Tag Archives: Economic Growth/Recession

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U.S. GDP Rose 2.9% in the Fourth Quarter After a Year of High Inflation

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The U.S. economy grew at a solid 2.9% annual rate last quarter but entered this year with less momentum as rising interest rates and still-high inflation weighed on demand.

U.S. growth in the fourth quarter was down slightly from a 3.2% annual rate in the third quarter, the Commerce Department said Thursday. Consumer spending helped drive the fourth-quarter gain, while the housing market weakened and businesses cut back their spending on equipment.

The October-to-December period capped a year of economic slowdown with growth of 1% in the fourth quarter of 2022 compared with a year earlier, down sharply from 5.7% growth in 2021. The slowdown in part reflected a return to a more normal pace of growth after output surged amid business reopenings, fiscal stimulus and a waning pandemic in 2021.

Markets were mixed following Thursday’s release. Investors have been closely scrutinizing economic data for signs that U.S. growth is coming under pressure from the Federal Reserve’s campaign of interest-rate increases aimed at cooling the economy and bringing down high inflation.

So far in 2023, many traders and portfolio managers appear satisfied that economic activity remains strong enough that a recession this year is far from certain. That conclusion, together with cooling inflation readings, has helped fuel a modest rebound in U.S. stock indexes following last year’s washout.

The Fed is on track to slow interest-rate increases when it meets next week and debate how much higher to raise them this year as it tracks inflation’s trajectory and other economic developments.

The labor market has cooled some but continues to run strong. Jobless claims—a proxy for layoffs—fell last week and held near historic lows, despite the spread of layoff announcements beyond tech companies.

Workers received large wage gains through the end of last year. That helped consumer spending, the economy’s main engine, grow at a solid annual pace of 2.1% last quarter.

Despite some signs of resilience, recent data suggest consumers and businesses are starting to falter. Retail sales fell last month at the sharpest pace of 2022. Surveys of U.S. purchasing managers found that higher interest rates and persistent inflation weighed on demand in January in the manufacturing and service sectors. Companies cut temporary workers in December for the fifth consecutive month, a sign that broader job losses could be on the horizon.

Many economists are concerned about the possibility of a U.S. recession this year. They worry that the Fed’s efforts to curb inflation could trigger broad spending cutbacks and job losses.

“Headwinds from the big jump in interest rates, consumers cutting back on discretionary spending and weak economies overseas were big problems for the U.S. in late 2022,” said

Bill Adams,

chief economist for Comerica Bank. “I expect real GDP growth will likely turn negative in the first half of this year.”

A buildup in inventories helped drive economic growth at the end of last year. That category is volatile, though.

Final sales to private domestic purchasers, a measure of consumer and business spending that gauges underlying demand in the economy, cooled to a 0.2% annual pace in the fourth quarter from 1.1% in the third, the Commerce Department said, a sign of economic cooling in line with the Fed’s goals.

One of the most interest-rate-sensitive sectors—housing—is stumbling amid high mortgage rates. Residential investment declined throughout last year, while existing-home sales fell almost 18% in 2022 from the previous year.

Some economists say the worst of the housing downturn is over as mortgage rates are down from their peak last fall. But few expect a return to the boom times of 2021 any time soon.

The Fed had initially hoped it could bring down inflation with only a slowing in economic growth rather than an outright contraction, an outcome dubbed a “soft landing.”

“If we continue to get strong job growth and if we continue to get consumer spending on services, and companies don’t cut back on [capital expenditures], I think that adds fuel to the soft-landing story,” said Luke Tilley, chief economist at Wilmington Trust.

Consumer spending rose by 1.9% in the fourth quarter of 2022 compared with a year earlier, a slowdown from 7.2% growth in 2021 but close to 2019’s gain.

StoryBright Films, which provides photography and planning services for elopements in the Blue Ridge Mountains, photographed 16 couples’ elopements last year, down from 20 in 2021, said Mark Collett, the company’s co-owner.

Mr. Collett said his small business received many inquiries and engaged in conversations with a lot of potential clients last year. But more couples expressed concern about their financial situations and ability to pay for a big event than a year earlier.

“We would even get as far as sending them a contract to book, but then they got cold feet,” Mr. Collett said.

For 2022 marriages, clients tended to book at the bottom and top ends of the price range, rather than the middle, he added.

Purchasing power from paychecks fell for middle-income households last year, while it rose for lower-income and higher-income households. Many lower-income households benefited from wage increases and pandemic savings, while higher-income households had a large-enough savings buffer to spend aggressively.


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the third quarter.

Residential

investment

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on growth.

