Gas station prices are seen in Bethesda, Maryland on August 11, 2022.
Mandel Ngan | AFP | Getty Images

There was more good news Friday for inflation, as import prices fell more than expected and brought some much-needed relief for consumers.

The report capped off a relatively upbeat week for those worried about rising prices — and “relatively” is the operative word — as the U.S. is on pace this year to import just over $4 trillion of goods and services this year, according to the latest Bureau of Economic Analysis data.

With Americans already paying huge bills for food, energy and a host of other items in their daily lives, any respite is a welcome one. After all, the monthly import price drop of 1.4% was just the first this year, and the year-over-year increase is still more than 8.8%.

That news followed reports earlier in the week that both wholesale and retail price increases abated for the month. Producer prices declined 0.5%, and consumer prices including food and fuel were flat, both numbers owing largely to a sharp slide in most of the energy complex.

People are noticing: A New York Federal Reserve survey released Monday showed consumers are expecting inflation to stay high but not by as much as previous months. On Friday, the University of Michigan consumer sentiment survey — whose ups and downs tend to ride in tandem with prices at the pump — was higher than expected, though still just off record-low levels hit in June.

‘This is just one report’

Taken together, the numbers are reason for at least a little optimism. But it’s probably wise to put exuberance on hold.

The consumer price index is still up 8.5% from a year ago, while the producer price index has surged 9.8% during the same period.

Krishna Guha, who heads global policy and central bank strategy for Evercore ISI, cautioned in a client note on CPI that, “while the report is consistent with the notion that inflation pressures may finally have peaked, this is just one report.”

Similar comments came Friday from Richmond Federal Reserve President Thomas Barkin. The central bank official told CNBC that the inflation news was “very welcome,” but added that he didn’t see any reason to pull back on the interest rate increases that some economists fear will drag the U.S. into a recession.

“There is a very long way to go before the Fed will feel it has sufficient compelling evidence that inflation is moderating to stop raising rates,” Guha added.

The Fed and investors will get a look next week at how much of an impact inflation has made on spending.

View from the consumer

The Wednesday advance report from the Commerce Department is expected to show a modest 0.2% headline gain for July in retail sales after a 1% increase in June, according to FactSet. The report is not adjusted for inflation.

However, there is a wide range of opinion on where the numbers could land.

Citigroup said its credit card data show a potential 1.1% decline for the month, while Bank of America said it sees a 0.2% decrease, though control group spending — excluding a variety of volatile categories — may have risen 0.9%.

Fed officials will be watching closely to see larger trends in how inflation is impacting Main Street.

“It does appear that a tentative peak in inflation is in place,” said Joseph Brusuelas, chief economist at RSM.

However, he said this week’s numbers are likely to do little to sway a Fed intent on stomping inflation down to the central bank’s 2% target.

“I think that the July inflation does nothing to alter the path of Fed policy, and any notion that a Fed pivot is at hand should be dismissed,” he said. “We are some months away from any potential clear and convincing evidence that inflation is well on its way back to the 2% target that currently defines price stability.”

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Wholesale prices fell in July for the first time in two years as a plunge in energy prices slowed the pace of inflation, the Bureau of Labor Statistics reported Thursday.

The producer price index, which gauges the prices received for final demand products, fell 0.5% from June, the first month-over-month decrease since April 2020, the month after Covid-19 was declared a pandemic. Economists surveyed by Dow Jones had been expecting an increase of 0.2%.

On an annual basis, the index rose 9.8%, the lowest rate since October 2021. That compares with an 11.3% increase in June and the record 11.7% gain in March.

Most of the decline came from energy, which dropped 9% at the wholesale level and accounted for 80% of the total decline in goods prices, which fell 1.8%. The index for services rose 0.1%.

Stripping out food, energy and trade services, PPI increased 0.2% in July, which was less than the expected 0.4% gain. Core PPI rose 5.8% from a year ago.

The numbers come a day after the consumer price index showed that inflation was flat in July though up 8.5% from a year ago. The easing in the CPI also reflected the slide in energy prices that has seen prices at the pump fall below $4 a gallon after hitting record nominal levels above $5 earlier in the summer.

“Cooling prices paid by producers portend a further cooling for consumer prices, as producer prices are further up the inflation pipelines,” said Jeffrey Roach, chief economist at LPL Financial. “We expect producer prices to ease as supply chains improve. It could take up to three months for improved supply chains to affect prices for the end consumer.”

Federal Reserve officials are watching the inflation data closely for clues about where the economy stands after more than a year of wrestling with high inflation.

