The combination of higher interest rates, supply chain disruptions and China’s “Zero-Covid” policy may have finally tripped up the global growth machine, triggering an inexorable slide into economic recession.  Q1’s surprise -1.6% Q/Q slide in US GDP may just prove the recession has already started here in the US and we well could be a majority of the way through it before it is formally recognized by the National Bureau of Economic Research (NBER).  Sagging consumer confidence may portend a slowdown in consumer spending while warnings on hiring from corporate America are only just beginning.

The combination of higher interest rates, supply chain disruptions and China’s “Zero-Covid” policy may have finally tripped up the global growth machine, triggering an inexorable slide into economic recession.  Q1’s surprise -1.6% Q/Q slide in US GDP may just prove the recession has already started here in the US and we well could be a majority of the way through it before it is formally recognized by the National Bureau of Economic Research (NBER).  Sagging consumer confidence may portend a slowdown in consumer spending while warnings on hiring from corporate America are only just beginning.

Inflationary pressures continue to plague the economy and show little sign of abating any time soon.  Supply and demand imbalances remain across industries and extend from labor challenges to energy resources to semiconductor stocks.  The Consumer Price Index for May rose a full +1.0% MoM and has surged +8.6% YoY.  Stripping out food and energy, consumer prices rose +0.6% MoM and +6.0% YoY.  Producer prices have surged even higher, rising +0.8% MoM in May and a staggering +10.8% from a year ago.  Export prices rose +2.8% MoM and are now up +18.9% YoY, largely reflecting the rise in energy and commodity prices.

The labor market remains strong for now, although we’ll be watching for an uptick in Initial Jobless Claims for signs of a deteriorating jobs market.  The Unemployment Rate for May came in at 3.6%, while weekly Initial Jobless Claims numbers held steady around 230k.  The latest JOLTS Job Openings survey indicated 11.4 million jobs available, while the US Labor Force Participation Rate has ticked up to 62.3% but remains below pre-pandemic levels.  Average Hourly Earnings rose +0.3% in May and are now up +5.2% YoY.

Housing is beginning to feel the impact of higher interest rates as the average 30-year mortgage rate ticked above 6.0% in June.  Although the overall stock of housing remains below aggregate demand here in the US, input costs as well as financing costs are catching up to potential buyers.  Housing Starts fell -14.4% in May (MoM) while Building Permits dropped -7.0%.  New Home Sales surged an unexpected +10.7% MoM, although Existing Home Sales declined by -3.4%.  Despite a continued rise in April for the S&P CoreLogic CS 20-City home price index (+1.8% MoM and now +21.2% YoY), we wouldn’t be surprised to see some softening ahead.

The US Federal Reserve remains committed to raising short-term interest rates after June’s 75 basis point hike.  All indications point to another ¾ point rise at the July meeting, while the Dot Plot suggests a year-end level for the Fed Funds rate closer to 3.5%.  Slowing economic growth may scuttle those plans; however, Chair Powell has indicated that defeating inflation is the Fed’s one and only priority right now and that may have to come at the expense of full employment.  Time will tell.

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