Stock markets face new questions about the direction of the economy

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A deluge of divisive economic signals, combined with falling tech stocks, led financial markets to close April at lows last seen when the pandemic began in March 2020.

Uncertainty over the path of the economy played a part in the market turmoil on Friday, as the tech-heavy Nasdaq closed 4.2% for the day and the Dow Jones industrial average rose. lost 939.18 points, or 2.8%. The S&P 500 fell 3.6% on Friday, wiping out 9.1% of its value in April, its worst month since March 2020. And it fell 13.8% in 2022, the worst start to the year since the Second World War.

The economy is being pulled in several directions at once, weighed down by soaring energy, food and housing prices, while being boosted by a formidable labor market, pent-up demand, consumers with high savings and solid and continuous business investments. The coming weeks could determine which economic forces will prevail and shape the fortunes of households and businesses as the midterm elections approach.

“The market is worried about a very fragile economic outlook, as it should be,” said Joe LaVorgna, chief economist for the Americas at Natixis and former economic adviser to Trump in the White House. “The economy is fundamentally soft: the Fed will increase next week, the situation in Ukraine is not improving and high inflation is reducing costs.”

At the same time, vacation bookings are skyrocketing, car sales are exploding, and Americans continue to spend lavishly, thanks to higher wages and rapid hiring. Still, the economy unexpectedly contracted in the first quarter, led by trade deficits and a drop in inventory purchases.

The diverging trajectories of the economy were evident in a Commerce report on Friday that showed consumer spending rose higher than expected in March and inflation rose in March the most significantly. in more than 15 years.

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“There are so many factors pulling our economy right now – uncertainty and low numbers – despite the fact that demand is so high,” said Tara Sinclair, professor of economics at George Washington University. . “It can be worrying because when companies and decision makers – from the household level to Fortune 500 companies – start worrying about the ‘R’ word, it can become a bit of a self-fulfilling prophecy.”

On Capitol Hill, politicians are scrambling for widely divided numbers to bolster their policy-making activities ahead of the critical 2022 midterm elections. Two years after the worst economic crisis in generations, perhaps no question is likely to motivate Americans to the polls more than the state of their own finances.

Democrats insisted this week that the 1.4% annualized drop in gross domestic product reflected broader economic tailwinds — from new shortages in global supply chains to the evolving consequences of Russia’s invasion of China. ‘Ukraine. As they have for months, party lawmakers have instead tried to highlight other, more encouraging indicators, including a continued burst in hiring, low unemployment and buoyant consumer spending, all under watch. of Biden.

“That’s not a good sign,” Sen. Richard J. Durbin (D-Ill.), the majority whip, said of the GDP numbers in a brief interview. “[But] there are enough positive indicators for things to turn around.

Economy shrinks 1.4% in the first 3 months of the year, raising fears of a recession

Meanwhile, for Republicans, the economic contraction has provided fresh fodder to ramp up their opposition to Democrats’ legislative solutions to a potential sweeping shift in November that could elevate them to majority power. Few GOP lawmakers are expected to support Democrats’ efforts to fight inflation, for example, which Republicans instead blame on Biden’s spending policies.

“They’re hurting our economy,” said Sen. Rick Scott (R-Fla.), the head of the Republican National Senate Committee, which aims to elect the party’s lawmakers to the chamber. “It makes it difficult for people to go back to work.”

Companies in all sectors are feeling the economic headwinds. For example, strong sales of Apple Watch, iPhone and MacBook in the first three months of the year helped propel Apple sales to a record high of $97.3 billion. But looming worries about war in Ukraine and coronavirus lockdowns in China, including supply chain pitfalls, could end up costing the company $8 billion this quarter, Apple reported. Apple closed 3.7% on Friday.

And Amazon led market losses on Friday with a 14% drop, the biggest one-day sale in 16 years. This follows a weaker earnings report, with the company posting its first big quarterly loss since 2015 this week, due to a loss on its investment in electric vehicle maker Rivian.

“There’s no question the market is pricing in a recession,” said Loop Capital Markets analyst Anthony Chukumba. “When you see metrics like Netflix and Amazon missing numbers by a country mile, it’s concerning – especially when it happens in the tech space, which for so long has been the market leader.” (Jeff Bezos, the founder of Amazon, owns The Washington Post.)

Agricultural and construction equipment company Caterpillar, which posted a 14% increase in first-quarter sales on Thursday, also warned that widespread coronavirus lockdowns in China could dampen demand for excavators later this year. The company said it also faces ongoing shortages and delays for components such as semiconductors. Caterpillar closed down 1% on Friday.

“The environment continues to be challenging due to supply chain constraints and more recent covid-19-related shutdowns in China,” chief executive Jim Umpleby told analysts on an earnings call this week. week.

The only bright spot in the economy has been the labor market, which has created 1.7 million jobs so far this year. The unemployment rate in the United States, at 3.6%, is near its lowest level and wages continue to rise.

“The economy has hit a speed bump, but when you look under the hood, there’s a lot to like,” said Ken Kim, U.S. economist at KPMG. “The good thing is that there is strength in the job market. We are still optimistic about the US expansion for 2022 and do not see a recession on the horizon, neither this year nor the next.

But some economists say the momentum is likely to slow later this year, especially as the Federal Reserve continues to raise interest rates in hopes of curbing inflation.

The Fed board is due to meet next week and is expected to raise interest rates another 0.5 percentage points, which will be the biggest increase since 2000 and could likely do so again in June. Investors are concerned that bad economic news will influence future rate hikes, which is also rattling markets.

Fed officials, including Chairman Jerome H. Powell, said they aimed to steer the economy to a “soft landing,” avoiding a recession, raising interest rates just enough to calm the inflation, although economists say finding the right balance will be difficult.

“It’s hard to get from here to where the Fed wants to be on inflation without an increase in the unemployment rate or a risk of recession,” said Diane Swonk, chief economist at accounting firm Grant Thornton, who s expect unemployment to end 2023 at over 5 percent. “When you’re skating on thin ice, it’s not hard to fall through.”

Business owners say they are also feeling pangs of uncertainty.

At Delta Children’s Products, consumers have so far been happy to splurge on baby and toddler furniture, even as the company has hiked prices up to 25% to offset rising raw material costs. and shipping. Sales are up 12% this year for the company’s cribs, mattresses and strollers, which are sold at major retailers including Walmart, Pottery Barn and Buy Buy Baby.

But President Joe Shamie says he’s worried about the future. Birth rates are falling, meaning it has a shrinking pool of buyers, and lockdowns in China continue to weigh on production and shipping. He also worries that consumers will soon start to withdraw if they start worrying about their own financial prospects.

“We’re extremely concerned about what’s going to happen next,” Shamie said. “There are a lot of holes in the economy that need to be fixed.”

Aaron Gregg contributed to this report.

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