Before July’s easing, prices had been running at their highest levels in more than 40 years. Supply chain issues, demand imbalances, and high amounts of fiscal and monetary stimulus associated with the pandemic had driven the annual CPI rate past 9%, well above the Fed’s 2% long-run target.

This week’s data could give the Fed reason to dial back rate increases that have come in successive 0.75 percentage point increments in June and July. Markets are now pricing in a 0.5 percentage point move in September.

A separate Labor Department report Thursday showed that weekly jobless claims totaled 262,000 for the week ended Aug. 6, an increase of 14,000 from the previous week though 2,000 below the estimate.

Claims have been elevated in recent weeks in a sign that a historically tight labor market is shifting. Continuing claims rose 8,000 to 1.43 million.

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Prices that consumers pay for a variety of goods and services rose 8.5% in July from a year ago, a slowing pace from the previous month due largely to a drop in gasoline prices.

On a monthly basis, the consumer price index was flat as energy prices broadly declined 4.6% and gasoline fell 7.7%, according to the Bureau of Labor Statistics. That offset a 1.1% monthly gain in food prices and a 0.5% increase in shelter costs.

Economists surveyed by Dow Jones were expecting headline CPI to increase 8.7% on an annual basis and 0.2% monthly.

Excluding volatile food and energy prices, so-called core CPI rose 5.9% annually and 0.3% monthly, compared with respective estimates of 6.1% and 0.5%.

Even with the lower-than-expected numbers, inflation pressures remained strong.

The jump in the food index put the 12-month increase to 10.9%, the fastest pace since May 1979. Butter is up 26.4% over the past year, eggs have surged 38% and coffee is up more than 20%.

Despite the monthly drop in the energy index, electricity prices rose 1.6% and were up 15.2% from a year ago. The energy index rose 32.9% from a year ago.

Used vehicle prices posted a 0.4% monthly decline, while apparel prices also fell, easing 0.1%, and transportation services were off 0.5% as airline fares fell 1.8% for the month and 7.8% from a year ago.

Markets reacted positively to the report, with futures tied to the Dow Jones Industrial Average up more than 400 points and government bond yields down sharply.

“Things are moving in the right direction,” said Aneta Markowska, chief economist at Jefferies. “This is the most encouraging report we’ve had in quite some time.”

The report was good news for workers, who saw a 0.5% monthly increase in real wages. Inflation-adjusted average hourly earnings were still down 3% from a year ago.

Shelter costs, which make up about one-third of the CPI weighting, continued to rise and are up 5.7% over the past 12 months.

People shop at a grocery store on June 10, 2022 in New York City.
Spencer Platt | Getty Images

The numbers indicate that inflation pressures are easing somewhat but still remain near their highest levels since the early 1980s.

Clogged supply chains, outsized demand for goods over services, and trillions of dollars in pandemic-related fiscal and monetary stimulus have combined to create an environment of high prices and slow economic growth that has bedeviled policymakers.

The July drop in gas prices has provided some hope after prices at the pump rose past $5 a gallon. But gasoline was still up 44% from a year ago and fuel oil increased 75.6% on an annual basis, despite an 11% decline in July.

Federal Reserve officials are using a recipe of interest rate increases and related monetary policy tightening in hopes of beating back inflation numbers running well ahead of their 2% long-run target. The central bank has hiked benchmark borrowing rates by 2.25 percentage points so far in 2022, and officials have provided strong indications that more increases are coming.

There was some good news earlier this week when a New York Fed survey indicated that consumers have pared back inflation expectations for the future. But for now, the soaring cost of living remains a problem.

While inflation has been accelerating, gross domestic product declined for the first two quarters of 2022. The combination of slow growth and rising prices is associated with stagflation, while the two straight quarters of negative GDP meets a widely held definition of recession.

Wednesday’s inflation numbers could take some heat off the Fed.

Recent commentary from policymakers has pointed toward a third consecutive 0.75 percentage point interest rate hike at the September meeting. Following the CPI report, market pricing reversed, with traders now anticipating a better chance of a lesser 0.5 percentage point move.

“At the very least, this report takes the pressure off the Fed at the next meeting,” Markowska said. “They’ve been saying they’re ready to deliver a 75 basis point hike if they have to. I don’t think they have to anymore.”

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A shopping cart is seen in a supermarket as inflation affected consumer prices in Manhattan, New York City, U.S., June 10, 2022.
Andrew Kelly | Reuters

If inflation has been the biggest threat to U.S. economic growth, then July’s data should provide signs that there’s at least some relief in the pipeline.

