If the latest reports about consumer sentiment in the U.S. are accurate, then widespread stress about the current state of both the U.S. and global economies is hitting a crescendo. In fact, it's hard to find anybody who thinks the "livin' is easy" right at the moment.
The rhetoric generated by upcoming elections and from recent Supreme Court decisions is no doubt exacerbating the anxiety. However, the fundamental issues causing the tension are still the concerns stemming from inflation, problems with the supply chain and COVID-19 fatigue. Therefore, I expect the amount of attention paid to the stream of economic data in the coming days and weeks will be much greater than usual.
Of course, the data pertaining to the current rate of inflation will be closely scrutinized. But there are three other data sets/trends that I will peruse in an effort to find clues about future risks to growth and the chances of an outright economic recession in the U.S. in the coming quarters. Those are: the second-quarter earnings reports from bellwether companies in the S&P 500, particularly companies in the manufacturing sector; the Federal Reserve decision and the statement explaining this decision coming up on July 27; and the Advance Q2 GDP report released on July 28.
My interest in the earnings reports this season stems from the fact that economic recessions do not occur unless there is first a bear market. Not every bear market portends an upcoming recession in the overall economy, so not every signal this indicator generates is valid. Nevertheless, this does not mean you can ignore the signals. And in case you missed it, the markets are currently in bear territory.
Where the markets go from here will depend in large part on the information about corporate earnings released in the coming weeks. There will be much discussion in these earnings reports, and the subsequent analyses, about inflation and supply chains. There will also be guidance offered about the expectations for the trends in consumer spending and business investment.
We must all keep in mind that nobody, not even the most influential of the captains of industry, can predict the future. But the information they choose to share, and the subsequent reaction by the market to this curated information, will provide useful clues about the risks to both the economy and the plastics industry as we progress through the second half of the year.
The markets will also rigorously parse the information released by the Fed later this month. As of this moment, it is a foregone conclusion they will decide to raise the Fed Funds Rate by another 75 basis points at the July meeting. This follows a similar 75-point increase last month, and it would put the rate in the range of 2.25-2.5 percent.
The Fed has clearly stated that they want to curb the rate of inflation but not put the overall economy into recession. This is a noble objective, but the problem is that nobody knows for sure the best way to do this. I remain cautiously optimistic that they will succeed in their efforts, but I also believe it will be difficult and may even require some luck.
One of the problems growing from the rising interest rates has been the sharp rise in the value of the U.S. dollar. A year ago, the Fed was printing dollars and injecting them into the money supply as fast as they could in an effort to stave off a severe, pandemic-induced depression. That huge increase in the money supply last year is the reason we are struggling with inflation this year. The powers that be made the choice to trade the risk of sharp job losses for higher inflation.
I will leave it to future generations of economics scholars to determine whether this was a successful or even appropriate decision. But the point I want to make today is that nobody at that time would have ever guessed that the U.S. dollar would rise sharply against the world's other major currencies in 2022.