The German economy lost momentum in 2022 as the country faced multidecade high inflation rates as energy prices soared, posing challenges for its key industrial sector.
The eurozone’s largest economy expanded 1.9% in 2022 compared with a year earlier, according to preliminary data published Friday by Germany’s statistics office Destatis. This marks a slowdown from the 2.6% expansion registered in 2021, when the economy rebounded from 2020’s pandemic-driven contraction.
The reading is in line with expectations from economists polled by The Wall Street Journal.
“The overall economic situation in Germany in 2022 was characterized by the consequences of the war in Ukraine such as the extreme increases in energy prices,” said Ruth Brand, president of Germany’s statistics office.
Economists expect the German economy to slow down further in the months ahead. Still, recently declining energy prices and easing concerns about energy rationing have improved the economy’s short-term outlook, with any upcoming downturn likely to be shallow.
Write to Xavier Fontdegloria at xavier.fontdegloria@wsj.com
New York City Mayor Eric Adams unveiled the state of the city’s economic outlook as part of a $102.7 billion budget proposal for 2024 on Thursday, highlighting slow economic growth despite spikes in tourism and jobs.
Adams touted investments that will be made into public safety and affordable housing while promoting what he called “strong fiscal management.”
The budget proposal will be voted on by the city council later this year.
“We crafted this budget in the environment of economic and fiscal uncertainty. While our country has made an amazing recovery since the darkest days of the pandemic, the national economy has slowed as the Federal Reserve raises interest rates to tamp down inflation,” Adams said on Thursday.
Office vacancy rates are now at a record high as the Adams administration points to the continuing slow pace of workers returning to the office since the pandemic shut down in 2020. The increase in vacancies weakens the commercial office market, according to analysis from the preliminary budget.
The Adams administration has also pointed to substantial fiscal challenges due to the migrant crisis, which they estimate is now at roughly 40,000 asylum seekers that have come into New York City since last April.
New York City’s share from a pot of $785 million earmarked for major cities struggling to deal with the migrant crisis won’t cover all the costs from dealing with the situation, according to the preliminary budget.
Rising health care costs and settling expired labor contracts are also listed as hurdles, according to the preliminary budget.
Despite the challenges, employment in New York City has grown 4.8% -— outpacing the state, which is at 3.3% and the United States as a whole, which is at 3.2%, according to the preliminary budget.
Adams said that 88% of jobs lost during the pandemic have been recovered, according to the preliminary budget.
The Adams administration also boasts $8.3 billion in budget reserves, according to the preliminary budget, which also looks ahead to investments in affordable housing addressing and environmental concerns.
Over the next 10 years, the city plans to invest $153 million into the development of Willets Point, transforming it from a gritty industrial zone in Queens into a bustling community with 2,500 affordable homes, a soccer stadium, a hotel and public space, according to the preliminary budget.
The city will also aim to enhance security measures at schools, investing $47.5 million on top of the already $30 million in capital funding to make technological upgrades to doors and entryways, Adams said.
The city has also earmarked $228 million for high-priority street reconstruction projects, $77 million for signal installation and $46 million to upgrade marine infrastructure in Manhattan and Staten Island.
“We are focused on governing efficiently and measuring success, not by how much we spend but by our achievements,” Adams said.
The numbers: The U.S. generated 223,000 new jobs in December to mark the smallest increase in two years, but the labor market still showed surprising vigor even as the economy faced rising headwinds.
SPX, -1.16%
rose in premarket trades and bond yields edged higher after the report.
Economists polled by The Wall Street Journal had forecast a smaller increase in new jobs of 200,000.
The resilient labor market is a double-edged sword for the Federal Reserve.
For one thing, a scarcity of workers has driven up wages and threatens to prolong a bout of high inflation. The Fed wants the labor market to cool off further to ease the upward pressure on prices.
Yet the strong labor market also offers the best hope for the Fed to avert a recession as it jacks up interest rates to the highest level in years. Higher rates reduce inflation by slowing the economy.
James Bullard, president of the St. Louis Federal Reserve, said on Thursday the odds of so-called soft landing have gone up in part because of the sturdy labor market. He was referring to a Goldilocks scenario in which the central bank vanquishes inflation without causing a recession.
Senior Fed officials still want to see the jobs market slacken some more, however. They are likely to keep raising rates — and keep them high — until demand for labor, goods and services ease up.
Big picture: The U.S. economy has shown more fragility, especially in segments like housing and manufacturing that are sensitive to high interest rates. Many economists predict a recession is likely this year due to the higher cost of borrowing.
The Fed, for its part, is trying to thread the needle: Bring down high inflation and keep the economy out of recession.
