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Wall Street says a recession is coming, but consumers say it’s here

06 July 2022 - 10:53 By Philip Aldrick, Enda Curran and Michael Sasso
Goldman Sachs Group Inc. Economists at Goldman Sachs Group Inc put the risk of a slump in the US in the next year at 30%, while Bloomberg Economics sees a 38% chance.
Goldman Sachs Group Inc. Economists at Goldman Sachs Group Inc put the risk of a slump in the US in the next year at 30%, while Bloomberg Economics sees a 38% chance.
Image: Rogan Ward/Reuters

Recession calls are getting louder on Wall Street, but for many of the households and businesses who make up the world economy the downturn is already here.

Take Gina Palmer, who runs She Salon on Atlanta’s busy Northside Drive. She’d ordinarily expect her business to be alive with the din of customers on a Friday morning. But on that day late last month, it was largely empty and quiet, save for a few employees. With summer break moving into full swing in the US, her clients are preoccupied with affording summer camps for their children amid soaring food and fuel costs.

“When people look at their budgets, the first thing they cut is self care,” Palmer said. “I’ve seen my clients go from having weekly appointments to bi-weekly, and my bi-weekly clients are now coming in every six weeks.”

Shoppers are getting squeezed and money is disappearing fast.
Shoppers are getting squeezed and money is disappearing fast.
Image: Bloomberg

About 6,500km away, Abbie Marshall, the owner of The Buck Inn in the countryside of northern England, is also trying to cope with surging costs. When she took over the pub last year, she ran the numbers on a 4% inflation rate, an assumption that would normally be seen as conservative given it’s twice the Bank of England target. But now it’s more than 9% and rapidly heading for double digits.

Marshall has changed the costs on her menu four times and raised the price of a pint of beer on three occasions.

For Palmer, Marshall and many others, the technical definitions of a recession — traditionally two quarters of contraction — are irrelevant.

Goldman Sachs Group Inc economists put the risk of such a slump in the US in the next year at 30%. A Bloomberg Economics model sees a 38% chance in the same period, with the risks building beyond that time frame. But for many it already feels as if it’s here. More than one-third of Americans believe the economy is now in a recession, according to a poll last month by CivicScience.

The worries among small business owners, consumers and others are illustrated by so-called misery indexes, which blend unemployment and inflation rates. The gauge for the US is already 12.2%, similar to levels witnessed at the start of the pandemic and in the wake of the 2008 financial crisis, according to Bloomberg Economics.

The UK is similarly elevated and other measures echo that grim view. US consumer expectations, as measured by the Conference Board, have dropped to the lowest in almost a decade. Sentiment across OECD member countries has fallen for 11 months and hasn’t been this low since 2009.

“People are getting poorer,” said Ludovic Subran, chief economist at Allianz SE. “So this is not a recession, but it really feels and tastes like a recession.”

The reason? Prices are soaring worldwide, particularly for essential foods and fuels, eroding the spending power of families. Central banks are responding to the inflation surge, but as they push up interest rates, that turns the screw on those with debt.  Workers are complaining their wages aren’t keeping up with the cost of living, a frustration that’s led to strikes in some countries.

Quite simply, people’s money is disappearing fast and they’re worried it could get a lot worse.

The situation is a far cry from what was once expected for 2022 and beyond, which for a time included the idea of a new 'Roaring Twenties'. Instead, euphoria is in short supply and the narrative is one of downgrades.

And as 2022 hits the halfway mark, new worries are taking hold. Layered on top of the inflation squeeze are mounting concerns about the outlook for economic growth, not just this year, but into 2023. That’s sparked talk of stagflation, a nasty cocktail of little to no growth, or worse, and faster than usual price increases.

The situation is a far cry from what was once expected for 2022 and beyond, which for a time included the idea of a new “Roaring Twenties”. Instead, euphoria is in short supply and the narrative is one of downgrades.

Last month the OECD cut its outlook for 2022 global growth to 3% from 4.5%, with even slower expansion seen next year. The World Bank lowered its projections, warning of “danger” for the economy.

