It’s been three months since the May CPI report prompted the Federal Reserve to adopt a “whatever it takes” mentality to fight inflation. Markets are now bracing for an expected third straight interest rate hike of 0.75% at the next Fed policy meeting. But something funny has happened as markets and the economy have adjusted to the new political environment: Much of the pain Main Street felt has shifted to Wall Street.
The two most important changes that have taken place in the real economy in the last three months have been the energy markets and the housing market. Retail gasoline prices peaked at $5 a gallon in mid-June and have since fallen more than $1.25 a gallon. According to GasBuddy’s Patrick De Haan, American motorists are saving $500 million a day on gas compared to what they were paying three months ago. And as gasoline futures prices continue to fall, those savings should increase for at least the next few weeks.
In the housing market, transactions have slowed to a crawl as mortgage rates have soared, and house prices have begun to fall in some metro areas where they have risen the most in recent years. This has become a headache for the relatively small percentage of Americans currently looking to buy or sell a home, but for the tens of millions of Americans who are perfectly content to stay in their home – with a mortgage rate likely below 3 is % — that’s not a problem at all.
The stock of homes for sale is falling now as homeowners face no financial pressure to sell their homes as their job prospects remain good amid persistently low unemployment.
Inflation is still causing pain, especially in the grocery store. And as the housing market cools, rental prices continue to rise.
But by and large, Americans are encouraged by the recent turn in economic events, according to a variety of polls. Consumer confidence rose in August after three months of decline and is back to where it was in May, according to Conference Board data. Consumer confidence, as measured by the University of Michigan, rose in both July and August after hitting a multi-decade record low in June.
Internet polling and data analysis firm Civiqs is showing a similar improvement since June, with the collapse in gasoline prices and a resilient job market seemingly overriding the broader tightening in financial conditions in terms of how Americans view the state of the economy.
The same does not apply to investors. Strategists from Morgan Stanley to Bank of America still believe stock prices will remain under pressure given their views on the trajectory of earnings and economic growth. In the dismal S&P Services Sector Survey released this week, the financial sector reported the most negativity.
Wall Street’s focus is on rising interest rates weighing on financial markets and what they think that means for the economy, while Main Street broadly sees a resilient job market and falling gas prices as a sign that conditions aren’t getting worse are than in June, and maybe even better.
For so long we’ve grown accustomed to looking to Wall Street as a guide to what’s likely to happen to Main Street. If investors were doing well, maybe some of that would trickle down to workers. And when Wall Street struggled, workers inevitably meant stagnation or worse. This mentality was at the root of the bailouts during the 2008 financial crisis – banks, corporations and investors were held up more than workers.
But in the current economic environment, the relationship is not so easy. The stock market faces its worst year in over a decade while the US economy added 3.5 million jobs. So the next time you see a negative economic outlook, pause and consider if it’s really going to hit workers and consumers, or if it’s just investors frustrated that they can’t make money as easily as they did in the Past.
It’s possible that we’re in the midst of a transitional period where consumers and workers will get some relief before the grim reality of tightening financial conditions derails the job market and economic growth down the road. But most of the tightening that’s happening right now is happening on Wall Street rather than Main Street, and it’s also possible for inflation to ease without a dire economic scenario ever materializing.
More from other authors at Bloomberg Opinion:
It’s a real estate crisis, not a financial crisis: Jared Dillian
Powell sees well beyond the next CPI report: Jonathan Levin
Ready to work ’til you die? America needs you: Stephen Mihm
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.
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