the most severe market downturn since March of 2020, when COVID-19 erupted in the U.S. Historically, 401(k) investments take about two years after a market decline of this size to regain their previous value.
“Anybody who has to retire when the market is down is in a bad position,” Munnell said. “Younger people, you can kind of wait it out — these things have come back time and time again,” she added. “But people who use their retirement money to support themselves really suffer in this kind of event.”
According to CBS News, Retirement accounts are the main channel through which most Americans are exposed to the ups and downs of the stock market. Nearly three-quarters of all 401(k) money is held in stocks, according to a Vanguard report from 2021. This year it’s been mostly down: The S&P 500 has sunk 22%, the Dow Jones Industrial Average has lost nearly 13% and the Nasdaq Composite has fallen more than 30%.
To be sure, many Wall Street professionals viewed last year’s run-up in stocks as a bubble fueled by speculators looking for a place to park new money. But that doesn’t make the loss any easier to swallow for most workers, who lack the time, skill, or interest to try to time the markets.
“One could argue that these recent losses are simply wiping out the extraordinary gains that occurred from mid-2020 to the end of 2021, so that people are not actually worse off than before the pandemic,” Munnell wrote in a blog post, shared first with CBS MoneyWatch. But human nature being what it is, “the prior gains were permanent, so the recent losses are no less painful.
Meanwhile, overseas, China’s holdings of U.S Treasuries tumbled in April to their lowest since May 2010, data showed on Wednesday, with Chinese investors likely cutting losses as Treasury prices fell after Federal Reserve officials signaled sizable rate hikes to temper soaring inflation.
Chinese holdings dropped to $1.003 trillion in April, down $36.2 billion from $1.039 trillion the previous month, according to U.S. Treasury Department figures. China’s stock of Treasuries in May 2010 was $843.7 billion, data showed. The reduction in Treasury holdings may also have been aimed at diversifying China’s foreign exchange holdings, analysts said.
The Chinese sales contributed to a drop in overall foreign holdings of Treasuries in April that helped propel yields higher. U.S. benchmark 10-year Treasury yields started April with a yield of 2.3895% and surged roughly 55 basis points to 2.9375% by the end of the month.
Japan’s holdings of U.S. Treasuries fell further in April to their lowest since January 2020, amid a persistent decline in the yen versus the dollar, which may have prompted Japanese investors to sell U.S. assets to benefit from the exchange rate.
According to Yahoo News, Japanese holdings fell to $1.218 trillion in April, from $1.232 trillion in March. Japan remained the largest non-U.S. holder of Treasuries. Overall, foreign holdings of Treasuries slid to 7.455 trillion, the lowest since April 2021, from $7.613 trillion in March.
On a transaction basis, U.S. Treasuries saw net foreign outflows of $1.152 billion in April, from net new foreign inflows of $48.795 billion in March. This was the first outflow since October 2021. The Federal Reserve, at its policy meeting in March, raised benchmark interest rates by a quarter of a percentage point.