Whatever the outcome, one thing is virtually certain: The unemployment rate is expected to rise as U.S. growth wanes. Whether it’s enough to help the Fed achieve is far from clear.
Key details: Health care providers, hotels and restaurants accounted for most of the increase in employment last month. They added a combined 150,000-plus jobs.
Hiring was weaker in most other sectors, suggesting that the labor market is likely to soften further.
High-tech has been hit particularly hard and is experiencing a wave of layoffs.
Employment in so-called professional businesses, which includes some tech, fell by 6,000, largely reflecting fewer temps being hired. It was the only major category to post a decline.
The share of working-age people in the labor force — known as the participation rate — rose a tick to 62.3%.. A lack of people looking for work is a chief source of the labor shortage.
Hiring in November and October was little changed after government revisions. The economy added 256,000 jobs in November and 263,000 in October.
Market reaction: The Dow Jones Industrial Average DJIA and S&P 500 SPX were set to open higher in Friday trades.
Investors worry a strong labor market will push the Fed to take sterner measures to slow the economy. The slowdown in hiring and wage growth is likely to be seen in a positive light.
In the first trading day of the new year, U.S. financial markets were bogged down by the almost universal view that a recession is approaching.
A stocks rally fizzled out within the first 30 minutes of opening gains. Gold, a traditional safe haven, touched its highest level in six months, rising alongside silver and platinum. And 10- to 30-year Treasury yields, nestled in what’s known as the long end of the bond market, fell as investors jumped into government bonds — driving those yields down respectively to around 3.8% and 3.9%.
At the heart of the market moves was the strong sense that an economic downturn is all but inevitable at this point, following months of central bank interest rate hikes around the world — with the International Monetary Fund‘s chief Kristalina Georgieva warning that the economies of the U.S., European Union and China are all slowing simultaneously. Scion Asset Management founder Michael Burry said he expects another “inflation spike” after recession rocks the U.S., and former New York Fed President William Dudley said a U.S. economic downturn “is pretty likely.”
“Recession is what everyone is betting on,” said Ben Emons, senior portfolio manager and head of fixed income/macro strategy at NewEdge Wealth in New York. “And, the thinking is, therefore inflation will decelerate faster than what people anticipate and the Federal Reserve could move quicker to a rate cut. But the whole narrative of a recession is something that’s bothering the stock market and other asset classes because it will mean shrinking margins and earnings.”
Indeed, a much-hoped for rally in stocks around this time of the year, known as the “Santa Claus rally,” is failing to materialize, with just one more trading session left on Wednesday before the end of that seasonal period. The in-house research arm of BlackRock Inc., the world’s largest asset manager, described recession as “foretold” on Tuesday and said it is “tactically underweight” developed-market stocks, which are still “not pricing the recession we see ahead.” That’s the case even though global stocks ended 2022 down by 18% and bonds fell 16%, said Jean Boivin, head of the BlackRock Investment Institute, and others.
Sources: BlackRock Investment Institute, Refinitiv, Bloomberg.
“We see stock rallies built on hopes for rapid rate cuts fizzling. Why? Central banks are unlikely to come to the rescue in recessions they themselves caused to bring inflation down to policy targets. Earnings expectations are also still not fully reflecting recession, in our view. But markets are now pricing in more of the damage we see – and as this continues, it would pave the way for us to turn more positive on risk assets,” Boivin and others at BlackRock Investment Institute wrote in a note Tuesday.
“Even with a recession coming, we think we are going to be living with inflation,” they said.
Interestingly, the financial market’s focus on a 2023 recession is being accompanied by the view that such a downturn will help cure inflation, allowing central banks to end, slow, or even reverse their monetary policy-tightening campaigns. That view was buttressed by Tuesday’s release of inflation data out of Germany, which showed that the annual rate from the consumer price index fell by more than expected in December to a four-month low. Back in the U.S., fed funds futures traders priced in a greater likelihood of a smaller-than-usual, 25-basis point rate hike by the Federal Reserve in February.
As of Tuesday afternoon, all three major U.S. stock indexes DJIASPX were down, led by a 1.3% drop in the Nasdaq Composite.
Meanwhile, a rally in Treasurys moderated relative to earlier in the day. The 10-year Treasury yield TMUBMUSD10Y, 3.785%,
a benchmark for borrowing costs, dropped back to levels last seen around Dec. 23-26, a period when conditions were “totally illiquid and no one was trading,” said Emons of NewEdge Wealth.
This year is going to be tougher on the global economy than 2022, the International Monetary Fund’s chief, Kristalina Georgieva, has warned.
“Why? Because the three big economies, U.S., EU, China, are all slowing down simultaneously,” she said in an interview that on the CBS Sunday morning news program “Face the Nation.”
