Americans are super gloomy about higher prices, but they just keep spending. That is the upshot of two new snapshots of the economy out Friday that reinforce how inflation remains the top concern for the economy, leaving a lot of work for policymakers seeking to bring prices down.
The benchmarks reflect the blazing hot economy, which already became clear when inflation reached 9.1 percent for the 12 months ending in June, thanks in large part to higher energy prices.
The pandemic, along with the war in Ukraine and looming uncertainties in China, are weighing heavily on the domestic economy, which in recent weeks has become a cauldron of mixed messages. Hiring is slowing but still very strong. Inflation is at the highest level in 40 years but not deterring families from shelling out. Many economists and Wall Street analysts are now predicting a recession later this year or next year.
“The reality is the latest data tells us what we already knew, that inflation has persisted for way too long, and even when it cools, it may not cool enough,” said Diane Swonk, chief economist at financial company Grant Thornton. “Words like ‘pain’ and ‘higher unemployment’ have seeped into the Fed’s messaging, which means they know they will likely have to raise the unemployment rate to a level that is consistent with a recession.”
Rising costs are reshaping consumer spending habits and forcing many families to allocate more of their household budgets to necessities like rent, gas and groceries. In June, the biggest jump in monthly spending occurred at gas stations, where Americans spent 3.6 percent more than they did in May. People also spent more at grocery stores, restaurants and bars but skimped at clothing shops and department stores.
There is “a shift in what people are spending on, with much of the growth being driven by essential products where consumers have little choice but to accept higher costs,” said Neil Saunders, managing director of analytics company Global Data. “In simple terms, consumers did not buy more stuff in June. They bought less product but paid more for it.”
The higher retail numbers are not adjusted for inflation, so the figures could be reflecting higher prices overall for the goods people are already buying. But financial markets soared after the figures came out, on hopes that the Federal Reserve will not work quite as aggressively in late July to quell inflation later this month.
By the close on Friday, the Dow Jones industrial average had spiked more than 650 points, or 2.1 percent, while the broader S&P 500 advanced 1.9 percent and the technology-heavy Nasdaq index added 1.7 percent.
“We are at this weird moment where you sort of want the economy to slow. You just don’t want it to go into reverse,” said Jason Furman, an economics professor at Harvard University. “There are a lot of unusual uncertainties that we don’t usually see.”
The looming question is whether the economy shrank again in the second quarter of 2022, after unexpectedly contracting in the first three months of the year. The next round of gross domestic product figures will be released July 28.
“After flying well above cruising altitude last year, the inevitable descent in economic growth is clearly underway,” Wells Fargo economists wrote in a research note on Thursday. “The tight stance of policy alongside still high inflation suggests a recession is more likely than not next year.”
There is a mix of signals in the business world. On Thursday, two of the largest banks in the nation, JPMorgan Chase and Morgan Stanley, reported lower profits partly because of fewer mergers and initial public offerings on Wall Street. Wells Fargo followed suit on Friday, reporting a 48 percent drop in net income for the second quarter.
Both JPMorgan and Wells Fargo are setting funds aside to protect against losses in the event of a downturn. Yet JPMorgan chief executive Jamie Dimon said Americans are better situated to withstand a recession than they were before the financial crisis.
For many families across the country, the economy feels more dire. Americans are facing higher prices on everyday essentials like housing, food and gas. The inflation figures released Wednesday showed that consumer prices have soared 9.1 percent in the past year, exceeding expectations and putting renewed pressure on the central bank to move aggressively to cool the economy.
There are also growing fears that a sharp Fed move could, in turn, tip the economy into recession. “It is hard to find much encouraging news in the latest inflation report,” said Karen Dynan, an economist at Harvard University and a former economist at the Fed.
“This was the most important data point the Fed will get prior to its meeting later this month, and it is probably going to have to intervene more aggressively than it had hoped to in order to restrain demand. And it also raises the odds that they cannot achieve that without a downturn,” Dynan said.
The blistering inflation report raised questions about whether Fed officials would move even more aggressively to tame inflation at their upcoming policy meeting. Inflation notched yet another peak last month, zapping any hope that the rate increases by the central bank so far were bringing prices down.
For weeks, policymakers have leaned toward another hike of three-quarters of a percentage point, mirroring the increase they adopted in June. But it was unclear whether they would start to show support for a hike of a full percentage point before their policy meeting that convenes July 26. So far, Fed officials appear to be sticking to their original message. And if anything, they are warning against reacting too suddenly to one bucket of data.
Christopher Waller, a member of the Fed board of governors, said on Thursday that even though the latest consumer price index report was “a major league disappointment,” there were hazards to snap policy decisions. “You don’t want to overdo the rate hikes,” Waller said. “A 75 basis-point hike is huge. Don’t think because you are not going 100, you are not doing your job.”
James Bullard, president of the Federal Reserve Bank of St. Louis, said the central bank has plenty of work to do regarding rates this year. But the exact configuration of hikes matters somewhat less. “It probably doesn’t make too much difference to do 100 basis points here, and less in other three meetings of this year, or to do 75 basis points here and slightly more in the remaining three meetings of the year,” Bullard said Friday.
Mary Daly, president of the Federal Reserve Bank of San Francisco, said on Thursday that even though she expected a brutal inflation report, she still favors a hike of three-quarters of a percentage point. An outlier is Raphael Bostic, president of the Federal Reserve Bank of Atlanta, who does not have a vote this year. Asked about the possibility of a hike of a full percentage point on Wednesday, Bostic told reporters that “everything is in play.”