There’s also alarm in markets, where the S&P 500 has plunged more than 20% from its January high and the Stoxx Europe 600 is down about 19%. The near-constant stream of warnings, with gloomy headlines, mean there’s a chance a recession becomes a self-fulfilling prophecy, where apprehension forces consumers and businesses to hunker down and cut back on spending. That would suck demand out of the economy, worsening any downturn.

A 2021 paper co-authored by Danny Blanchflower, a Dartmouth College economics professor and former BOE policymaker, said declines in US consumer expectation gauges of 10 points or more, from either the University of Michigan or Conference Board surveys, are predictors of recessions going back to the 1980s. The Conference Board measure is down almost 30 points this year.

“The risk of a self-fulfilling recession, and one that can happen as soon as early next year, is higher than before. Even though household and business balance sheets are strong, worries about the future could cause consumers to pull back, which would lead businesses to hire and invest less,” said Anna Wong, chief US economist at Bloomberg Economics. 

For the US, the National Bureau of Economic Research is the official arbiter of recessions, which it defines as a “significant decline in economic activity that is spread across the economy and lasts more than a few months”.

Any such declaration will usually only come well into a slump or even after it. In the meantime, the debate rages on. Deutsche Bank AG CEO Christian Sewing sees a 50% chance of a global recession, a prediction that Citigroup Inc economists have also made. Federal Reserve Chair Jerome Powell says a US recession is a possibility, but not inevitable. Morgan Stanley economists expect a mild euro-area recession at the end of 2022.

Away from that back and forth, businesses and consumers are fretting about their finances and trying to figure out how to keep their heads above water as the pressures intensify.

Inflation was already heading higher coming into 2022 amid a post-Covid-19 demand bump. Then Russia invaded Ukraine, energy and food costs jumped, and the world found itself dealing with soaring prices, a very unfamiliar situation after years of low inflation. Fuel in the US topped an average of $5 (about R83) for about 4 litres for the first time last month.

We’re seeing people who were on benefits, but stable financially, people who really know how to budget, now coming to us. We’re even seeing working people, those on zero-hour contracts, needing help to tide them over,
Phil Storey, CEO, Hammersmith & Fulham Foodbank 

Given the affect on basics, from filling fuel tanks to the supermarket run, few have escaped the squeeze.

In New Mexico’s capital city the cowboys at the annual Rodeo de Santa Fe last month were sweating about the price of fuel more than mounting a 1,000kg bull. The number of entrants in the contest fell by a third, which president Jim Butler blames on the price of fuel. While farmers and truckers can pass along these costs, “the cowboys don’t have it”, he said.

The tough times stretch to Asia too, where China’s Zero-Covid policy and lockdowns sent the world’s second-biggest economy into a tailspin, compounding the damage from a property slump. 

In Beijing, 31-year-old Tian Lijun began the year shutting the two florists she ran. After finding work as a sales representative for a high-end medical clinic, she lost that job in May. To make ends meet she’s taken to selling flowers at stalls in community compounds and stopped shopping for anything beyond necessities.

“There’s no way to make money nowadays. I can only manage to repay my loans, pay the rent and feed myself,” Tian said. “Forget about entertainment or any other spending.”

Many have to make even tougher decisions on simple day-to-day spending, sometimes forced to choose between the electricity bill or food. UK grocery chain Tesco Plc says shoppers are buying fewer items and trading down to cheaper own-brand versions of staples.

Just as the pandemic and its recovery proved to be k-shaped, so the next deterioration may prove similarly unequal. In the UK, a report by the Resolution Foundation think-tank said years of income stagnation have left the poorest families “brutally exposed” to the cost-of-living crunch.

Phil Storey’s recent experience as CEO at Hammersmith & Fulham Foodbank in London is more evidence of that. With food prices up almost 9%, he’s seen an increase in demand. 

“We’re seeing people who were on benefits, but stable financially, people who really know how to budget, now coming to us,” Storey said. “We’re even seeing working people, those on zero-hour contracts, needing help to tide them over.”

At The Buck Inn, Marshall raises a similar concern as she tries to balance protecting her income with not driving away customers. 

“The cost of goods is moving so quickly, I have to pass that on,” she said. “But at what point does my pricing become prohibitive? Does going out become so expensive that it is only for the better off?”

More stories like this are available on bloomberg.com

— Bloomberg


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