“We expect one-third of the world economy to be in recession,” she said, adding that even for countries that are not in recession, it “would feel like recession for hundreds of millions of people.”
The U.S. may end up avoiding a recession, but the situation looks more bleak in Europe, which has been hit hard by the war in Ukraine, she said. “Half of the European Union will be in recession,” Georgieva added.
Purchasing manager index numbers for manufacturing published on Monday showed negative readings across Europe, Turkey and in South Korea. S&P Global data due Tuesday are expected to show similarly bad numbers for Malaysia, Taiwan, Vietnam, the U.K., Canada and the U.S.
The IMF currently projects a global growth rate of 2.7% in 2023, slowing from 3.2% in 2022. Last October, the IMF cut its outlook for global economic growth for 2023, reflecting the ongoing drag from the war in Ukraine as well as inflation and the resulting high interest rates from central banks.
The economic slowdown in China may have an impact around the world. The world’s second largest economy weakened in 2022 because of lockdowns and restrictions imposed on businesses and consumers under its zero-COVID policy which disrupted supply chains and damaged trade flows.
Data published on Saturday showed that China’s reversal of its extraordinarily strict COVID policy meant economic activity in December fell to the slowest pace since February 2020 as the coronavirus overwhelmed the healthcare system, dampening consumption and production in the process.
“For the first time in 40 years China’s growth in 2022 is likely to be at or below global growth,” Georgieva said. “Before COVID, China would deliver 34, 35, 40% of global growth. It is not doing it anymore,” she said, adding that it is “quite a stressful” period for Asian economies.
“When I talk to Asian leaders, all of them start with this question, ‘What is going to happen with China? Is China going to return to a higher level of growth?’ ” she said.
The next couple of months will “be tough for China, and the impact on Chinese growth would be negative,” Georgieva said, adding that she expects the country to move gradually to a “higher level of economic performance, and finish the year better off than it is going to start the year.”
China’s economy grew at least 4.4% in 2022, according to leader Xi Jinping, a figure much stronger than many economists hadexpected. But the current Covid wave may hobble growth in the months ahead.
China’s annual GDP is expected to have exceeded 120 trillion yuan ($17.4 trillion) last year, Xi said in a televised New Year’s Eve speech on Saturday. That implies growth of more than 4.4%, which is a surprisingly robust figure.
Economists had generally expected growth to slump to a rate between 2.7% and 3.3% for 2022. The government had maintained a much higher annual growth target of around 5.5%.
“China’s economy is resilient and has good potential and vitality. Its long-term fundamentals remain unchanged,” Xi said. “As long as we are confident and seek progress steadily, we will be able to achieve our goals.”
In his remarks, Xi made a rare admission of the “tough challenges” experienced by many during three years of pandemic controls. Many online commentators noted that his tone appeared softer and less self congratulatory than his New Year’s addresses over the past two years.
In 2020, Xi devoted much time topraising China’s economic achievements, highlighting that it was the first major global economy to achieve positive growth.Last year, he emphasizedthe country had developed rapidly and that he had wonpraise from his counterparts for China’s fight against Covid.
However, in 2022,China’s economy was hit by widespread Covid lockdowns and a historic property downturn. Its growth is likely to be at or below global growth for the first time in 40 years, according to Kristalina Georgieva, managing director of the International Monetary Fund.
Chinese policymakers have vowed to seek a turnaround in 2023. They’re betting that the end of zero-Covid and a series of property support measures will revive domestic consumption and bolster growth.
But an explosion of Covid infections, triggered by the abrupt easing of pandemic restrictions in early December, is clouding the outlook. The country is battling its biggest-ever Covid outbreak.
Last week, Beijing announced it will end quarantine requirements for international arrivals from January 8, marking a major step toward reopening its borders.
The sudden end to the restrictions caught many in the country off guard and put enormous strain on the healthcare system.
The rapid spread of infections has kept many people indoors and emptied shops and restaurants. Factories have been forced to shut down or cut production because workers were getting sick.
Key data released Saturday showed factory activity in the country contracted in December by the fastest pace in nearly three years. The official manufacturing purchasing managers’ index (PMI) slumped to 47 last month from 48 in November, according to the National Bureau of Statistics.
It was the biggest drop since February 2020 and also marked the third straight month of contraction for the index. A reading below 50 indicates that activity is shrinking.
The non-manufacturing PMI, which measures activity in the services sector, plunged to 41.6 last month from 46.7 in November. It also marked the lowest level in nearly three years.
“For the next couple of months, it would be tough for China, and the impact on Chinese growth would be negative,” said Georgieva in an interview aired by CBS News on Sunday. “The impact on the region would be negative. The impact on global growth would be negative.”
