It’s easy to point to the U.S. economy’s vulnerabilities: Despite the strong labor market and strong household balance sheets, consumer confidence has been depressed for a while, likely driven by energy prices. Deteriorating business sentiment can weigh on investment rapidly, robbing the economy of momentum.
But the greatest risk for a recession is monetary policy makers, who in trying to moderate inflation have pushed up the risk of a recession. The authors offer four priorities for executives to focus on while navigating the macroeconomic risks.
US. consumer inflation in May reached its highest level in more than four decades as surging energy and food prices pushed prices higher.
The Labor Department on Friday said that the consumer-price index increased 8.6% in May from the same month a year ago, marking the highest reading since December 1981.
Economists surveyed by The Wall Street Journal had expected the consumer-price index to rise 8.3% in May.
U.S. stocks fell sharply. The Dow Jones Industrial Average fell around 2.7%, or about 880 points, in 4 p.m. trading. Technology shares slid along with banks and consumer shares, sending the S&P 500 down 2.9% and the Nasdaq Composite down 3.5%.
That widely followed gauge of optimism registered a paltry 50.2, the lowest in survey data going back to 1978. That’s lower than the depths of the Covid outbreak, lower than the financial crisis, lower even than the last inflation peak back in 1981.
Taken together, the data add up to an outlook that is not good for those hoping the U.S. could skirt its first recession since the brief pandemic downturn of 2020.
“I wouldn’t be surprised if it started in the third quarter of this year,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “You can say that we’re in the midst of it right now, in the beginning phase. Only in retrospect will we know for sure, but it should not surprise us at this point.”
Friday’s consumer price index report offered more reason for worry than comfort for Fed officials, who are watching for signs that inflation is cooling on a monthly basis as they try to guide price increases back down to their goal.
A broad array of products and services, including rents, gas, used cars and food, are becoming sharply more expensive, making this bout of inflation painful for consumers and suggesting that it might have staying power. Policymakers aim for 2% inflation over time using a different but related index, which is also elevated.
The quick pace of inflation increases the odds that the Fed, which is already trying to cool the economy by raising borrowing costs, will have to move more aggressively and inflict some pain to temper consumer and business demand. The central bank is widely expected to raise rates by half a percentage point at its meeting next week and again in July.
But Friday’s data prompted a number of economists to pencil in another big rate increase in September. A more active Fed would increase the chances of a marked pullback in growth or even a recession.
“We may see an increase in the legacy outsourcing of infrastructure as firms delay modernization projects to the cloud but shift their internal teams to focusing on the cloud and moving these infrastructure and support functions to an outsourced model. Hence, firms with large infrastructure practices such as HCL, Wipro and TCS could do well,” Bendor-Samuel added.
Between 2021 and 2024, global growth is projected to slow by 2.7 percentage points, according to the World Bank, more than twice the slowdown seen between 1976 and 1979, when the world last saw stagflation.
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