4 reasons why the US economy seems to be falling apart

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The US economy is super weird right now. Virtually anyone who wants a job gets one. The economy is so hot that prices are rising faster than at any time since the 1980s. The housing market is very hot. Consumers are spending like crazy.

Yet we continue to hear the word “recession” as if it were 2007 all over again.

The truth is that the country is probably not in a recession right now (although it is possible), but there are many signs that one is coming.

The US central bank is raising interest rates

Inflation has been rampant, and the US Federal Reserve’s (Fed) tool to fight rising prices lies in its ability to raise interest rates. This makes borrowing more expensive and slows the economy – on purpose.

The problem is that the Fed was too late to raise rates. Inflation was a growing concern throughout 2021, but the central bank only started raising rates in March 2022. So the Fed needs to catch up — and take much more drastic action now than if it had started raising rates. rates last year.

Last week, the Fed raised rates by half a percentage point, the biggest rate hike in 22 years.

Fed Chair Jerome Powell said this month that the central bank will continue to raise rates by half a percentage point at the end of each meeting until it is satisfied with inflation under control — and then it will continue to raise rates by a 0, 25% for a while.

The Fed is convinced it can raise rates without plunging the economy into recession. But this so-called soft landing has proved elusive in the past, and many Wall Street banks believe that the Fed will engineer a recession to beat inflation.

The stock market triggered the “sell all” mode

Extreme fear is the prevailing sentiment on Wall Street this year. CNN Business’s Fear & Greed index (which measures stock market movements and whether stocks are priced fairly) is a measly six out of 100.

After breaking records in early January, the stock market has lost nearly a fifth of its value – with stocks plummeting to such a degree close to bear market territory. Nasdaq is already showing losses. More than $7 trillion has evaporated from the stock market this year.

Worried that higher interest rates will erode corporate profits, investors are turning to exits.

This is bad news for people’s retirement plans. It is also unwelcome news for a number of investors who rely on the market for income, including day traders who have relied on virtually straight-line stock market growth for most of the decade. And it’s not good for consumer sentiment either.

While a minority of Americans actively invest in the stock market, when you see a sea of ​​falling numbers on their computer and cellphone screens, it has historically given people pause. In May, consumer sentiment fell to its lowest level in 11 years.

That’s potentially bad news for the economy, because consumer spending accounts for more than two-thirds of US gross domestic product.

the bond market

When investors don’t like stocks that much, they often switch to bonds. Not this time.

Safe US government treasures are being sold. When bond prices fall, yields rise — and 10-year Treasury yields hit 3% this month for the first time since 2018.

This typically happens when the Fed raises rates – the higher cost of borrowing makes bonds less valuable when they mature, so a higher interest payment on bonds (the yield) will help offset them and make them more attractive for investors.

Bonds also sold as the Fed decided to unwind its huge portfolio of Treasuries it had been buying since the pandemic to shore up the economy.

As bonds sold and investors became more fearful of an economic slowdown, the gap between short-term and long-term bond yields narrowed.

Yields on the two-year Treasury note briefly rose above those of the benchmark 10-year note in March, for the first time since September 2019. This so-called yield curve inversion preceded every recession since 1955, producing a “false positive.” ” just once, according to the Federal Reserve Bank of San Francisco.

Chaos around the globe

None of this is happening in a vacuum. Russia continues its invasion of Ukraine, which has stifled supply chains and driven up energy prices. China continues to lockdown some of its biggest cities as Covid-19 cases remain high. And labor shortages have driven up wages and hampered the normal flow of goods across the world.

Russia continues to threaten European countries to cut their energy shipments, which could plunge European Union economies into recession. China’s economy has slowed dramatically as it keeps workers at home as part of its Covid zero policy.

What happens abroad can also affect the United States, hurting the American economy at the worst possible time.

With information from Allison Morrow and Jeanne Sahadi of CNN Business.

Source: CNN Brasil

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