Prices were flat for the month as gauged by the items that the Bureau of Labor Statistics tracks for its consumer price index. That marked the first time the aggregate measure hadn’t posted a month-over-month increase since May 2020, when the widely followed index showed a modest decline.

Just a month ago, CPI posted its fastest 12-month gain since November 1982, following a trend that helped send economic growth into contraction for the first half of the year, stirring up talk of a recession.

But with at least the short-term trend indicating the rate of price increases is abating, economic optimism is perking up.

No recession, for now

“The whole recession narrative really needs to be put on a shelf for now,” said Aneta Markowska, chief economist at Jefferies. “I think it’s going to be shifting to a stronger-for-longer narrative, which is really supported by a reversal in inflation.”

Markowska, whose forecasts this year have been accurate, sees solid growth in the near term, including a 3% growth rate in the third quarter. The Atlanta Federal Reserve’s GDPNow gauge, which tracks economic data in real time, pointed to a 2.5% growth rate in a Wednesday update, up 1.1 percentage points from its last one on Aug. 4.

However, Markowska also expects pressures to intensify in 2023, with a recession likely in the back part of the year.

Indeed, there was a little bit for both arguments in the CPI report.

Most of the tempering in inflation came because of a fall in energy prices. Gasoline slid 7.7%, the biggest monthly decline since April 2020. Fuel oil tumbled 11% as energy-related commodity prices were off 7.6%.

Transportation services cost increases also came off the boil, with airline fares tumbling 7.8% to reverse a trend that has seen tickets surge 27.7% over the past year.

But there were few other signs of inflation declines in the report, with food costs particularly high. The food index, in fact, rose 1.1% on the month, and its 10.9% pace over the past 12 months is the highest since May 1979.

That’s causing worries at places such as City Harvest, which helps feed needy New Yorkers who have been hit especially hard by price surge that began last year.

“We’re seeing many more children come into food pantries,” said Jilly Stephens, the organization’s CEO. “Food insecurity had been intractable even before the pandemic hit. Now we’re seeing even more people turn to food pantries because of the rising prices.”

Stephens said the number of children seeking food assistance about doubled a year after the Covid pandemic hit, and the organization is struggling to keep up.

“We’re always optimistic, because we are supported by incredibly generous New Yorkers,” she said.

People keep spending

Despite the surging prices, consumers have been resilient, continuing to spend even with inflation-adjusted wages contracting 3% over the past year.

Jonathan Silver, CEO of Affinity Solutions, which tracks consumer behavior through credit and debit card transactions, said spending is at a healthy pace, rising about 10.5% over the past year, though inflation is influencing behavior.

“When you start to look at specific categories, there’s been a lot of shifting in spending, and as a result, some categories are being impacted more than others by inflation,” he said. “People are delaying their spending on discretionary items.”

For instance, he said department store spending has fallen 2.4% over the past year, while discount store spending has risen 17%. Amusement park spending is down 18%, but move theaters are up 92%. Some of those numbers are influenced by rising prices, but they generally reflect the level of transactions as well.

As inflation eases, Silver expects discretionary spending to increase.

“We believe there will be a spike later in the year that will create an upward slope to the spending in key categories where the consumer has been delaying and deferring spending,” he said. “Consumers may get a holiday present of some relief on food prices.”

In the meantime, the year-over-year inflation pace is still running at 8.5%. That’s just off the most aggressive rise in 40 years and a “worryingly high rate,” said Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock.

At the center of worries about global growth is the Federal Reserve and concerns that its interest rate hikes aimed at controlling inflation will slow the economy so much that it will fall into recession.

Following Wednesday’s report, traders shifted their bets to expecting the Fed to hike just half a percentage point in September, rather than the previous trend toward 0.75 percentage points, a move that Rieder said could be mistaken.

“The persistence of still solid inflation data witnessed today, when combined with last week’s strong labor market data, and perhaps especially the still solid wage gains, places Fed policymakers firmly on the path toward continuation of aggressive tightening,” he wrote.

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Farmers harvest a wheat field near Melitopol in Ukraine. Wheat, soybean, sugar, and corn futures have fallen from their March highs back to prices seen at the start of 2022.
Olga Maltseva | Afp | Getty Images

Food prices dropped significantly in July from the previous month, particularly the costs of wheat and vegetable oil, according to the latest figures from the United Nations’ Food and Agriculture Organization.

