So far June has been full of bad economic news. Preparing for this monthly blog post ordinarily involves following the economic news all month, especially the mid-month releases, and pick a topic of interest.  This month I came up with twelve topics, so I decided to write a short comment on the more interesting ones.

Fed Interest Rate Hike

With a .75% raise in the Fed Funds rate, the Fed is signaling they are serious about inflation.  Many on Wall Street have been asking for that for a month.  The Fed is trying to show its resolve in fighting inflation but may have also cut demand enough to trip a recession.  The increases filter down to consumers as higher interest rates on mortgages, auto loans, credit card debt, etc.

Bear Market in Stocks, Bonds & Crypto

As of Friday, June 17, all of the major stock indices were down 20% or more from the most recent highs-the definition of a bear market.  Likewise, bond prices are falling as buyers require higher yields when they purchase bonds.  Cryptocurrencies are hitting their first major slide since they were introduced, and it has been a big one.  Growing pains, I assume.

Housing

Even before the rate increases, homes were becoming unaffordable for their buyers.  A lack of supply in the face of increased demand priced many out of the market.  Additionally, mortgage rates rose to compound the cost of ownership even further.  We are seeing falling demand for mortgages and for houses, so prices should moderate soon.  The other housing expense, rent, has been tracking home prices rapidly higher.  This hits the majority of households in the US.

Sentiment

People make decisions based on how they feel now and about the future.  There are several closely followed sentiment surveys that give a feel for how consumers and businesses see the economy.  The University of Michigan’s Consumer Sentiment Survey in early June highlighted consumers’ fear of inflation eating into their earnings.  The index fell to 50.2 in June, down 8.2 points or 14%.  Small Business Optimism isn’t much better, with a worrisome drop in the outlook for six months from now.

Inflation

We’ve written about the coming inflation for over a year.  It didn’t come as a surprise to many, except for the record levels it has reached.  Now that the Fed is all in to stop inflation, they’ve already squashed a lot of inflation expectations in the market.  But those same expectations carry a fear of a recession as a result of the Fed’s inflation fight.  Thus, the bear market in stocks.

Recession

We have not yet seen the impact of the Fed’s first rate hikes from the last two months.  It takes six months for the results to appear in the economic numbers.  The market is equalizing supply and demand all the time, and as prices rise, buyers in their current anxious state stop purchasing things they desire and cover the rising costs of basic needs.  That demand shift will reduce pressure on the currently chaotic supply chain as demand falls.

The traditional definition of recession is two consecutive quarters of negative growth.  In 1Q2022 we met one half of that definition with a 1.4% drop in GDP.  As of Thursday, June 16, the Atlanta Fed’s GDPNow survey shows an estimated 0.0% growth in GDP.

Inflation is too much money chasing too few goods.  The roughly $6trillion congress spent during Covid succeeded in drastically increasing demand.  The current inflation is the result.  The cure for that inflation is high prices that tamps down the excess demand.  Let’s see if this Fed can do it without a recession.