International Forecaster Weekly

THE ECONOMY IS ONE HOT POTATO - Once Again, Though, Consumers Come Through

An Economy at a Crossroad

Emily Peck believes the country’s at a new threshold in this period of bad vibes – thanks to mixed economic signals, a new and intensifying war and, yes, continuing Covid weirdness. 

Americans’ growing anxiety is rising as Jerome Powell and the Fed prepare to put the brakes on the economy, which could cool off the hot labor market – and further sink stocks and bonds and to a lesser extent precious metals. 

Next week, the Fed will almost certainly hike rates by half a percentage point.

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Inflation

Guest Writer | April 29, 2022

By Dave Allen for Discount Gold & Silver

An Economy at a Crossroad

Emily Peck believes the country’s at a new threshold in this period of bad vibes – thanks to mixed economic signals, a new and intensifying war and, yes, continuing Covid weirdness. 

Americans’ growing anxiety is rising as Jerome Powell and the Fed prepare to put the brakes on the economy, which could cool off the hot labor market – and further sink stocks and bonds and to a lesser extent precious metals. 

Next week, the Fed will almost certainly hike rates by half a percentage point.

GDP numbers, which came out yesterday, played right into consumers’ foul mood, as the 1st quarter came in a lot weaker than expected — with negative growth (at -1.4%) for the first time since the pandemic started.

Another quarter like the first, and you’ll have to start thinking about that dreaded R word (see below).

But under the hood, some are saying the growth report wasn't so bad. GDP math means that soaring imports — which reflect strong domestic demand — combined with falling exports shaved more than three points off the 1st quarter’s growth.

Peck observes that regardless of a hot labor market, life isn’t quite as awesome for a lot of people — from the ongoing pandemic to the shock of gas and food prices. 

It's not surprising that bad feelings are in the air. Consumers are increasingly feeling the pinch from high prices, of food, energy, rents and other things,

But economist Rubeela Farooqi at High Frequency Economics says, "[T]hey have managed to spend, supported by gains in incomes and savings."

And they’re continuing to spend – although it's uncertain how much longer they can keep that up.

A number of economists believe that our labor market is the economy’s bright spot at the moment – with low unemployment (although it’s at least twice the 3.6% the government says it is) plus record job security. 

While analysts like Nick Bunker at the Indeed Hiring Lab see the market cooling, he notes, "[T]hat's moving from a labor market that was at 105 degrees to a market that's maybe 95 degrees."

But jobs aren't everything and don’t alone an economy make. Multiple worries are taking their toll. Americans' mental health has worsened over the past two years. 

Last week, Discount Gold & Silver Trading CEO Melody Cedarstrom and I talked on our Financial Survival podcast about one of the quieter causes of the big drop in labor force participation since the pandemic started:

Opioid and methamphetamine abuse.

To paraphrase Richard Curtin, who heads the monthly consumer sentiment survey at the University of Michigan:

"People make complex…decisions that aren't just responding to one fact in their…life. These concerns invariably have a negative impact…"

Consumer Demand Remains Strong

But consumer spending (which accounts for about two-thirds of GDP) remained strong in the 1st quarter, growing at a 2.7% rate.

The factors that dragged down the economy weren’t related to consumer activity — at least directly, suggesting that underlying growth remains strong for now.

Trade continued to drag on growth for the 7th straight quarter as exports unexpectedly fell again. 

In response to last year’s overcorrection of inventory buildup to avoid 2020’s supply chain snafus, businesses continued to slow down their inventory stockpiles — and GDP counts that as a negative.

When stripped of those two factors, the U.S. economy grew at a 2.6% rate last quarter, a slight uptick from the end of last year.

Hope King believes consumer spending continues to grow in part “because demand has continued to move from goods to services.”

McDonald's CEO Chris Kempczinski, who should know these things, said: The overall…consumer from our vantage point is in good shape.” 

Wall Street doesn’t expect the Fed to read much into the GDP report and cause it to rethink its expected path of tightening. 

The negative headline number may, however, become a political liability for President Biden and for congressional Democrats running for reelection in 2022.

So, What About the R Word?

I imagine that virtually all economists are falling over each other to say we're not in a recession (I would add, yet!) – even if the economy is less safe than it was just a few weeks ago. 

For one thing, they argue, the GDP report usually gets revised substantially – once or twice. But more importantly, they add, the main drivers of the economy remain strong.

Chief U.S. economist of too big to fail JPMorganChase Michael Feroli insisted that the contraction “shouldn’t be taken as a signal of heightened near-term recession risks.” 

It should instead “reinforce concerns about the economy's longer-run growth potential.”

He notes that final domestic demand is what you get when you strip out trade and inventories and look at the core economy itself.

By that measure, GDP actually rose in the 1st quarter – at a 3.7% annual pace.

But just like stripping out energy and food costs from inflation measures like the CPI or PCE just because they’re volatile doesn’t make them any more reliable or relevant.

The same holds true for ignoring short- and long-term discouraged workers from the government’s headline unemployment numbers – it doesn’t make any sense, unless you’re a self-serving politician.

Just as Irwin thinks that “underlying growth remains relatively strong," we’ll see where we are this time next quarter. 

Don’t hold your breath for a quick turnaround.