Analysts are also expecting the economy to face a bumpy start in 2023 — with a likely contraction in the first quarter, as surging Covid infections dampen consumer spending and disrupt factory activity.
However, some forecast the economy will rebound after March, as people learn to live with Covid. Many investment banks now forecast China’s 2023 growth to top 5%.
The numbers: A survey of consumer sentiment rose to 59.7 in December, buoyed by falling gas prices and a rebound in stocks earlier in the month. Yet Americans are generally pessimistic about the economy.
The final reading in the sentiment poll marked a small increase from the initial 59.1 result earlier in the month, the University of Michigan reported.
The index increased from 56.8 in November.
Consumer sentiment is still extremely weak, however. The index fell to a record low of 50 in June, just half as much as the 101 reading in the last month before the pandemic in 2020.
Key details: A gauge that measures what consumers think about their financial situation — and the current health of the economy — rose slightly to 59.4 last month. One year ago, the index stood much higher at 74.2.
Another measure that asks about expectations for the next six months registered 59.9, up from 55.6 in November. It was also well below year-ago levels, though.
Americans view inflation as somewhat less of a threat. They expect the inflation rate in the next year to average about 4.4%, compared to 4.9% in the prior month.
In the longer run, consumers see inflation falling toward 2.9%.
Top Federal Reserve officials pay close attention to inflation expectations because it could be a harbinger of future price trends.
The current 12-month rate of inflation is 7.1%, based on the consumer-price index. It’s fallen from a peak of 9.1% last summer.
Big picture: Falling gas prices and a slowdown in inflation have given consumers something to cheer about during the holidays. But they consumers are worried about what the future will bring.
The Federal Reserve is rapidly raising interest rates to slow inflation even further, but higher borrowing costs are weakening the economy. That’s likely to result in rising unemployment in 2023 — and perhaps even a recession.
Looking ahead: “While the sizable decline in short-run inflation expectations may be welcome news, consumers continued to exhibit substantial uncertainty over the future path of prices,” said survey director Joanne Hsu.
Market reaction: The Dow Jones Industrial Average DJIA, +0.53%
and S&P 500 SPX, +0.59%
XXX in Friday trades.
The numbers: A key gauge of U.S. prices rose just 0.1% in November, marking the fifth month in a row in which inflation eased after peaking at a 40-year high over the summer.
The yearly rate of inflation, meanwhile, slowed to 5.5% in November from 6.1% in the prior month, based on the personal consumption expenditures index. That’s the smallest increase since October 2021.
Key details: The PCE index is viewed by the Federal Reserve as the best measure of inflation, especially the core gauge that strips out volatile food and energy costs.
The increase in the core rate of inflation in the past 12 months relaxed to 4.7% from 5%. That’s also the lowest level since October 2021..
Unlike it’s better-known cousin, the consumer price index, the PCE gauge takes into account how consumers change their buying habits due to rising prices.
They might substitute cheaper goods such as ground beef for more expensive ones like ribeye to keep costs down. Or buy no-name denims instead of more fashionable jeans.
The CPI showed inflation rising at a 7.1% yearly rate in November.
Big picture: The rate of inflation is coming down, but not fast enough for the Fed.
The Fed plans to raise interest rates even higher to slow the economy enough to alleviate upward wage pressures, a strategy that’s bound to raise unemployment and potentially trigger a recession.
Looking ahead: “The economy is moving in the right direction from the Federal Reserve’s perspective at the end of 2022, but not quickly enough,” said chief economist Gus Faucher of PNC Financial Services. “The Fed is concerned that strong wage growth will lead to persistent increases in services prices and high overall inflation.”
The numbers: Orders for manufactured goods sank 2.1% in November in another sign of slackening demand in the U.S. economy as the year winds down.
Fewer contracts for commercial jets explained most of the weakness last month. But orders minus transportation and a key measure of business investment posted just very small increases.
Orders rise in an expanding economy and shrink when growth weakens. A variety of measures point to waning demand for goods due to a more fragile economy and a shift in consumer spending toward services such as travel and recreation.
Economists polled by the Wall Street Journal had forecast a 1.1% decline in orders for durable goods — or products meant to last at least three years.
Key details: Orders for aircraft nosedived 36% last month, reflecting typical seasonal swings in contract signings. Demand for new cars and trucks also fell slightly.
The transportation segment is a large and volatile category that often exaggerates the ups and downs in industrial production.
Outside of transportation, new orders rose a meager 0.2%. Bookings increased in every major category except primary metals.
