​The Markets
 
A lot of people are worried that a recession may be in our future. Some think it may already be here.
 
Unemployment is low (3.6 percent), and inflation is high (9.1 percent). Both tend to occur when an economy is experiencing strong growth. That makes it difficult to believe the United States is in a recession, but some data is pointing that way.
 
Last week, the Atlanta Federal Reserve’s GDPNow estimated that economic growth in the United States was -1.6 percent for the second quarter of 2022, after adjusting for inflation. They measured economic growth using gross domestic product or GDP, which is the value of all goods and services produced in the United States over a specific period of time. GDPNow is based on a simple, unadjusted mathematical model. It is not an official reading, and the model tends to be a bit volatile. For example:
 

• On April 29, when relatively little data was available for the second quarter, it was +1.9 percent.
• On May 17, as retail trade and industrial production statistics filtered in, it was +2.5 percent.
• On July 1, when construction spending and manufacturing data came out, it was -2.1 percent.
• Last week, after housing starts were released, it was -1.6 percent.

 
The Atlanta Fed’s estimate becomes more accurate as more data is added. It tends to be most accurate near the Bureau of Economic Analysis (BES)’s official GDP release date, reported a source cited by Jeff Cox of CNBC.
 
Since the United States economy shrank by 1.6 percent in the first quarter of 2022, that would mean the U.S. has experienced two quarters of declining economic growth. Technically, that’s a recession.
 
Not everyone expects GDP to shrink. Bloomberg surveyed economists and found they anticipate 0.5 percent growth in the second quarter, which would be an improvement on the first quarter.
 
There is an important distinction between the two quarters. The slowdown in the first quarter was caused by surging imports and slowing exports, which is unusual. The slowdown in the second quarter may be caused by a slowdown in consumer spending, which is the primary driver of U.S. economic growth, and business spending.   Of course, one of the obvious realities is that when it costs upwards of $100 or more to fill our tank with gas, combined with increased prices of food, energy, and other necessary consumables, people will have less money to spend on some common disposable items, and will naturally slow their spending as a result. Sometimes just whispering the word recession is all it takes to cause people to think twice about buying something, and it can have a rippling effect.       
 
The next BEA’s GDP numbers will be released this Thursday, July 28.  Keep in mind that Bull Markets outnumber Bear Markets, and economic recessions do not happen often.  But, many times, when economists start talking about actually being in a recession, they are looking at numbers in the rear-view mirror – meaning we are likely already in the middle of it, and may already be on our way out of it. 
 
Last week, Randall Forsyth of Barron’s reported that major U.S. stock indices ­­­­gained. Yields on shorter maturity Treasuries rose last week, while yields on Treasuries with maturities of one year or longer fell

​The Markets
 
Nobody is happy, but Americans are feeling more optimistic.
 
Last week, headlines blasted the new inflation numbers. Prices were up more than 9% year-over-year in June, according to the Bureau of Labor Statistic’s Consumer Price Index (CPI). When you dig into the numbers, energy prices were up 41.6 percent year-over-year and food prices were up 10.4 percent. 
 
“Prices are rising just about everywhere in the world, in part a consequence of Russia's invasion of Ukraine, which has elevated energy and food prices, and in part because of the supply chain bottlenecks that have driven U.S. prices up,” reported Paul Wiseman of U.S. News & World Report.
 
The U.S. inflation numbers caused markets to tumble early in the week as investors speculated about whether the Federal Reserve would decide to raise the federal funds rate at a faster pace at its next meeting, reported Ben Levisohn of Barron’s.
 
Then the retail sales and consumer sentiment data arrived.
 
After adjusting for inflation, retail sales slowed in June, just as they had in May, reported Megan Cassella of Barron’s. Retail sales data are a leading indicator, meaning they provide information about what may be ahead, while the CPI is a lagging indicator that provides information about what has already happened. Slower retail sales suggest demand is falling and lower prices may be ahead. The news cooled some investors’ rate-hike concerns.
 
On Friday, the University of Michigan’s Consumer Sentiment Survey showed a modest improvement. Barron’s reported, “…consumer sentiment that had hit an all-time low in June improved slightly in July, likely a reflection of the recent fall in gas prices. And long-term inflation expectations dropped modestly over the month as well. Together, the latest data shows early signs that the Federal Reserve is making progress in its quest to cool the economy.”
 
Last week, Barron’s reported that major U.S. stock indices declined. Yields on shorter maturity Treasuries rose last week, while yields on longer maturity Treasuries fell.

​The Markets
 
Rising inflation is a bit like a child throwing a temper tantrum in the grocery store.
 
