Barron's April 29, 2022 |Economy&Policy|The Economy|”There Will Be No Soft Landing. Why A Recession is Inevitable.” By Lisa Beilfuss
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Summary by 2244
The FED increased rates 0.5% at 2PM. Above the S&P500 trended up on the news of a stronger attack on inflation.
Earlier this week we reviewed an NPR article that suggested there wasn’t much of a case for a recession and now this article published also on April 29th states clearly “a recession is inevitable.” So we’ll try and make sense of this disparity. Also noted, as of this writing the Dow Jones, NASDAQ and the S&P500 responded favorably to the FED announcement of 0.5% increase in interest rates.
The key points made by the author, Lisa Beilfuss, is that perspective really matters in that small businesses, considered-the-canary-in-the-coal-mine-and responsible for “half of U.S. employment and half of GDP”, are pulling back on capital expenditures etc. They simply don’t “have the cushion” of big business and are struggling to “absorb rising prices.” “A record 72% of [small business] owners raised their selling prices, [more] say they are still planning to do so." In contrast, at least some big businesses don’t yet have plans that have the inflation fight ending in a recession.
As it is, new and existing single family housing suffers from low supply and persistent demand even in the face of rate increases-some of this is the result of real estate investors and some because most wealthy Americans have most of their assets in their homes rather than the stock market etc. Housing prices increased in February “at the fastest month-over-month pace on record, up 20.2% from a year earlier to an all time high.” Rents are already rising and will likely go higher as well.
It’s hard to put the brakes on housing demand leading to the question of how high rates must go? Some comment that 5-6% should be sufficient. Further complicating matters is that housing accounts for one-fifth of the GDP and is “40% of the consumer price index.” Raising rates will stabilize or lower housing prices at the expense of GDP. The stock market will fall as well. The FED may “eventually sell mortgage-backed securities they bought over the past two years” as an added effort to lower prices.
Arguing against a recession, some say the economic growth rate is still good but others point out that recent numbers, when inflation is factored out, shows a slowing economy ebbing toward recession. Reportedly, “the FED says it is focused on bringing inflation down without causing a recession” and this is the position taken by Stephen Squeri (CEO American Express). Having noted that, reportedly “it is a lonely few who disagree with the consensus view that the FED will slow inflation without causing recession.” But to the contrary Deutsche Bank (DBK) predicts “that not only is a recession coming, but also that it will be severe.” If higher rates work to slow inflation then according to David Folkerts-Landau (DBK) we will have a downturn next year, then “the FED will reverse course and the economy will then gradually pick up by mid-2024.”
So there‘s some out there that believe the idea of “a soft landing at this point is wishful thinking.’
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