But the FAO said that while the drop in food prices “from very high levels” is “welcome,” there are doubts over whether the good news will last.

“Many uncertainties remain, including high fertilizer prices that can impact future production prospects and farmers’ livelihoods, a bleak global economic outlook, and currency movements, all of which pose serious strains for global food security,” FAO chief economist Maximo Torero said in a press release.

The FAO food price index, which tracks the monthly change in the global prices of a basket of food commodities, fell 8.6% in July from the month before. In June, the index fell just 2.3% month on month.

However, the index in July was still 13.1% higher than July 2021.

Prices in the short term may fall further, if futures are anything to go by. Wheat, soybean, sugar, and corn futures have fallen from their March highs back to prices seen at the start of 2022.

For example, the wheat contracts closed at $775.75 per bushel on Friday, down from a 12-year high of $1,294 in March, and around the $758 price set in January.

Why prices fell

Analysts cited a mix of both demand and supply reasons for the slide in food prices: Ukraine and Russia’s closely watched agreement to resume exports of grain through the Black Sea after months of blockade; better-than-expected crop harvests; a global economic slowdown; and the strong U.S. dollar.

Rob Vos, the director of markets, trade and institutions at the International Food Policy Research Institute, pointed to the news that the United States and Australia are set to deliver bumper wheat harvests this year, which will improve supply since shipment from Ukraine and Russia have been curtailed.

The higher U.S. dollar also lowers the price of staples, since commodities are priced in U.S. dollars, Vos said. Traders tend to ask for lower nominal dollar prices of commodities when the greenback is expensive.

The widely heralded U.N.-backed deal between Ukraine and Russia also helped to cool the market. Ukraine was the world’s sixth-biggest wheat exporter in 2021, accounting for 10% of global wheat market share, according to the United Nations.

The first shipment of Ukrainian grain — 26,000 tons of maize — since the invasion left the country’s southwestern port of Odesa last Monday.

Skepticism over Ukraine-Russia deal

Global skepticism over whether Russia will keep its end of the bargain hangs in the air.

Russia fired a missile onto Odesa just hours after the U.N.-brokered deal in late-July.

And freight and insurance companies may still think it’s too risky to ship grain out of a war zone, Vos said, adding that food prices remain volatile and any new shock can cause more price surges.

“To make a difference it will not be enough to get a few shipments out, but at least 30 or 40 per month to get the existing grains stored in Ukraine out, as well as the produce of the upcoming harvest,” said Vos.

“To help stabilize markets, the deal will need to hold in full also during the second half of the year since that is the period where Ukraine does most of its exports.”

Even with the existing agreement, arable Ukrainian land may continue to be destroyed “for as long as the war continues,” which will result in even less crop yield next year, Carlos Mera, the head of agri commodities market research at Rabobank, told CNBC’s “Street Signs Europe” last week.

“Once this [grain] corridor is over, we might see even more price increases going forward,” Mera said. Consumers could also see further price increases as there is normally a lag of three to nine months before a movement in commodity prices is reflected on supermarket shelves.

Then there is the pressure of exporting enough grain as quickly as possible from a war zone.

“It’s time that we’re working again. I don’t see us exporting two [to] five million tons per month out of these Black Sea ports,” John Rich, the executive chairman of Ukrainian poultry giant Myronivsky Hliboproduct (MHP), told CNBC’s “Capital Connection” on Monday.

“Hungry people, at the end of the day, get hungry very quickly after a week.”

In a note published earlier this month, credit rating agency Fitch Ratings’ analysts wrote that a possible increase in fertilizer prices, which fell recently — but which are still double that of 2020 — could cause grain prices to jump again.

Russia’s restriction of gas supply has led European natural gas prices to spike. Natural gas is a key ingredient in nitrogen-based fertilizers. La Nina weather patterns could disrupt grain harvests later this year as well, they added.

And the fall in food prices is not all good news. Part of the reason why staples have become cheaper is that traders and investors are pricing in recessionary fears, the analysts said.

The global manufacturing purchasing managers’ index has been in decline, while the U.S. Federal Reserve seems bent on raising interest rates to curb inflation even if it triggers a recession, the Fitch team wrote.

Food staples

Cereal prices, under which wheat falls, fell by 11.5% month on month, the FAO index showed. Prices of wheat specifically fell by 14.5%, partly because of the reaction to the Russia-Ukraine grain deal, and better harvests in the Northern Hemisphere, the FAO said.

Vegetable oil prices fell by 19.2% month on month — a 10-month low — in part because of ample palm oil exports from Indonesia, lower crude oil prices, and lack of demand for sunflower oil.