Business investment, meanwhile, also rose 0.2% last month, but the annual rate of growth has slowed sharply in recent months to 5.7% from more than last spring.
These orders exclude military spending and the auto and aerospace industries.
Big picture: American manufacturers are likely to tread water for a while.
Higher interest rates have sapped demand for houses, new cars and other big-ticket items because of the added costs and a fading global economy has curbed exports.
The Federal Reserve plans to keep raising interest rates to tame high inflation, so the slowdown in manufacturing could intensify.
The one side-benefit? Congested supply chains are clearing up and reducing a primary driver of inflation over the past few years.
Looking ahead: “Underlying investment demand is weakening,” said senior U.S. economist Andrew Hunter in a note to clients. “We expect it to weaken more markedly next year as the full impact of the Fed’s aggressive tightening this year feeds through.”
Market reaction: The Dow Jones Industrial Average DJIA, +0.53%
and S&P 500 SPX, +0.59%
were set to open higher in Friday trades.
Big picture: The economy is still expanding as the year winds down, but rising interest rates orchestrated by the Federal Reserve to tame high inflation could choke off growth in 2023. Many economists even predict a recession.
Key details: The leading economic index fell last month largely because of higher jobless claims, a sagging housing market and a slowdown in manufacturing.
A measure of current economic condition rose 0.1% in November.
The so-called lagging index — a look of sorts in the rearview mirror — increased by 0.2%.
Looking ahead: “The U.S. LEI suggests the Federal Reserve’s monetary tightening cycle is curtailing aspects of economic activity, especially housing,” said Ataman Ozyildirim, senior director of economic research at the board.
“As a result, we project a U.S. recession is likely to start around the beginning of 2023 and last through mid-year.”
Market reaction: The Dow Jones Industrial Average DJIA, -1.40%
and S&P 500 SPX, -1.83%
fell in Thursday trades.
When members of the Federal Reserve make public statements, investors tend to listen. Over the past two decades, central bankers have consistently shared key information about the future trajectory of important inputs like interest rates. The Fed’s forward guidance on interest rates amid historic inflation has taken stock markets for a ride in 2022. As investors wait for a pivot, a panel of experts explains why many in the market choose not to fight the Fed.
America’s economy grew much faster than previously thought in the third quarter, a sign that the Federal Reserve’s battle to cool the economy to fight inflation t is having only limited impact.
The Commerce Department’s final reading Thursday morning showed gross domestic product, the broadest measure of the US economy, grew at an annual pace of 3.2% between July and September. That was above the 2.9% estimate from a month ago. Economists surveyed by Refinitiv had expected GDP to stay unchanged from its previous reading.
The report said the stronger-than-expected reading was due to increases in exports and consumer spending that were partly offset by a decrease in spending on new housing. Consumer spending is responsible for more than two-thirds of the nation’s economic activity.
The Fed has been raising interest rates throughout the year to cool demand for goods and services and reduce inflation. Economists have been worried for quite some time that the Fed’s actions could tip the US economy into recession next year.
Inflation has cooled in recent readings, but the US economy has stayed strong. Some surveys released this week suggest the Fed’s higher rates are not slowing spending by businesses or consumers.
A recent survey of chief financial officers found the current level of interest rates have not impacted their spending plans. And consumer confidence improved in December according to a survey by the Conference Board, reaching the highest level since April.
A separate Labor Department report Thursday showed that unemployment claims remained relatively unchanged.
Initial weekly claims for unemployment insurance benefits ticked up to 216,000 for the week ended, December 17. The previous week’s total was upwardly revised by 3,000 to 214,000.
Economists were expecting initial claims to land at 222,000, according to Refinitiv.
The weekly initial claims totals are hovering around pre-pandemic levels. In 2019, weekly claims averaged 218,000.
Continuing claims, which include people who are collecting benefits on an ongoing basis, dropped slightly to 1.672 million for the week ended December 10. The prior week’s number of continuing claims were revised up to 1.678 million.
The final GDP report is one of most backward-looking readings the government releases, looking at the state of the economy nearly three months ago. The current forecast from economists is that growth in the current period will be only 2.4%, significantly slower than Thursday’s reading.
Still, Wall Street was concerned that the GDP report could give the Fed more runway to raise rates. Stocks fell modestly Thursday. Dow futures were 200 points, or 0.6% lower. S&P 500 futures fell 0.8%.
The numbers: The number of Americans who applied for unemployment benefits in early December fell to a nearly three-month low of 211,000, indicating layoffs around the holiday season remain low even as the economy softens.
New unemployment filings declined by 20,000 from 231,000 in the prior week, the government said Thursday.
