As headline inflation dipped from 9.1% to 8.5% Wednesday and the debate whether the nation is in a recession continues—a deeper dive into the numbers points to inflation remaining elevated for the foreseeable future and a strong likelihood of the economy already being in a recession.
The improvement in the consumer price index (CPI) from June to July was the largest month-on-month decline in inflation since 1973, due primarily to a 20% decrease in the price of gasoline.
Drilling further down into the data finds that food remains very expensive, up 1.1% in July. Rent, and homeowners’ equivalent of the rent they would derive from their primary residence, is still elevated, soaring by 15.9% in the 12 months through May, according to the Zillow Observed Rent Index (ZORI).
Wages rose 0.5% in July, primarily because the current 3.5% unemployment is creating a tight labor market.
Furthermore, inflation is now shifting from goods to services, which rose by 5.5% in July and are typically more difficult for the Federal Reserve to control.
Then there is the question of whether the economy is in a recession, given that first quarter gross domestic product (GDP) decreased by 1.6%, and then contracted by another 0.9% in the second quarter.
Mark Matson, founder and CEO of Matson Money, agrees with the economists who call this the textbook definition of an economy in retreat: “Despite what the Biden administration may want you to believe, America is in a recession. We’ve had two straight quarters of negative GDP—by definition that’s a recession.”
Matson also tackles the question of a strong labor market, noting that for President Joe Biden to praise “a record job market is not a fair assessment of the economy. The Biden administration is not acknowledging the participation rate, which is terrible. It tracks how many people are searching for work.
“A low participation rate reflects potential loss of hope and a greater number of people living off welfare,” Matson continues.
George Schultze, founder of Schultze Asset Management, is equally distressed by the picture the data is painting. From his perspective, Schultze sees an economy contracting—“and that’s very concerning, given the extremely high rate of inflation—9.1% CPI in June and 8.5% in July.”
Schultze’s biggest fear is that inflation will remain elevated and that the economy might tip into “a potentially deep recession.”
As for the Inflation Reduction Act that would impose higher corporate taxes, Matson says this would decrease the earnings of larger corporations and their important contributions to the economy. “It’s counter-intuitive to take money from profitable companies and give it to those not producing,” he says, “but that’s what the administration is proposing.”
Postponing Retirement, Investing Fears
American workers are equally pessimistic about the nation and their personal finances. Eighty-three percent think a recession is likely in the next year, according to a recent FinanceBuzz survey of 1,000 adults. Forty-four percent say their current financial situation is worse than a year ago; 32% say it’s the same, according to the survey by FinanceBuzz, a financial education website aimed at helping people make the most of their money and achieve financial independence.
Only 16% think they will be able to retire when they want to, and 24% think it may take two years for today's hyper-volatile financial markets to feel normal again.
It is no wonder that some people are wary of investing; The extreme market volatility of 2022 wiped $3.4 trillion from Americans’ retirement savings between January and June, according to the Center for Retirement Research at Boston College.
Further, Fortune found that two-thirds of economic experts think a recession will happen sometime in 2023.
Schultze worries that the Federal Reserve, which, he says, was slow to recognize and work to combat inflation, could make the same mistakes with a recession.
“The U.S. government’s historic ability to predict economic resiliency has been poor, at best,” he says. “Moreover, reasonable minds could conclude that the U.S. economy today is in an extremely precarious state of equilibrium due to: excessive debt, historically low interest rates and excessive fiscal spending.”
Investors should expect a recession, and with it, major layoffs, in the months ahead, Schultze concludes.
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