One top wall street economist is warning current economic numbers would make it appear the Fed is going to have a very tough time creating a soft landing as they combat inflation.
Citi Global Chief Economist Nathan Sheets said in an interview, “I would say that the recent economic data have been central banks’ worst nightmare. On the one hand, I would say there is very clear evidence of a slowing in global demand. And on the other hand, there is also clear evidence that inflation pressures are persisting. You kind of put that together, it’s really hard for central banks to fight that.”
The fear created by that situation is that it paints a picture of a slowing economy, with inflation stubbornly persisting through the softening demand.
According to the Bureau of Economic Analysis, second quarter GDP dropped 0.9% due to inflation causing consumer demand to pullback. This was the second consecutive quarter of economic contraction after the first quarter GDP declined by 1.6%, which is one widely held marker of an economy entering recession.
Dreyfus Mellon Chief Economist Vincent Reinhart said in another interview, “I wouldn’t be surprised if they [NBER] actually push the start of the recession to the end of last year. So we might wind up being in one of the longer recessions on record.”
Adding to the angst, was big name retailers like Target, Walmart, and Best Buy offering profit warnings to investors, due to consumers reducing spending on gas and food as housing and other costs rise with inflation.
On top of that, the Conference Board’s consumer confidence measure has dropped for three straight months, stocks are still in Bear market territory, big market companies from Tesla to Meta and Amazon have all announced pullbacks in hiring, and the most recent measure of inflation, the Consumer Price Index, rose faster than it has since November of 1982 at 9.1%.
With inflation still rising at last measure, and the Fed having stated that its primary motivation going forward was tackling inflation, and it would not stop until there was clear and convincing evidence inflation was coming back under control, it paints a worrying picture of an economy in decline as inflation continues to rise.
Sheets noted, “It feels at the moment that we are going through a period of transitory stagflation.”
Of course the one thing analysts do not seem to focus on is the one factor which appears to have ignited the real troubles in our economy – the war in Ukraine. When Russia invaded Ukraine in February, it touched off a series of events culminating in sanctions on the Russian economy which disrupted the energy sector. Those rising energy prices proceeded to supercharge inflation, increase costs on consumers, and set in motion a Federal Reserve on a warpath of rising rates.
At some point, either Russia will reach its objectives in Ukraine, or it will decide its objectives are not worth the cost of continuing the conflict. At that point, Europe, already panicked over gas shortages due to withdrawn Russian supplies, and desperate to restore those Russian supplies, will likely push to normalize trade relations with the Russian nation quickly to restore the flow of gas as winter approaches.
At that point, it is likely oil will plummet as Russian supplies hit the market. With it, a major inflationary pressure will disappear quite quickly. That will lift the impetus on the Fed to raise rates, and it might even allow them to lower rates, feeding economic growth, as prices continue to drop due to the drop in energy.
In short, the one factor most powerfully affecting this entire economic situation is the one nobody is talking about, and it could change the dynamics of the entire system, almost overnight.
