Stubbornly high inflation, a possible recession, rising interest rates, corporate budget cuts and ... [+]
Stubbornly high inflation, a possible recession, rising interest rates, corporate budget cuts and headcount reduction are all likely to continue, as Federal Reserve Bank Chair Jerome Powell wages war against inflation.
Until Powell gets a grip on inflation, Americans are looking at a long, cold winter of falling stock and home prices, a litany of layoff announcements and a contracting economy.
This week’s unexpectedly high inflation report offered a stark reminder of how volatile and fragile the United States economy has become. On Tuesday, reacting to the news of the rise in the consumer price index, the stock market plummeted more than 1,200 points. The S&P 500, a bellwether of large corporations, plunged over 4% and the Nasdaq, primarily composed of tech companies, dropped 5%.
This may serve as a harbinger of what’s to come. The S&P is down about 14% this year and there is fear that stocks, along with real estate, will continue to decline in value.
Many investors thought Powell was bluffing when he said that he must cool down the economy. They overlooked his ominous message at the Jackson Hole Summit when he bluntly stated that there will be some “pain” as the Fed attempts to beat down inflation. As runaway inflation continues to rise, Powell has little choice other than to continue pulling the levers to cool things down, which includes causing an increase in unemployment.
Painfully Feeling Less Rich
This week’s sudden downturn resulted in a massive loss of cumulative net worth by a record $8.7 trillion. When stocks, real estate and other hard assets appreciate in value, it creates a wealth effect. This means that people feel confident in the economy and are willing to spend money, start businesses and take risks, as things look positive.
When Americans experience unabated inflation and furious drops in the prices of securities and home prices, people feel the opposite of the wealth effect. They start getting worried. Unironically, this is exactly what the Fed wants to happen. Powell needs to create a climate where businesses tighten their belts, enact hiring freezes, allow attrition by not replacing the departing personnel and rescind job offers. Consequently, families seeing the constricting economy will pull back on their spending further contracting the economy.
According to a recent Financial Health Pulse 2022 U.S. Trends Report, only around 31% of Americans feel “financially healthy” and more than 55% self-reported they were “financially coping,” while 15% described themselves as “financially vulnerable.” Under 60% of the people in the survey said that they have at least three months of living expenses. Usually, it’s the lower-wage-earning people who feel financially insecure. However, the study shows that middle-class people earning $60k to $100k are growing concerned.
Announcements Of Layoffs Keep On Coming
Top-tier investment bank Goldman Sachs announced that it plans to let go of bankers, according to the New York Times. As investment banking, mergers and acquisitions and other deal-making activities have slowed down, there is less of a need to keep highly compensated professionals. This is a far cry from last year when Goldman paid out over $4.4 billion in compensation to attract and retain top talent at the global bank.
Marc Andreessen, one of Silicon Valley’s most successful venture capitalists, said that most tech companies are significantly overstaffed. During the pandemic, money flooded the market. The Federal Reserve Bank kept interest rates at artificially low levels, the U.S. government poured trillions of dollars of stimulus money into the economy and an “everything” bubble emerged. This led to startups and other companies accessing cheap funding to jump-start their businesses, while young people at home started trading meme stocks on Robinhood.
Now that the spigots of free funds have been shut off and interest rates are rising, companies are cutting back. Roughly 80,039 people have lost their jobs at tech companies, according to Layoffs.fyi. The U.S. is also seeing layoffs across all industry sectors.
Millions Of Americans Out Of Work?
Powell and Treasury Secretary Janet Yellen previously asserted that inflation was only “transitory,” due to lockdowns and supply chain disruptions. Yellen, ultimately, admitted that she was incorrect about her assessment regarding transitory inflation.
Families seem intent on spending, as you can notice with plane flights that can’t accommodate the crush of travelers, crowded restaurants and bars, seats filled in sporting events and concerts. Employment still remains strong with 11.2 million jobs available. Due to the Russia and Ukraine conflict, there continue to be supply chain disruptions. These factors indicate that prices will remain stubbornly high and Powell will need to hike up interest rates, which will depress real estate and force people to walk away from buying a home, as the monthly mortgage payments are too high.
A top economist from former President Barack Obama’s former Treasury Secretary, National Economic Council director and former president of Harvard University Lawrence Summers warned on Tuesday that the U.S. still has a “serious inflation problem.” The odds of inflation falling to 2%, which is the mandate of the Fed, is unlikely to happen any time soon and would result in unemployment skyrocketing to 4.5%, putting millions of Americans out of work.