Sugar prices dipped by 3.8% to a five-month low in light of shrinking demand, a weaker Brazilian real against the greenback, and increased supply from Brazil and India.

Dairy and meat prices dropped by 2.5% and 0.5% respectively.

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Shoppers inside a grocery store in San Francisco, California, U.S., on Monday, May 2, 2022. 
David Paul Morris | Bloomberg | Getty Images

The consumer outlook for inflation decreased significantly in July amid a sharp drop in gas prices and a growing belief that the rapid surges in food and housing also would ebb in the future.

The New York Federal Reserve’s monthly Survey of Consumer Expectations showed that respondents expect inflation to run at a 6.2% pace over the next year and a 3.2% rate for the next three years.

While those numbers are still very high by historical standards, they mark a big drop-off from the respective 6.8% and 3.6% results from the June survey.

Through June, food prices rose 10.4% over the past year, according to the Bureau of Labor Statistics. They are still expected to climb 6.7% over the next 12 months, but that’s a decline from the June survey of 2.5 percentage points, the biggest fall in a data series going back to June 2013.

Likewise, respondents see gas prices, which rose 60% over the past year, increasing at just a 1.5% pace over the next year, a slide of 4.2 percentage points from June, the second-biggest monthly decline in the survey’s history.

The price of regular gas has come down about 67 cents a gallon over the past month though it remains 87 cents higher than a year ago, according to AAA. Commodity prices overall have been falling significantly as well.

Finally, home prices are expected to rise 3.5% from June’s 4.4%, the lowest projected gain since November 2020.

Five-year inflation expectations also slipped, dropping 0.5 percentage point to 2.3%.

The results come as the Fed has been raising interest rates aggressively to bring down inflation running at its highest level in more than 40 years. The central bank in 2022 has hiked benchmark rates four times for a total of 2.25 percentage points, and market pricing indicates a third consecutive 0.75 percentage point increase in September, according to CME Group data.

However, the New York Fed results from July might give policymakers reason to pull back if not in September then later in the year if the inflation data cooperates. The Fed targets inflation at 2% over the long run, so the projected levels in the survey remain well above the central bank’s comfort level.

Over the weekend, Fed Governor Michelle Bowman said she doesn’t expect inflation to come down anytime soon and sees a need to keep pushing rates higher. San Francisco Fed President Mary Daly echoed those sentiments, saying the increases are “far from done.”

Those comments came after the BLS on Friday reported much higher numbers for payroll growth — 528,000 — and wages, with average hourly earnings jumping 5.2%.

The New York Fed survey also showed that overall household spending growth for the next year is expected to cool to 6.9%. That’s also a comparatively high number over the longer run but well below the record-high 9% result from May. The 1.5 percentage point monthly decline is the largest in the survey’s history.

Consumers also grew slightly more optimistic on stock prices during a month that saw the S&P 500 soar 9%, with 34.3% now expecting higher prices over the next 12 months.

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Federal Reserve Bank Governor Michelle Bowman gives her first public remarks as a Federal policymaker at an American Bankers Association conference In San Diego, California, February 11 2019.
Ann Saphir | Reuters

Federal Reserve Governor Michelle Bowman said Saturday she supports the central bank’s recent big interest rate increases and thinks they are likely to continue until inflation is subdued.

The Fed, at its last two policy meetings, raised benchmark borrowing rates by 0.75 percentage point, the largest increase since 1994. Those moves were aimed at subduing inflation running at its highest level in more than 40 years.

In addition to the hikes, the rate-setting Federal Open Market Committee indicated that “ongoing increases … will be appropriate,” a view Bowman said she endorses.

“My view is that similarly sized increases should be on the table until we see inflation declining in a consistent, meaningful, and lasting way,” she added in prepared remarks in Colorado for the Kansas Bankers Association.

Bowman’s comments are the first from a member of the Board of Governors since the FOMC last week approved the latest rate increase. Over the past week, multiple regional presidents have said they also expect rates to continue to rise aggressively until inflation falls from its current 9.1% annual rate.

Following Friday’s jobs report, which showed an addition of 528,000 positions in July and worker pay up 5.2% year over year, both higher than expected, markets were pricing in a 68% chance of a third consecutive 0.75 percentage point move at the next FOMC meeting in September, according to CME Group data.

Bowman said she will be watching upcoming inflation data closely to gauge precisely how much she thinks rates should be increased. However, she said the recent data is casting doubt on hopes that inflation has peaked.

