- June 28, 2022
-- With just a few days away from the end of June, stocks gained some ground last week but remain down nearly 20%, their worst first six months of any year since 19701
. Aggressive central-bank tightening, concerns around inflation, and the effect of these two factors on growth have led to a rapid adjustment in interest rates, valuations, and sentiment. We think that the economy will continue to slow in the quarters ahead, reflecting the lagged impact of policy tightening. However, the year-to-date sell-off in both stocks and bonds has improved future returns for long-term investors. We'd offer the following perspective on how the economy is shaping up at the midyear point and what could be in store for the second half.The economy
- After having grown by 5.7% in 2021, the U.S. economy entered the year from a position of strength1. A positive outlook was supported by pent-up consumer demand because the pandemic headwinds had started to fade, the labor market was robust, and corporate and household finances were solid. Yet, lingering inflation pressures, which worsened following the invasion of Ukraine and lockdowns in China, started taking a bite out of personal disposable income and savings, and forced the Fed to signal an aggressive rate-hike path.
- First-quarter GDP unexpectedly contracted, driven by a drag from exports and a decline in inventory spending. But consumer spending, which accounts for nearly 70% of U.S. GDP, continued to grow at a solid pace.
Sources: 1. Bloomberg
- As we move into the second half of the year, demand will likely decelerate further as consumers and businesses react to the sharp rise in borrowing costs. Typically, changes in Fed policy impact the broader economy with a lag, but the interest-rate-sensitive sectors, such as housing and autos, are already slowing. Mortgage applications are in a downtrend, and existing home sales have been lower for the last four months1.
- The labor market remains tight, which, along with household savings, will continue to support growth. However, applications for unemployment benefits (initial jobless claims) have been slowly rising over the past two months, as companies are taking a more cautious approach to hiring amid elevated costs and slowing demand. Job openings are still twice the number of unemployed workers1. We don't think that the economy is facing an imminent threat of a recession, but the downside risks are increasing.