Placeholder when loading item promotions
If a recession were brewing in the United States, it would be news to Doug Johnson.
President of Marion Manufacturing Co. of Cheshire, Connecticut, Johnson is enjoying some of the best times in his company’s 76-year history. Sure, he’s heard the negative babble about rising prices, falling stocks, and growing risks from troubles abroad. And he’s seen the polls showing that most Americans think the economy is headed for a tumble.
But as Johnson looks out over his 30,000-square-foot operation, all he sees are hard workers struggling to keep up with new orders for a variety of vital steel and copper components, including those used in electrocardiograms and cable TV hookups. His biggest problem is finding enough labor to do all the metal bending work that comes his way.
“There’s so much pent-up demand and everyone I speak to — our suppliers and our customers — says the same thing,” he said. “We have increased by 40 percent compared to last year, and the trend is rising. This month we were up 100 percent year-on-year. It’s incredible.”
Johnson’s optimistic outlook stands in stark contrast to the deepening gloom of prominent figures. On Wednesday, Jamie Dimon, chief executive officer of JPMorganChase, warned that “a hurricane” is about to hit the US economy.
Tesla CEO Elon Musk and Lawrence Summers, a former Treasury Secretary, have also warned of an impending recession. In a Quinnipiac University poll last month, 85 percent of Americans agreed that a downturn next year was either “very” or “fairly likely.”
But Marion Manufacturing’s fortunes — reflected by the continued strength in consumer spending and signals from Wall Street — suggest such gloomy assessments could be wrong. On Friday, the Labor Department said the economy added 390,000 jobs in May, beating analysts’ expectations, while the unemployment rate remained at 3.6 percent.
“I’m not sure what’s driving all the talk about the recession,” Johnson said. “There’s a lot of negativity out there that isn’t well founded.”
The Federal Reserve’s recent shift in monetary policy is the biggest source of recession fears. After repeatedly assuring investors last year that inflation would prove “temporary,” Fed Chair Jerome H. Powell this year has steered the central bank on a path of raising interest rates to slow the economy and reduce pressure on consumer prices.
The Fed’s turnaround was already bad news for financial markets. Raising interest rates from near zero caused investors to reconsider their portfolios, sending stocks plummeting and cementing the notion that something was seriously wrong in the economy.
However, recent indicators suggest that the two-year expansion — while slowing from an unsustainable annual growth pace of nearly 7 percent late last year — is showing little sign of reversing. The job market produces “Help Wanted” signs faster than employers can hire workers. Consumers and businesses are cashless. And by some standards, the bond market seems less concerned about inflation than many pundits.
“After a rocket-like recovery from the pandemic, growth needs to be moderated somewhat,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “But there is an important difference between moderation and recession.”
Economists describe recessions as widespread declines in activity affecting output, income, industrial production and retail sales. The term is generally understood to mean two consecutive quarters of falling gross domestic product, although there is no official definition.
Despite Americans’ gloomy sentiment, economists polled by Bloomberg in May expect the economy to grow at an annual rate of 2.7 percent this year. That’s less than April’s forecast of 3.3 percent, but far from a recession.
In April, layoffs hit the lowest level since the Labor Department began keeping records in 1999. The economy has added an average of 408,000 jobs in each of the past three months. And initial jobless claims, while up from their all-time low in March, are at about half their average for the past 50 years.
Continued economic strength is a double-edged sword. It means more people looking for work are likely to find it. But it raises the likelihood that the Fed, which has already raised rates twice and announced plans for two more half-point hikes, could overdo it and trigger a recession.
Summers, a Democrat critical of the Fed, said at a live Washington Post event this week that rates need to rise faster and higher than the central bank plans. Without “higher unemployment,” inflation won’t be brought under control, he said.
Dean Baker, senior economist at the Center for Economic and Policy Research, said the Fed’s initial rate hikes are working. The financial markets’ reaction to the Fed’s actions will further tighten financial conditions and may reduce the need for further rate hikes.
“I’m not usually the big optimist,” Baker said. “But things are generally going in the right direction. I see no basis for a recession.”
Even before the Fed started raising interest rates in March, financial conditions were becoming increasingly tight. First, banks started charging more for mortgages. On Thursday, the interest rate on a standard 30-year home loan was 5.39 percent, according to Bankrate, up more than two percentage points since January.
Then stocks tumbled. The tech-rich Nasdaq index is down more than 20 percent this year, which could help slow the economy as chastised investors curb spending.
At least for the time being, investors appear to be siding with the Fed over the summer as well. Wall Street expects annual inflation to come in at 2.76 percent over the next 10 years, down from more than 3 percent at the end of April, according to a popular market indicator derived from 10-year U.S. Treasury bond yields.
It’s a signal that investors believe the Fed will suppress inflation before expectations of future price increases harden into a self-fulfilling prophecy. The central bank’s preferred measure of inflation, the personal consumption price index, has also fallen for two straight months.
“The path may be narrow. But we believe the Fed can still thread this needle to a soft landing,” said Michael Pond, global head of inflation-linked research at Barclays.
Americans are less confident. The University of Michigan monthly consumer confidence for May is at an 11-year low.
It’s not difficult to understand why consumers are dissatisfied. The retail price of gasoline looks set to rise to $5 a gallon. Ongoing supply chain headaches have left buyers facing a range of product shortages, including critical items like baby formula. And even where wages are rising, they are not keeping pace with prices.
The economy also faces an unusually complex mix of risks.
The war in Ukraine pushed up the prices of key global commodities, including wheat and oil, and increased the likelihood of a recession in Europe. Meanwhile, China’s inflexible zero-Covid policy has triggered repeated lockdowns that have disrupted factories in the world’s top exporting nation and left global supply chains shrouded in uncertainty.
These geopolitical forces are immune to higher interest rates, which could put the Fed in an awkward position if inflation remains high even after borrowing costs have risen sharply.
Further shocks from the European war or tangled Asian production networks could also drag the United States into a downward slide.
But even as surveys show consumers and business leaders are worried about a recession, they’re spending as if they expect good times to continue. In late May, Macy’s raised its earnings guidance after reporting that net income nearly tripled in the most recent quarter compared to the same period last year.
Although Americans have started to dive into their savings to cover their expenses, they still have more than $2 trillion in reserves. That should boost growth, economists said.
“Fear of a slowdown in economic activity this year will prove overdone in the absence of new adverse shocks,” Goldman Sachs economists concluded in a May 30 note to clients.
At DHL’s North American supply chain unit, CEO Scott Sureddin said he didn’t see any signs of a downturn. The company has built new warehouses and sidestepped the tight labor market by filling them with autonomous forklifts and smaller robots for handling packages. This year it will spend hundreds of millions of dollars on such efforts.
“We are still seeing good growth. We’re still making big investments in technology,” he said. “There is no slowdown that will make us stop investing.”
In fact, the financial imbalances that often precede a recession are absent. For example, on the eve of the Great Recession of 2008, consumers were struggling to pay their bills and were spending most of their income in history on their monthly loan and credit card fees. Today, Americans’ debt-service payments consume just 9.3 percent of disposable income, near a 41-year low, according to the Federal Reserve.
Corporate debt is also remarkably low. Two decades ago, interest payments eat up nearly 25 percent of non-financial corporations’ cash flows, according to Moody’s. Today it is less than 10 percent.
At Marion Manufacturing, Johnson is spending hundreds of thousands of dollars this year on new factory equipment to turn stainless steel and beryllium copper into a variety of industrial parts. He sees no reason to reconsider these plans.
“Our business as a whole has never been as resilient as it is now,” Johnson said. “We’re pretty optimistic.”
Comments are closed.