The numbers: The number of Americans who applied for unemployment benefits in early December rose slightly to 230,000, pointing to a slow but steady increase in layoffs as the U.S. economy slows.
Economists polled by the Wall Street Journal had forecast new claims to total 230,000 in the seven days ended Dec 3. The figures are seasonally adjusted.
The number of people applying for jobless benefits is one of the best barometers of whether the economy is getting better or worse. New unemployment filings have gradually risen from a 54-year low of 166,000 last spring , but they are still extremely low.
Economists predict layoffs will rise, however, as rising interest rates orchestrated by the Federal Reserve choke off U.S. growth. The tech sector has already suffered a wave of layoffs and manufacturers are also scaling back.
Big picture: The strongest U.S labor market in decades has now become a double-edged sword.
Rising wages and low unemployment have allowed Americans to meet their needs and spend enough to keep the economy growing.
Yet the fastest wage growth in four decades is now adding to high U.S. inflation and putting more pressure on the Fed to get prices back under control.
U.S. stock indexes are wavering between small gains and losses on Wall Street Wednesday, struggling to gain ground after a four-day losing streak amid worries about the chances of an economic downturn in coming months.
How are stock-index futures trading
S&P 500 SPX, -0.16%
dropped 14 points, or 0.3%, to 3,927
Dow Jones Industrial Average DJIA, +0.08%
shed 70 points, or 0.2%, to 33,528, after rallying over 145 points earlier in the session
Nasdaq Composite COMP, -0.50%
fell 83 points, or 0.8% to 10,931
On Tuesday, the Dow Jones Industrial Average fell 351 points, or 1.03%, to 33596, the S&P 500 declined 58 points, or 1.44%, to 3,941, and the Nasdaq Composite dropped 225 points, or 2%, to 11,015.
What’s driving markets
A four-day losing streak, during which the S&P 500 index has lost 3.4%, showed little sign of being snapped Wednesday as investors continued to assess the potential economic damage inflicted by high inflation and the Federal Reserve’s campaign to damp it by raising interest rates. U.S. stock indexes extended losses in midday trade despite regaining some ground in the morning session.
“The recent run of macro data points in the U.S. continues to underscore relatively solid economic trends. And combined with the recent easing in financial conditions, it may trigger a need for the Fed to push back in December. Put another way, the dove camp is feeling some pain,” said Stephen Innes, managing partner at SPI Asset Management.
Jim Reid, strategist at Deutsche Bank , noted that the S&P 500 had now lost ground in the last seven out of eight sessions. “In fact, the latest moves for the S&P mean it’s now unwound the entirety of the rally following Fed Chair Powell’s [supposedly dovish] speech last week, which makes sense on one level given he didn’t actually say anything particularly new.”
The S&P 500 has fallen 17.2% in 2022 as the Federal Reserve has driven borrowing costs sharply higher in an effort to tame inflation that has been running at the fastest pace in 40 years.
“Fears are growing that economies are in for a rough time ahead as feverish inflation and the bitter interest rate medicine being used to bring it down take effect,” said Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.
“Worries deepened amid warnings from U.S. banking and media sectors that navigating through the storm would not be easy, while the latest data has shown China’s trade has been sideswiped by a drop in global demand and zero-COVID policies. Despite today’s easing of restrictions it’s clear China’s COVID nightmare is not at an end,” Streeter added.
China on Wednesday announced a series of measures rolling back some of its most draconian anti-COVID-19 restrictions. People who test positive for the virus will be able to isolate at home rather than in overcrowded and unsanitary field hospitals, and schools where there have been no outbreaks must return to in-class teaching, according to the National Health Commission.
The Hang Seng index HSI, -3.22%
in Hong Kong fell 3.2%, while the CSI 300 000300, -0.25%
dropped 0.2%, suggesting investors had already discounted Beijing’s more relaxed COVID stance.
However, long time bull Tom Lee, head of research at Fundstrat, reckons equities will benefit in coming weeks as investors start to get greater clarity on when the Fed may stop tightening policy.
“We don’t think the end of the inflation war in 2022 is the Fed cutting rates. It is when Fed and markets see sufficient progress in inflation to remove the upside risks to higher rates. We think this could happen as early as the November CPI report. This will be released on 12/13,” Lee wrote in a note.
“And if November CPI is soft, we think this will support a strong year-end rally. Admittedly, a 10% move between now and [year end] seems a stretch given the S&P 500 is around 4,000 but… the broader point is we see stocks having positive skew given the cautious positioning of investors and the possibility of very favorable incoming inflation reports,” Lee added.
On the U.S. economic front, nonfarm productivity, which measures hourly output change per worker, rose at a 0.8% annualized rate last quarter, the Labor Department said on Wednesday. Unit labor costs, the price of labor per single unit of output, climbed by a smaller 2.4% annual pace in the third quarter, compared to the preliminary 3.5% increase.