“I have seen few, if any, concrete indications that support this expectation, and I will need to see unambiguous evidence of this decline before I incorporate an easing of inflation pressures into my outlook,” she said.

Moreover, Bowman said she sees “a significant risk of high inflation into next year for necessities including food, housing, fuel, and vehicles.”

Her comments come following other data showing that U.S. economic growth as measured by GDP contracted for two straight quarters, meeting a common definition of recession. While she said she expects a pickup in second-half growth and “moderate growth in 2023,” inflation remains the biggest threat.

“The larger threat to the strong labor market is excessive inflation, which if allowed to continue could lead to a further economic softening, risking a prolonged period of economic weakness coupled with high inflation, like we experienced in the 1970s. In any case, we must fulfill our commitment to lowering inflation, and I will remain steadfastly focused on this task,” Bowman said.

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A person removes the nozel from a pump at a gas station on July 29, 2022 in Arlington, Virginia.
Olivier Douliery | AFP | Getty Images

You’d be hard-pressed now to find a recession in the rearview mirror. What’s down the road, though, is another story.

There is no historical precedent to indicate that an economy in recession can produce 528,000 jobs in a month, as the U.S. did during July. A 3.5% unemployment rate, tied for the lowest since 1969, is not consistent with contraction.

But that doesn’t mean there isn’t a recession ahead, and, ironically enough, it is the labor market’s phenomenal resiliency that could pose the broader economy’s biggest long-run danger. The Federal Reserve is trying to ease pressures on a historically tight jobs situation and its rapid wage gains in an effort to control inflation running at its highest level in more than 40 years.

“The fact of the matter is this gives the Fed additional room to continue to tighten, even if it raises the probability of pushing the economy into recession,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “It’s not going to be an easy task to continue to tighten without negative repercussions for the consumer and the economy.”

Indeed, following the robust job numbers, which included a 5.2% 12-month gain for average hourly earnings, traders accelerated their bets on a more aggressive Fed. As of Friday afternoon, markets were assigning about a 69% chance of the central bank enacting its third straight 0.75 percentage point interest rate hike when it meets again in September, according to CME Group data.

So while President Joe Biden celebrated the big jobs number on Friday, a much more unpleasant data point could be on the way next week. The consumer price index, the most widely followed inflation measure, comes out Wednesday, and it’s expected to show continued upward pressure even with a sharp drop in gasoline prices in July.

That will complicate the central bank’s balancing act of using rate increases to temper inflation without tipping the economy into recession. As Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock, said, the challenge is “how to execute a ‘soft landing’ when the economy is coming in hot, and is landing on a runway it has never used before.”

“Today’s print, coming in much stronger than anticipated, complicates the job of a Federal Reserve that seeks to engineer a more temperate employment environment, in keeping with its attempts to moderate current levels of inflation,” Rieder said in a client note. “The question though now is how much longer (and higher) will rates have to go before inflation can be brought under control?”

More recession signs

Financial markets were betting against the Fed in other ways.

The 2-year Treasury note yield exceeded that of the 10-year note by the highest margin in about 22 years Friday afternoon. That phenomenon, known as an inverted yield curve, has been a telltale recession sign particularly when it goes on for an extended period of time. In the present case, the inversion has been in place since early July.

But that doesn’t mean a recession is imminent, only that one is likely over the next year or two. While that means the central bank has some time on its side, it also could mean it won’t have the luxury of slow hikes but rather will have to continue to move quickly — a situation that policymakers had hoped to avoid.

“This is certainly not my base case, but I think that we may start to hear some chatter of an inter-meeting hike, but only if the next batch of inflation reports is hot,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.

Sonders called the current situation “a unique cycle” in which demand is shifting back to services from goods and posing multiple challenges to the economy, making the debate over whether the U.S. is in a recession less important than what is ahead.

That’s a widely shared view from economists, who fear the toughest part of the journey is still to come.

“While economic output contracted for two consecutive quarters in the first half of 2022, a strong labor market means that currently we are likely not in recession,” said Frank Steemers, senior economist at The Conference Board. “However, economic activity is expected to further cool towards the end of the year and it is increasingly likely that the U.S. economy will fall into recession before year end or in early 2023.”

