The economic data released on Tuesday significantly increased the risk of recession and forced the onset of a possible economic collapse. At the same time, none of the data indicates a decrease in inflationary pressure, increasing the likelihood that the economy will move towards stagflation.
The likelihood of a recession increased earlier this year, when inflation was not temporary and actually started to accelerate in the first months of 2022. Higher-than-expected inflation meant the Fed had to tighten monetary policy harder and faster. the economy is more likely to contract. As Fannie Mae’s economics team put it, shrinkage is “the most likely way to meet the Federal Reserve’s goal, given the current rate of wage growth and inflation.”
Despite the slight economic downturn in the first quarter of this year, the idea that the recession will have to wait until the second half of next year rests on three assumptions. First, the labor market is incredibly strong by almost all measures and is likely to increase wages, which should support more consumer spending in the near term. Second, the housing market provides a significant increase in household wealth, supports spending, and the construction of new homes is an important source of economic activity. Third, rising oil and fuel prices will stabilize and resolve supply chain problems, prevent headline inflation, and increase real profits.
Commerce Department data on new home sales point to a sharper-than-expected slowdown in housing market growth. Single-family home sales fell sharply 16.6% in April to their lowest level since April 2020. Seasonally adjusted, annual sales were 591,000 units, only 9,000 more than the quarantine period of 582 thousand units. In addition, the March figure was revised from 763,000 to 709,000, indicating that the housing market is weaker than expected. The decline in these sales is likely to deepen further as the Fed continues to raise its interest rate target and lower its balance sheet.
From the perspective of the Federal Reserve, this isn’t always a negative development. The new home market is only a fraction of the total housing market, but economically outpaces the weight class. Building a house requires a lot of labor and materials. New home purchases encourage the purchase of durable items. Mortgage rates are heavily dependent on monetary policy, making housing one of the most direct channels for turning the Fed’s goals into economic reality. The sharp slowdown in the new home market is a positive sign that the rate hike is working.
However, it also points out that the economy may react faster than expected to the Fed’s rate hike. The classic line is that the response to monetary policy changes has a long and variable lag. Recent evidence, including the rapid recovery from the pandemic collapse, suggests that these gaps may have narrowed considerably. As a result, the housing market may support economic growth less than expected in the coming months.
The Richmond Fed’s monthly production review report confirmed the weakness recorded in the New York Fed and Philadelphia Fed reports last week. The general index turned negative in May, pointing to a contraction in economic activity. Most of the indicators are in negative territory. Inflationary measures, on the other hand, made one think that price pressures were revived after the short-term recovery in April. A Fed production survey showed that stagflation can be ignored. Two are notable. All three are worrying.
This puts the Fed in a difficult position. The economy could slow down faster than prices. If the slowdown in manufacturing and housing accelerates as the Fed raises rates, we may no longer have to wait until the second half of next year to see the recession many have been waiting for. This could be by the end of next year or early next year. And probably inflation was still very high then. Stagflation has not yet been prevented. After today’s data, it’s unlikely anymore.
Source: Breitbart
