Experts are warning Americans that an economic hurricane is coming. Tesla CEO Elon Musk has said he has a “super bad feeling” about the recession. Companies are lowering their earnings forecasts. Where do all these gloomy predictions come from?
JPMorgan Chase CEO Jamie Dimon says an economic hurricane is coming. Tesla’s Elon Musk says he has a “very bad feeling” about the recession. Companies cut their earnings forecasts.
Oh, and we’re also going through an energy and inflationary crisis, and the stock market is slowly turning bearish. Now there are all the prerequisites for falling into pessimism about the economy. And as it turns out, many Americans actually do: according to a recent CNN poll, only 23% of Americans say the current economic conditions are “fairly good.”
However, these same Americans continue to spend money like crazy because almost everyone has a job. On Friday, we received another rather optimistic unemployment report: in May, another 390,000 new jobs appeared in America. That’s double the 186,000 that averaged into the US economy every month during the pre-pandemic period of President Donald Trump’s administration, just a couple of years ago, when Americans were very worried about the state of the national economy.
And who is right?
The Federal Reserve puts on the brakes
If you feel like the United States economy is slowing down, you are not alone. In fact, this slowdown is quite deliberate.
The Federal Reserve has been pumping up the economy since March 2020, buying up billions of dollars of government and corporate bonds every month and keeping rates near zero for two years.
Against the backdrop of such actions by the Federal Reserve, the American economy “fell high”, and inflation quickly reached a record high in the last 40 years. In March 2022, Federal Reserve Chairman Jerome Powell finally said “enough” and the central bank raised rates. In May, the Federal Reserve decided on a record rate hike in 20 years and promised that it would continue to do so until sentiment improved.
An unending string of historically large rate hikes and a rapid reduction in the Federal Reserve’s balance sheet should help cure the economy’s dependence on free money: by slowing the economy, the Fed hopes to slow inflation. However, it could also plunge the economy into recession.
A strong dollar hurts international corporations
I know what you’re thinking: what could this mean for giant mega-corporations with a global presence?
Well, that’s not good news for them. This week, Microsoft cut its earnings and sales forecasts for the current quarter because the dollar is too strong.
Well, now we have another problem to worry about: thanks to the actions of the Federal Reserve, your money is now worth too much.
The rate hike is helping boost the value of the dollar, which has come close to parity with the euro for the first time in two decades. This is good news if you love to travel abroad, and bad news if you’re a giant US company that makes money overseas (Microsoft gets just under half of its income from foreign countries), because the widgets you sell overseas suddenly will cost more to your foreign customers than the widgets you sell in the good old United States of America.
The opinion of the author may not reflect the opinion of the editors.