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In this article

National Guard troops pose for photographers on the East Front of the U.S. Capitol the day after the House of Representatives voted to impeach President Donald Trump for the second time January 14, 2021 in Washington, DC.
Chip Somodevilla | Getty Images

In an earnings call this week, Yum Brands CEO David Gibbs expressed the confusion many people are feeling as they try to figure out what’s going on with the U.S. economy right now:

“This is truly one of the most complex environments we’ve ever seen in our industry to operate in. Because we’re not just dealing with economic issues like inflation and lapping stimulus and things like that. But also the social issues of people returning to mobility after lockdown, working from home and just the change in consumer patterns.”

Three months earlier, during the company’s prior call with analysts, Gibbs said economists who call this a “K-shaped recovery,” where high-income consumers are doing fine while lower-income householders struggle, are oversimplifying the situation.

“I don’t know in my career we’ve seen a more complex environment to analyze consumer behavior than what we’re dealing with right now,” he said in May, citing inflation, rising wages and federal stimulus spending that’s still stoking the economy.

At the same time, societal issues like the post-Covid reopening and Russia’s war in Ukraine are weighing on consumer sentiment, which all “makes for a pretty complex environment to figure out how to analyze it and market to consumers,” Gibbs said.

Gibbs is right. Things are very strange. Is a recession coming or not?

There is ample evidence for the “yes” camp.

Tech and finance are bracing for a downturn with hiring slowdowns and job cuts and pleas for more efficiency from workers. The stock market has been on a nine-month slump with the tech-heavy Nasdaq off more than 20% from its November peak and many high-flying tech stocks down 60% or more.

Inflation is causing consumers to spend less on nonessential purchases like clothing so they can afford gas and food. The U.S. economy has contracted for two straight quarters.

San Francisco’s cable cars return to service after COVID-19 shutdown in San Francisco, California, United States on September 21, 2021.
Anibal Martel | Anadolu Agency | Getty Images

Downtown San Francisco doesn’t quite have the ghost town feel it did in February, but still has vast stretches of empty storefronts, few commuters and record-high commercial real estate vacancies, which is also the case in New York (although Manhattan feels a lot more like it’s back to its pre-pandemic hustle).

Then again:

The travel and hospitality industries can’t find enough workers. Travel is back to nearly 2019 levels, although it seems to be cooling as the summer wanes. Delays are common as airlines can’t find enough pilots and there aren’t enough rental cars to satisfy demand.

Restaurants are facing a dire worker shortage. The labor movement is having its biggest year in decades as retail workers at Starbucks and warehouse laborers at Amazon try to use their leverage to extract concessions from their employers. Reddit is filled with threads about people quitting low-paying jobs and abusive employers to … do something else, although it’s not always exactly clear what.

A shrinking economy typically doesn’t come with high inflation and a red-hot labor market.

Here’s my theory as to what’s going on.

The pandemic shock turned 2020 into an epoch-changing year. And much like the 9/11 terrorist attacks in 2001, the full economic and societal effects won’t be understood for years.

Americans experienced the deaths of family members and friends, long-term isolation, job changes and losses, lingering illness, urban crime and property destruction, natural disasters, a presidential election that much of the losing party refuses to accept, and an invasion of Congress by an angry mob, all in under a year.

A lot of people are dealing with that trauma — and the growing suspicion that the future holds more bad news — by ignoring propriety, ignoring societal expectations and even ignoring the harsh realities of their own financial situations. They’re instead seizing the moment and following their whims.

Consumers aren’t acting rationally, and economists can’t make sense of their behavior. It’s not surprising that the CEO of Yum Brands, which owns Taco Bell, KFC and Pizza Hut, can’t either.

Call it the great unrest.

How might that manifest itself? In a decade, how will we look back at the 2020s?


  • Older workers will continue to leave the workforce as soon as they can afford it, spending less over the long term to maintain their independence, and stitching together freelance or part-time work as needed. The labor market will remain tilted toward workers.
  • Workers in lower-paying jobs will demand more dignity and higher wages from their employers, and be more willing to switch jobs or quit cold if they don’t get them.
  • People will move more for lifestyle and personal reasons rather than to chase jobs. Overstressed workers will continue to flee urban environments for the suburbs and countryside, and exurbs one-to-three hours’ drive from major cities will see an upswing in property values and an influx of residents. Dedicated urban dwellers will find reasons to switch cities, creating more churn and reducing community bonds.
  • The last vestiges of employee loyalty will disappear as more people seek fulfillment ahead of pay. As one tech worker who quit her job at Expedia to work for solar tech company Sunrun recently put it, “You just realize there’s a little bit more to life than maxing out your comp package.”
  • Employees who proved they could do their jobs remotely will resist coming back to the office, forcing employers to make hybrid workplaces the norm. Spending patterns will change permanently, with businesses catering to commuters and urban workers continuing to struggle.
  • Those with disposable income will vigorously spend it on experiences — travel, restaurants, bars, hotels, live music, outdoor living, extreme sports — while curbing the purchase of high-end material goods and in-home entertainment, including broadband internet access and streaming media services. The pandemic was a time to hunker down and upgrade the nest. Now that we’ve got all the furniture and Pelotons we need, it’s time to go out and have fun.