What companies are in focus
Carvana Co. CVNA, -31.45%
shares slumped 33% after creditors led by Apollo Global Management Inc. and Pacific Investment Management Co. inked an agreement to team up in credit talks with the used car dealer in a move to avoid the conflicts that have arisen in other debt restructurings.
Lowe’s LOW, +3.05%
shares gained 2.1% after the company announced a new $15 billion share repurchase program and the home improvement retailer reaffirmed its full-year forecast.
Chinese electric vehicle stocks NIO Inc. NIO, -4.87%
and XPeng Inc. XPEV, -7.74%
dropped over 6.2% and 8.2%, respectively, despite news of the country easing some COVID-19 restrictions on production and travel.
An obscure and arcane economic indicator suggests that Federal Reserve Chairman Jerome Powell was wrong when he said at his Nov. 30 news conference that “There is a path to a soft, a softish landing” for the U.S. economy.
This indicator traces to the large divergence between consumers’ views about the economy in general and their immediate personal financial circumstances in particular. A recession has occurred each time over the past four decades in which this divergence even approached its current level.
To measure this divergence, this indicator focuses on the Conference Board’s Consumer Confidence Index (CCI) and the University of Michigan’s Consumer Sentiment Survey (UMI). While there is some overlap between what these two indices measure, there is a significant difference in emphasis, according to James Stack of InvesTech Research, from whom I first heard about this indicator. The CCI more heavily reflects consumers’ attitudes towards the overall economy, according to Stack, while the UMI is more heavily weighted towards their immediate personal circumstances.
Perhaps not surprisingly, the CCI currently is higher than the UMI. Even as American consumers’ attitudes towards their immediate financial situations continue to sour, due to everything from inflation to higher mortgage rates to a softening housing market, the overall economy has proven to be remarkably resilient. Yet more evidence of this resilience was the Dec. 2 jobs report, in which the Labor Department reported the creation of a much-higher-than-expected number of new jobs.
What is more surprising is the magnitude of the current divergence. According to the latest data releases from the Conference Board and the University of Michigan in late November, the CCI is 43.4 percentage points higher than the UMI. That’s close to a record; the latest reading stands at the 98th percentile of all monthly readings of the past four decades.
Furthermore, as you can see from the chart above, a recession was in the economy’s not-too-distant future (shadowed bars) the past four times this difference rose to even 25 percentage points.
Consumer sentiment and the stock market
Stark as this chart’s correlations are, it’s difficult for a sample with just four observations to be statistically significant. To test this indicator’s potential, I next measured its ability to predict the S&P 500’s SPX, -1.96%
inflation-adjusted total return over the subsequent one- and five-year periods. The table below reflects data since 1979, which is when monthly data for both of these consumer indices first began to be reported.
When divergence between CCI and UMI was…
S&P 500’s average total real return over subsequent 12 months
S&P 500’s average total real return over subsequent 5 years (annualized)
In the highest 10% of monthly readings since 1979
-0.4%
-3.1%
In the lowest 10% of monthly readings since 1979
+14.3%
+14.8%
The differences shown in this table are statistically significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine.
The bottom line? It’s not good news, for the economy in general or the U.S. stock market in particular, that consumers are so much more upbeat about the overall economy than they are about their immediate financial circumstances.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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For many people living in the U.S., these are tough — and confusing — times.
On Friday, the Labor Department reported 263,000 new jobs in November, while the unemployment rate held steady at 3.7%. Layoffs remain low, despite mass job cuts in the tech sector. Average hourly wages have also risen 5.1% in the past year, but still lag behind inflation for many workers. And there were 10.3 million job openings in October — slightly down from the previous month’s 10.7 million.
Some people might see the latest economic data as both challenging and confusing.
“‘It’s just mind-boggling, the disconnect that we’ve seen.’”
Given all the conflicting signals, economists say it can be difficult for consumers to know exactly how to feel about the economy right now. “It’s not new, this disparity between the actual facts on the ground about what’s going on in the economy and the sentiment,” said Heidi Shierholz, president of the Economic Policy Institute, a left-leaning think tank.
“I remember this summer it was just unambiguously the strongest jobs recovery we’ve had in decades,” she added. “There’s just absolutely zero chance that we were in a recession — not only were we not in a recession, we were in just an extraordinarily fast recovery — and the polling, a huge share of people actually thought we were in a recession. It’s just mind-boggling, the disconnect that we’ve seen.”