The red-faced parent, in this case the U.S. Federal Reserve (Fed), tries to calm the child. Sometimes, it works and the child calms down (soft landing). Other times, the child won’t settle, and the parent takes more extreme action, like leaving and coming back for groceries later (recession).
 
The Fed is laser focused on calming inflation. At a June press conference, Fed Chair Jerome Powell said, “We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses. The economy and the country have been through a lot over the past two and a half years and have proved resilient. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.”
 
To calm inflation, the Fed has tightened monetary policy aggressively, taking steps that include raising the federal funds target rate by 1.5 percent from March through June of this year. Raising the fed funds rate pushes interest rates higher so borrowing costs go up, and consumer and business spending fall. Lower spending slows economic growth and prices fall.
 
According to data released last week, the United States economy is slowing but remains quite strong. The data showed:

• Service industries and manufacturing continue to grow. The ISM® Purchasing Manager’s Indexes (PMIs) for manufacturing and services showed continued growth in June, although the pace of growth slowed, reported Karishma Vanjani of Barron’s.

 

• Jobs growth was stronger than expected in June. More new jobs were created in June than anyone had expected, but the topline number may not tell the whole story. Ben Levisohn of Barron’s explained:

 
“…the jobs report, in particular, might not have been as good as it looked. While the establishment number was very strong, the household survey showed a loss of 300,000 jobs, while the unemployment rate remained unchanged at 3.6% only because the workforce shrank. At the same time, average hourly earnings increased by a mere 0.3% in June from May’s level, lower than the rate of inflation.”

• The middle of the yield curve flattened. At the end of last week, the yield on the two-year U.S. Treasury was 3.12 percent, slightly above the yield on the benchmark 10-year Treasury. The yield on the three-month Treasury finished the week at 1.98 percent. A flattening yield curve suggests that investors are concerned about what may be ahead for the economy. When the yield curve inverts, it’s a sign recession may be ahead.

 
Last week, major U.S. stock indices moved higher, according to Barron’s, while Treasury bonds lost value as yields moved higher across the yield curve.
​

​The Markets
 
The first six months of 2022 have earned a place in history books.
 
2022 is likely to become part of the lore passed from generation to generation. Stories will be told about this bear market, as well as the remarkable political and social events that have occurred in the United States and elsewhere. Here is a brief look back at the last three months.
 

• Will the real inflation please stand up? Prices continued to rise during the second quarter, although there was a significant difference in inflation readings. The Consumer Price Index (CPI), which reflects price changes in cities, showed inflation was up 8.6 percent in May, year-over-year. The Personal Consumption Expenditures (PCE) Price Index (excluding food and energy) which measures price changes in urban and rural areas, showed inflation was up 6.3 percent for the same period.

 

• The Federal Reserve attacked inflation. The Federal Reserve’s inflation target is 2 percent. With inflation well above that level, the Fed began to tighten monetary policy aggressively. It ended its bond buying program, began to shrink its balance sheet, and raised the fed funds rate by 1.50 percent year-to-date (with 1.25 percent of that increase coming in the second quarter).

 

• Bond rates rose. Bond rates moved higher during the quarter. Since bond prices move lower when bond rates rise, many investors saw a decline in the value of bond portfolios. By the end of the second quarter, the benchmark 10-year Treasury was at 2.98 percent, up from 2.32 percent at the end of the first quarter.

 

• Stock prices fell. Evie Liu of Barron’s reported, “Energy stocks were the only ones that posted gains in the first half [of the year] on the back of soaring oil prices, but even that sector has lost its momentum…Although energy companies are still pocketing record profits today, traders are quite aware that a recession would drag down demand, curb oil prices, and cut into their earnings.”

 

• Consumer sentiment tumbled. The University of Michigan’s Consumer Sentiment Survey showed that consumer pessimism deepened throughout the second quarter, largely due to inflation concerns. The June sentiment reading was 50, which is the lowest on record.

 

• The yield curve isn’t feeling it – yet. Many people anticipate a recession next year, but bond markets don’t seem to think so. One of the most credible recession-forecasting tools is the U.S. Treasury yield curve. When the yield curve inverts, meaning shorter-term Treasuries yield more than longer-term Treasuries, there is a significant probability that a recession is coming.

 
More specifically, when a three-month Treasury bill yields more than a 10-year Treasury note a recession is likely in the following six to 18 months, according to a study from the Federal Reserve Bank of New York. At the end of June, the three-month Treasury yielded 1.72 percent and 10-year Treasury yielded 2.98 percent. In other words, the yield curve was not inverted.
 
Markets are likely to remain volatile until investors are confident the U.S. has avoided a recession, and no one is sure that will be the case.
 
Last week, major U.S. indices rallied late in the week, but finished lower overall, according to Barron’s. The yield on benchmark 10-year U.S. Treasuries moved lower.