Spending

on services

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Write to Sarah Chaney Cambon at sarah.chaney@wsj.com

Write to Sarah Chaney Cambon at sarah.chaney@wsj.com

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Business

China’s Shrinking Population Is Deeper Problem Than Slow Growth for Its Economy

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Economists said China’s shrinking population poses a major future challenge for the world’s second-largest economy, while President Xi Jinping’s top economic adviser sought Tuesday to restore investor confidence after one of the most disappointing growth rates in decades.

China has already rolled back the zero-Covid policies that restrained growth for much of 2022, setting the stage for a recovery this year. The U-turn, in the wake of public protests, was part of a broad policy reset aimed at boosting the economy, including an easing of regulations on the property sector and signals that the clampdown on the tech sector has ended.

Beijing is now betting on a robust rebound in economic activities as officials increasingly signal that the recent wave of infections is reaching its peak. Some government advisers say the central leadership likely will announce a growth target of between 5% and 5.5% for 2023 at the coming legislative sessions in March. China on Tuesday posted 3% growth for 2022, its second-worst growth rate since 1976.

Speaking to the World Economic Forum in Davos, Mr. Xi’s top economic adviser, Vice Premier Liu He, sought to send a message to investors and executives that China’s growth would return to prepandemic levels this year as the country reopens.

On a Davos panel titled “China’s Next Chapter,” speakers also projected optimism. China’s reopening and exit from its zero-Covid policy is the “most positive catalyst” for global markets this year, said

Hong Kong Exchanges and Clearing Ltd.

’s Chief Executive

Nicolas Aguzin.

Vice Premier Liu He sought to restore investor confidence in China at the World Economic Forum in Davos, Switzerland.



Photo:

Markus Schreiber/Associated Press

“If China produces a solid growth number for 2023, 5% or 5% plus, that will actually underpin much global growth for the year to come,” said

Kevin Rudd,

president and CEO of Asia Society.

China’s recent measures, however, won’t address a host of challenges, some of which were exacerbated by the pandemic. A rapidly aging population, slowing growth in productivity, high debt levels and rising social inequality will weigh on the country’s economic ascent for decades to come, economists said.

On Tuesday, the same day that China posted 3% growth, the second-worst growth rate since 1976, it also said that for the first time since 1961, its population shrank.

China’s population dropped by 850,000 to 1.412 billion. The shift toward a shrinking population, which came faster than Beijing had projected, marks a watershed moment in China’s history with profound implications for its economy and its status as the world’s factory floor.

The demographic milestone comes when, despite its enormous size, China’s economy is still that of a middle-income, developing country, as measured by average worker incomes when compared with the U.S. and other rich-country peers. China’s leaders have long held the ambition of leapfrogging the U.S. to become the world’s biggest economy, a task made harder by this strengthening demographic headwind, economists say.

The global economy has grown to rely on China’s vast pool of workers for manufactured goods.



Photo:

Kyodonews/Zuma Press

“The likelihood of China someday overtaking the U.S. as No. 1 economy has just gone down a notch,” said Roland Rajah, lead economist at the Lowy Institute, a Sydney think tank.

The global economy has grown to rely on China’s vast pool of factory workers for manufactured goods, and its consumers represent a growing market for Western-made cars and luxury goods. A dwindling population means fewer consumers when China is under pressure to power growth through greater consumption instead of investment and exports.

Any rebound in consumption will also likely be constrained by a weak labor market and a housing downturn that has eroded the wealth of Chinese families. The jobless rate among people age 16 to 24 remained elevated at 16.7% in December, versus the peak of near 20% last summer. Growth in disposable income per capita could slow to around 4% each year in the next five years, downshifting from around 8% before the pandemic, according to David Wang, chief China economist at

Credit Suisse.

A smaller workforce will likely restrain economic growth. An economy can only grow by adding workers or producing more with the workers it has. China’s working-age population, which peaked around 2014, is expected to fall by 0.2% a year until 2030, according to S&P Global Ratings.

Productivity growth has been slowing. It slid to 1.3% on average in the 10 years through 2019, from 2.7% in the preceding decade, according to estimates from the Conference Board, a nonprofit research organization.

“It seems like it’s going to get old before it gets rich,” said Andrew Harris, deputy chief economist at Fathom Consulting in London.

Countries around the world are welcoming back Chinese tourists, once the largest source of tourism revenue globally. But even as China reopens its borders, the travel industry isn’t expecting things to bounce back to what they were just yet. Here’s why. Photo illustration: Adam Adada

There are some grounds for optimism, economists say. China could make better, more productive use of underemployed urban workers in state-owned enterprises as well as those still laboring in the countryside.

It is also adding automation and related technology to its factories rapidly, replacing or augmenting its shrinking pool of workers. Advances in robotics, artificial intelligence and other high-tech sectors that could turbocharge worker productivity “is the potential out for China,” Mr. Harris said, though he added whether it will succeed or not is unclear.

Meanwhile, China remains tied to its old playbook of fueling growth by encouraging governments and companies to borrow more to fund investments, a model that economists warn will be unsustainable in the long run.