“Going into the pandemic, more than seven out of every 10 extremely low-income renters were already spending more than half of their income on rent. And then the pandemic hits; we saw a lot of low-wage workers lose their jobs and see an income decline,” said Andrew Aurand, vice president for research at the National Low Income Housing Coalition. “Then in 2021, we see this huge spike in prices. For a variety of reasons, they’ve struggled for a long time, and since the pandemic, it’s gotten even worse.”
But we would like your help telling an ongoing story about the American economy, centering the experiences of everyday people. Our readers know better than anyone about how today’s economic conditions have impacted their daily lives.
Senior officials at the Federal Reserve expect smaller increases in interest rates will “soon be appropriate” as the threat of recession grows.
Although the Fed still expects rates to rise higher than previously forecast, senior officials are unsure just how much further they will go. Slower rate hikes, they say, would give them more time to evaluate the “lagging” effects on the economy amid the rising threat of a recession.
“Short of some wild inflation report before the next meeting, 50 basis points sounds very reasonable in December. But the Fed is clearly not finished yet.”
The Fed’s economic staff for the first time said a recession was possible in the next year, according to a detailed summary of the bank’s last strategy session in early November.
The bank’s previous minutes have not mentioned the possibility of a recession.
DJIA, +0.50%
extended gains after the release of the Fed minutes.
The Fed has quickly raised a key U.S. interest rate to a top range of 4% from near zero last spring in an effort to tame high inflation. Rising rates tend to reduce inflation by slowing the economy and depressing demand for goods and labor.
Yet some economists and senior officials at the Fed also worry the central bank could spark a recession or a period of prolonged economic weakness if rates go too high.
Some members said there was an increasing risk that the Fed’s actions “would exceed what was required” to bring inflation down to acceptable levels.
In recent speeches, a few have suggested a “pause” in rate hikes might be warranted by early next year to see how they affect the economy. A rapid easing of inflationary pressures could strengthen their case.
The rate of inflation exploded earlier this year to a 40-year high of 9.1% from almost zero during the early stages of the pandemic. It has since slowed to 7.7%.
Earlier this month, the bank lifted the so-called fed funds rate by three-quarters of a point to a range of 3.75% to 4% — the third big rate increase in a row. Most U..S. loans such as mortgages and car loans are tied to the fed fund rate.
In December, the Fed is likely to raise rates again, but markets are betting on a smaller 1/2-point increase. The minutes also suggest a smaller rate hike is likely.
“Short of some wild inflation report before the next meeting, 50 bps sounds very reasonable in December,” senior economist Jennifer Lee of BMO Capital Markets said. “But the Fed is clearly not finished yet.”
Senior Fed officials have repeatedly said they plan is to further raise rates in 2023 and then keep them high for an unspecified period of time to make sure inflation declines.
Officials are less unified on just how high rates will go. Some want to stop at around 5% while others suggest they might need to go higher.
Wall Street expects the Fed to raise its benchmark rate to 5% by next year.
The Fed’s aggressive posture stems from the biggest surge in prices since the early 1980s.
The Fed is aiming to bring down inflation to pre-pandemic levels of 2% or so, but they acknowledge it could take a while.
Several Fed members also expressed worries that non-traditional financial institutions could amplify the problems for the U.S. economy if higher rates exposed them to greater instability.
The troubles at the crypto-currency firm FTX were emerging just as the Fed meeting took place.
The numbers: Business conditions at U.S. companies deteriorated again in November and pointed to a slowing economy.
The “flash” U.S. services sector index drop to a three-month low of 46.1 this month from 47.8 in October, keeping it near the lowest level of the pandemic era. The service side of the economy employs most Americans.
The S&P Global U.S. manufacturing sector index, meanwhile, slid to a 2 1/2-year low of 47.6 from 50.4.
Any number below 50 reflects a contracting economy.
Key details: New orders, a sign of future sales, fell in November at the fastest pace since early in the pandemic in 2020, S&P Global found. Exports also declined.
The cost of supplies, a measure of inflation, eased again in a sign that intense inflationary pressures are on the wane. Companies also raised prices at the slowest rate in more than two years.
Shortages of supplies, a big problem during the pandemic, also continued to diminish.
These shortages were one of the biggest contributors to the U.S. and global surge in inflation. While they are fading, they remain a big problem.
Rising interest rates orchestrated by the Federal Reserve have dampened sales in the U.S. while a strong dollar has hurt exports by making American products more expensive.
Looking ahead: “Inflationary pressures should continue to cool in the months ahead, potentially markedly, but the economy meanwhile continues to head deeper into a likely recession,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
Market reaction: The Dow Jones Industrial Average DJIA, +0.28%
and S&P 500 SPX, +0.59%
rose in Wednesday trades.
