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So here we are: when investors aren’t worried about inflation, they’re worried about a recession. Tech companies are increasingly announcing hiring freezes and job cuts. Builders are starting to talk about a slacking in demand and the supply of existing homes is increasing. Walmart reported this week that it has excess inventory.
Isn’t that exactly what we wanted?
Barring a few geopolitical shocks – the impact of the war in Ukraine on food and energy, and another round of Covid-19 lockdowns in China – the rebalancing we’ve seen in the US economy over the past few months reflects trends Expected and Desired When Forecasters were thinking of 2022 late last year. The shifts in the economy that are so worrying people are largely what economists were hoping for six months ago.
Let’s start with the housing market. As late as March it was overheating, with conditions that were stagflationary. Inventories were at record lows and home prices soared even as mortgage rates rose from under 3% to over 4%.
Eventually, affordability would become an issue, but it wasn’t clear what home prices or mortgage rates would be to calm things down. Two months later we know – current asking prices and mortgage rates of around 5.5% have finally led to a rebalancing of the market. It’s too early to tell if this is a temporary pause or something worse, but the unhealthy pandemic boom in the housing market appears to be over for now.
Another trend economists were looking for was a shift from spending on goods back to spending on services as consumers take fewer pandemic-related precautions and return to more normal patterns of behavior. We now see this happening. Amazon said in its quarterly earnings report that it was overstocked in March, and Walmart is in the process of shedding excess inventory. Meanwhile, airlines and hotel companies are reporting strong demand and pricing power. But investors are more concerned by signs of slowing consumption of goods than they are cheered by the leisure boom.
Market watchers have been concerned about signs of foam in Silicon Valley and the cryptocurrency ecosystem for years. Countless companies with dubious business models have gone public in the last two years, either via the Special Purpose Acquisition Company or the traditional IPO process.
Now, in 2022, we are seeing all of that fall back to earth. Stock prices and the value of cryptocurrencies have been under pressure. Cash-burning companies like Peloton Interactive Inc. and Carvana Co. have announced layoffs. Venture capitalists are telling anyone who will listen to prepare for a more sober environment for the foreseeable future. The exciting days for tech companies and crypto seem to be over for now.
All of these shifts are necessary because inflation was running too hot and the Federal Reserve had to do something to contain it. The booming signals across the economy didn’t seem enough to contain inflation. Today, expectations for the fed funds rate in March 2023 are closer to 3%. We don’t yet know if that will be enough to get inflation back to where the Fed wants it to be. But based on the housing market slowdown, the curbing of tech and crypto excesses and tightening conditions priced into the stock market, and additional capacity at Amazon.com Inc. and Walmart Inc., it is now, at least in some ways Possibility it wasn’t in early 2022.
The question investors wrestle with is whether the Fed can manage this process and rein in inflation without sending the economy into recession. The irony is that if you asked forecasters in December what a healthy rebalancing of the economy and monetary policy would look like in the first half of 2022, they would probably say exactly what we are seeing now.
More from other authors at Bloomberg Opinion:
• Target, Walmart are victims of their own success: Andrea Felsted
• History says buying dips is a dangerous game: John Authers
• The Fed sure sounds like it’s expecting a recession: Robert Burgess
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Conor Sen is a columnist for the Bloomberg Opinion. He is the founder of Peachtree Creek Investments and may have interests in the areas he writes about.
For more stories like this, visit bloomberg.com/opinion
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