The country’s overall debt as a share of its economy reached a high during the pandemic, as local governments borrowed to finance infrastructure projects and boost the economy. As of June 2022, credit to the nonfinancial sector reached $51.8 trillion, or 295% of gross domestic product, according to data from the Bank for International Settlements.

China’s policies throughout the pandemic have focused heavily on the supply-side rather than the demand-side of the economy. Unlike many countries in the West, the Chinese government refrained from handing out cash to households, directing most of its efforts toward supporting manufacturers.

“The systemic problems that China had in its economy before Covid are still there,” said

George Magnus,

an economist and research associate at Oxford University, “In some aspects, the pandemic made them worse.”

A dwindling population means fewer consumers as China is under pressure to power growth through consumption.



Photo:

Qilai Shen/Bloomberg News

Despite the optimism expressed by some speakers in Davos, investors and corporate executives both inside and outside China remain wary of Beijing’s willingness to sufficiently roll back its restrictions on businesses of the past few years to re-embrace private capital.

Mr. Liu sought to allay those concerns during his Tuesday speech. He told the Davos crowd that a return to a planned economy, where the party-state dictates economic activities, is impossible.

But economists say Mr. Xi’s drive for self-sufficiency across a range of industries and his penchant for dictating how private business should be run will continue to sap vitality from the economy.

To achieve self-reliance in key sectors, Beijing has focused on channeling low-cost loans to favored sectors, such as semiconductors, renewable energy and pharmaceuticals. But the spending, which often involves less-productive state-owned enterprises, has also been plagued by waste and corruption, economists say, with limited evidence of real innovation.

“Xi’s desire to make sure that the Party’s control extends across society runs far deeper than his commitment to growing a market economy,” said Mark Williams, chief Asia economist at Capital Economics.

—Rebecca Feng contributed to this article.

Write to Stella Yifan Xie at stella.xie@wsj.com and Jason Douglas at jason.douglas@wsj.com

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Business

The stock market is sliding because investors fear recession more than inflation

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A stock-market paradox, in which bad news about the economy is seen as good news for equities, may have run its course. If so, investors should expect bad news to be bad news for stocks heading into the new year — and there may be plenty of it.

But first, why would good news be bad news? Investors have spent 2022 largely focused on the Federal Reserve and its rapid series of large rate hikes aimed at bringing inflation to heel. Economic news pointing to slower growth and less fuel for inflation could serve to lift stocks on the idea that the Fed could begin to slow the pace or even begin entertaining future rate cuts.

Conversely, good news on the economy could be bad news for stocks.

So what’s changed? The past week saw a softer-than-expected November consumer-price index reading. While still running mighty hot, with prices rising more than 7% year over year, investors are increasingly confident that inflation likely peaked at a roughly four-decade high above 9% in June.

See: Why November’s CPI data are seen as a ‘game-changer’ for financial markets

But the Federal Reserve and other major central banks indicated they intend to keep lifting rates, albeit at a slower pace, into 2023 and likely keep them elevated longer than investors had anticipated. That’s stoking fears that a recession is becoming more likely.

Meanwhile, markets are behaving as if the worst of the inflation scare is in the rearview mirror, with recession fears now looming on the horizon, said Jim Baird, chief investment officer of Plante Moran Financial Advisors.

That sentiment was reinforced by manufacturing data Wednesday and a weaker-than-expected retail sales reading on Thursday, Baird said, in a phone interview.

Markets are “probably headed back to a period where bad news is bad news not because rates will be driving concerns for investors, but because earnings growth will falter,” Baird said.

A ‘reverse Tepper trade’

Keith Lerner, co-chief investment officer at Truist, argued that a mirror image of the backdrop that produced what became known as the “Tepper trade,” inspired by hedge-fund titan David Tepper in September 2010, may be forming.

Unfortunately, while Tepper’s prescient call was for a “win/win scenario.” the “reverse Tepper trade” is shaping up as a lose/lose proposition, Lerner said, in a Friday note.

Tepper’s argument was that the economy was either going to get better, which would be positive for stocks and asset prices. Or, the economy would weaken, with the Fed stepping in to support the market, which would also be positive for asset prices.

The current setup is one in which the economy is going to weaken, taming inflation but also denting corporate profits and challenging asset prices, Lerner said. Or, instead, the economy remains strong, along with inflation, with the Fed and other central banks continuing to tighten policy, and challenging asset prices.

“In either case, there’s a potential headwind for investors. To be fair, there is a third path, where inflation comes down, and the economy avoids recession, the so-called soft landing. It’s possible,” Lerner wrote, but noted the path to a soft landing looks increasingly narrow.