It’s possible that this summer will be the capstone to this period of uncertainty and consumers will suddenly stop spending this fall, sending the U.S. into a recession. Further “black swan” events like wars, natural disasters, a worsening or new pandemic, or more widespread political unrest could similarly squash any signs of life in the economy.

Even so, some of the behavioral and societal shifts that happened during the pandemic will turn out to be permanent.

These signals should become clearer in earnings reports as we move further from the year-ago comparisons with the pandemic-lockdown era, and as interest rates stabilize. Then, we’ll find out which businesses and economic sectors are truly resilient as we enter this new era.

WATCH: Jim Cramer explains why he believes inflation is coming down

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A cooldown in the job market is underway: The number of job openings dropped in June while near-record numbers of people continued to quit and get hired into new roles, according to the Labor Department’s latest Job Openings and Labor Turnover Summary.

The labor market posted 10.7 million new job openings in June, which is down from 11.3 million in May but also much higher than a year ago and a more than 50% increase from before the pandemic. Despite the drop, there are still roughly 1.8 open jobs for every person who is unemployed.

Meanwhile, workers are continuing to leverage the market and make moves: 6.4 million people were hired into new jobs, and 4.2 million voluntarily quit — leveling off from record highs but still extremely elevated.

The job market cooldown is “far from a plunge,” says Nick Bunker, director of economic research at Indeed Hiring Lab.

“The labor market is loosening a bit, but by any standard it is still quite tight,” Bunker adds. “The outlook for economic growth may not be as rosy as it was a few months ago, but there’s no sign of imminent danger in the labor market.”

People are concerned about the future of jobs but are still quitting now

Workers are growing more concerned about having their pick of jobs in the months to come, but it’s not stopping many of them from calling it quits right now. The share of people who left their jobs voluntarily in June make up 2.8% of the workforce.

Workers’ confidence in the job market decreased slightly in June and July compared with May, according to a ZipRecruiter index measuring sentiment across 1,500 people. The index also showed an uptick in job-seekers who believe there will be fewer jobs six months from now, a decrease in people who say their job search is going well and a slight increase in people who feel financial pressure to accept the first job offer they receive.

People may also be spooked by headlines of big-name companies, especially ones across tech and housing sectors that saw Covid-era growth, announcing layoffs, hiring freezes and rescinded job offers in recent months.

Bunker recognizes “there are pockets of the economy and labor market going through turbulence,” he says, “but they’re for the most part concentrated pockets.”

These workers may also be getting hired into new jobs pretty quickly. The national unemployment rate held steady at 3.6% in June.

Looking ahead, Bunker expects to see payroll growth and expanding employment in the jobs report out Friday. “If you’re thinking of switching jobs, it’s still a good time,” he says, adding that job-seekers may focus more on going to an industry, sector or employer with a “strong economic outlook.”

A hiring slowdown doesn’t indicate an inevitable recession

In contrast with strong job numbers, economists and consumers alike are worried about a potential recession.

“We have a paradox in our economy because of conflicting signals,” says Andrew Flowers, a labor economist at Appcast and research director at Recruitonomics.

For example, the share of people filing for unemployment insurance has ticked up in recent weeks. But according to the Labor Department’s report, layoffs stayed just under 1% in June, near record-lows.

Bunker says inflation concerns are likely to blame, but reasons for “heightened concern about a recession have not fully materialized yet.”

Flowers says the latest jobs numbers signal more of an economic slowdown than a recession. And even so, lower hiring demand might not result in mass layoffs.

“Should people be worried? Right now, it’s unclear,” Flowers says. “My message to job-seekers and workers is that it’s not clear this economic slowdown will result in a material increase in unemployment.”

He adds: “As the economy shifts to a lower gear of growth, which is the Fed’s intention, that doesn’t mean we’ll suddenly have 10% unemployment.”

Check out:

It’s worth it to bring up inflation at work, even if you don’t get a raise now

What’s a good salary or raise to ask for right now? How to find your number in this wild job market

3 reasons your recruiter ghosted you, according to a hiring pro

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