Unemployment claims surged this week, suggesting the economy, and the jobs market, is weakening. The question is: Will growth slow, or is the economy about to fall off a cliff? Will there be a soft landing or a recession?
Americans continue to give President Biden low marks on the economy, despite incessant assurances from the White House that things are going great. Ongoing inflation, high interest rates, unaffordable housing and a softening jobs market seem more persuasive than a stock market fueled by AI enthusiasm and the president’s misleading claims that he has “created” millions of jobs.
The reality is, the U.S. economy is being supported by three shaky pillars: over-the-top government spending, an overly concentrated stock market and unprecedented illegal immigration. The result is flagging growth, volatile stocks, declining consumer confidence and pressure on unskilled wages.
There’s a reason famed investor Stanley Druckenmiller recently gave Bidenomics an “F” grade. He blasted Treasury Secretary Janet Yellen for too much government spending and Fed Chair Jay Powell for “fumbling on the five-yard line” in his fight against inflation. The billionaire is, of course, totally right.
Yellen “just keeps spending and spending,” Druckenmiller says, “[and] it doesn’t take a genius to figure out that the average American is getting hurt by the inflation.” At the same time, Druckenmiller says Powell undermined his battle to bring down inflation by pumping up the prospects of rate cuts late last year. Right again. Soaring markets, juiced by optimism about lower interest rates, feed rising consumer optimism and spending, effectively counteracting the Fed’s effort to slow growth.
The result has been inflation numbers that are unexpectedly high and a Fed chair who has had to ice expectations of multiple rate cuts. Meanwhile, the economy is definitely slowing. April hiring, at 175,000 minus downward revisions of 22,000, came in below expectations, a report that was met with a Pavlovian response from traders. Stocks soared, and even amid renewed chatter about “stagflation,” predictions of rate cuts blossomed.
A year and a half ago, most investors were expecting a recession; today that concern has nearly vanished. And yet, there are some worrisome signs that could mean a downturn is coming. As Ed Hyman at Evercore ISI has frequently noted, in 2000, on the cusp of recession, everything was fine until it wasn’t.
Specifically, the job market was strong during the first five months of 2000, with additions averaging 265,000; in May, the government reported adding 223,000 jobs. The very next month, the “dot com” merry-go-round stopped, and for 26 of the next 42 months, jobs growth went negative.
ISI is monitoring signs of a downturn, including most recently the firm’s trucking survey, which tracks GDP and is in contraction territory. In addition, state and local tax receipts, another barometer of economic strength, are also declining.
The Institute for Supply Management reported that the PMI for the services sector fell into contraction territory in April, which was a surprise since that segment of the economy has enjoyed solid growth. Prices accelerated as new orders slowed; companies reported laying off workers at a faster pace. At the same time, manufacturing has been in a slump for 17 of the last 18 months.
Jobs remain key to consumer spending. Top-line figures on employment are misleading. Government, health care and social assistance contributed 60 percent of new jobs. That does not bode well for increased productivity or growth. The National Federation of Independent Businesses reported recently: “Owners’ plans to fill open positions continue to slow,” with the number expecting to hire at “the lowest level since May 2020.”
The weakening employment picture and still-high inflation are causing consumers to pull back. CEOs of numerous companies like McDonald’s, 3M and Starbucks have commented that (especially) low-income Americans are feeling pinched and are cutting back. After the burger chain reported disappointing sales, McDonald’s CEO Chris Kempczinski noted consumers “are more discriminating with every dollar that they spend as they faced elevated prices in their day-to-day spending.” The management of 3M said consumer spending on discretionary items was soft and that overall outlays were likely to remain “muted.”
Inflation pressure shows up in declining consumer confidence in the future, which last month dropped to its lowest level since July 2022. The Conference Board reported that survey participants were anxious about prices, the jobs outlook, incomes and stock prices. Assessing present conditions, more respondents reported that jobs are hard to get.
Robust consumer spending has been driving the economy, fueled by excess savings piled up during the pandemic and the “wealth effect” of rising stock prices. But rising credit card debt is a warning sign that Americans are still shopping even though their savings have dwindled. With rates well above 20 percent on credit card borrowings, delinquencies are rising and spending is slowing.
Fed data shows that Americans pulled in their credit card borrowing in March. Total revolving debt, which mainly reflects credit card debt, grew by $152 million in March, a sharp drop from the $10.7 billion added in February, and the smallest increase since April 2021. Overall consumer debt, which includes auto and student loans, rose by $6.3 billion, considerably less than the $14.8 billion economists had expected.
One factor fueling spending has been hefty stock market gains — the “wealth effect” — which bolster confidence and expenditures. But the stock market rally is concentrated in 10 stocks, which together constitute 34 percent of the total market capitalization, the highest level of concentration since the 1970s. As one market observer notes: “Even at the peak of the 2000 Dot-com bubble, the weight of the top 10 stocks not break above 30% of the index.”
If the economy suddenly falters, the Fed will surely cut interest rates. Whether they will be nimble enough to stave off a possible recession remains to be seen. The record is not encouraging.
Liz Peek is a former partner of major bracket Wall Street firm Wertheim & Company.