Economic Update – Summer 2022 | “Summer of Transition”

The first half of 2022 has been challenging in many respects. Inflation has been the main theme so far as the price of nearly everything has risen considerably. Everything except stocks and bonds that is. Financial markets have pulled back due to the uncertainty around how high inflation will go, and how high the Federal Reserve (Fed) will have to raise interest rates in order to get it under control.

Inflation, as measured by the Consumer Price Index (CPI) began rising in 2020 after the economic shutdowns caused by the global Covid pandemic. In 2021, it blew past the Fed’s target level of 2%. The Fed did not respond to this increase in inflation saying “2% was a long-term target” and that the high levels at the time were “transitory”. As you can see, higher prices have persisted and they continued to accelerate through the first half of 2022.

The month of June, however, may have been a tipping point in this battle against inflation. Many of the commodities that have risen in price and lent to the pricing pressures of other goods have come down… some considerably so.

Here are a few examples.

Copper – a leading cost input for many industries and especially in new construction projects. The price is at a new 52-week low.

Cotton – a high-cost input for most textile industries. The price dropped over 30% in the course of a couple days.

Natural Gas – after more than doubling from January to May, is down around 40% in June.

Wheat – a huge export of both Russia and Ukraine is down almost, but not quite, to its prewar level.

Why the sudden reversal in these prices?

There are a couple of contributors to this sudden price drop. The first is that many of these price increases were a result of supply shocks caused by the war in Ukraine. As that war drags on, companies are finding alternative solutions to get the materials they need in order to sell goods to eager buyers. Global supply chains can be fragile, but they also tend to heal themselves over time as businesses figure out how to keep doing the business they need to do.

The second factor is that demand has started to soften in some areas due to higher prices. As clever economists around the world like to say “the cure for high prices, is high prices.” We are starting to see customers alter their behaviors as a result of higher prices. At the gas pump, for instance, high gas prices are convincing drivers to drive less than they normally would during the summer driving season.

What does this mean for the economy?

Our base case is for an economic slowdown that could turn into a mild recession. Ultimately, we think we will avoid a deep and prolonged recession due to the underlying strength of some economic fundamentals.

Even though consumer sentiment, as measured by the University of Michigan Consumer sentiment survey, is at 50-year lows…

… retail sales numbers are still holding up near all-time highs. This means that consumers may not feel good, but they are still buying.

And speaking of the consumer, despite some stories of lay-offs and hiring freezes, there are still almost twice as many job openings as there are people available to fill them.

This remains a very tight job market that is just now starting to show signs of slack. Even if a worker gets laid off, there are still a lot of potential opportunities to find work.

The Bottom Line

Markets have been rattled by raging inflation and the fear of impending recession. Markets will likely remain volatile as investors weigh the depth and duration of any upcoming economic slow-down. With inflation likely peaking at the start of June, we think the Fed will be able to ease off the brake and help the economy avoid a deep recession.

What this means for financial markets is difficult to say. Official readings of both inflation and growth will be important barometers to monitor. We will also be looking at company earnings reports over the coming months to see how they are being impacted by the current environment. As always, we are watching developments closely.

Let us know if you would like to talk further about this or how it affects your financial situation, please give us a call. We look forward to helping.

Contact Our Trust Officers

Keith J. Akre, CFA, CFP® – Vice President & Trust Officer

Opinions expressed are solely my own and do not express the views or opinions of Stillman Bank. Investments available through Stillman Trust & Wealth Management (1) are not FDIC insured (2) are not deposits, obligations, or guaranteed by the bank and (3) are subject to investment risk including possible loss of principal.