Recession jitters were on display Thursday, when November retail sales showed a 0.6% fall, exceeding forecasts for a 0.3% decline and the biggest drop in almost a year. Also, the Philadelphia Fed’s manufacturing index rose, but remained in negative territory, disappointing expectations, while the New York Fed’s Empire State index fell.

Read: Still a bear market: S&P 500 slump signals stocks never reached ‘escape velocity’

Stocks, which had posted moderate losses after the Fed a day earlier lifted interest rates by half a percentage point, tumbled sharply. Equities extended their decline Friday, with the S&P 500
SPX,
-1.11%
logging a 2.1% weekly loss, while the Dow Jones Industrial Average
DJIA,
-0.85%
shed 1.7% and the Nasdaq Composite
COMP,
-0.97%
dropped 2.7%.

“As we move into 2023, economic data will become more of an influence over stocks because the data will tell us the answer to a very important question: How bad will the economic slowdown get? That’s the key question as we begin the new year, because with the Fed on relative policy ‘auto pilot’ (more hikes to start 2023) the key now is growth, and the potential damage from slowing growth,” said Tom Essaye, founder of Sevens Report Research, in a Friday note.

Recession watch

No one can say with complete certainty that a recession will occur in 2023, but it seems there’s no question corporate earnings will come under pressure, and that will be a key driver for markets, said Plante Moran’s Baird. And that means earnings have the potential to be a significant source of volatility in the year ahead.

“If in 2022 the story was inflation and rates, for 2023 it’s going to be earnings and recession risk,” he said.

It’s no longer an environment that favors high-growth, high risk equities, while cyclical factors could be setting up nicely for value-oriented stocks and small caps, he said.

Truist’s Lerner said that until the weight of the evidence shifts, “we maintain our overweight in fixed income, where we are focused on high quality bonds, and a relative underweight in equities.”

Within equities, Truist favors the U.S., a value tilt, and sees “better opportunities below the market’s surface,” such as the equal-weighted S&P 500, a proxy for the average stock.

Highlights of the economic calendar for the week ahead include a revised look at third-quarter gross domestic product on Thursday, along with the November index of leading economic indicators. On Friday, November personal consumption and spending data, including the Fed’s preferred inflation gauge are set for release.

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Business

U.S. Economy Grew 2.6% in Third Quarter, GDP Report Shows

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The U.S. economy grew in the third quarter but showed signs of a broad slowdown as consumer and business spending faltered under high inflation and rising interest rates.

Gross domestic product—a measure of goods and services produced across the nation—grew at a 2.6% annual rate in the third quarter after declining in the first half of the year, the Commerce Department said Thursday.

Trade contributed the most to the third quarter’s turnaround as the U.S. exported more oil and natural gas with the Ukraine war disrupting supplies in Europe. Consumer spending, the economy’s main engine, grew but at a slower pace than in the prior quarter.

Businesses slashed spending on buildings, however, and residential investment fell at a 26.4% annual rate, the department said.

Stocks were mixed after the GDP release and earnings announcements. Treasury yields fell.

Economic uncertainty is growing and many economists are worried about the possibility of a recession in the coming 12 months. They expect the Federal Reserve’s efforts to combat high inflation by raising interest rates will further weigh on the economy.

“The overall state of the economy is deteriorating and a lot of it is just the weight of elevated inflation and higher interest rates,” said Richard F. Moody, chief economist at

Regions Financial Corp.

“I don’t think that we’ve seen the full effects of higher rates work their way through the economy, so that’s why we have pretty low expectations for the next several quarters.”



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The U.S. isn’t the only part of the world facing economic challenges. The European Central Bank on Thursday raised its key interest rate to 1.5% from 0.75% as it too attempts to tame inflation in a region teetering close to recession.

One of the sectors most sensitive to interest rates—housing—is showing signs of pain. Home sales posted their longest streak of declines in 15 years and the average rate on a 30-year fixed-rate mortgage eclipsed 7% Thursday for the first time in more than 20 years.

Economists don’t expect the third-quarter rise in exports to endure, given a stronger dollar and weakening global economy. Many point to final sales to private domestic purchasers, a measure of consumer and business spending that gauges underlying demand in the economy, as a sign of a broader economic slowdown. That inched up at a 0.1% annual rate in the third quarter after it rose 0.5% in the second quarter and increased 2.1% in the first quarter.

Some of the economic slowdown this year reflects a return to a more normal rate of growth after the economy last year expanded at an unusually fast pace of 5.7% as it rebounded from earlier pandemic disruptions.

The trajectory of the economy largely depends on how consumers fare in the coming months.

High inflation and rising interest rates haven’t done much to weaken the health of the American consumer, Bank of America Corp. Chief Executive

Brian Moynihan

said in an October earnings call. The company’s data show consumers continue to spend more. They also have more money in the bank than before the pandemic.

Consumers are benefiting from a tight labor market. Employers are holding on to the workers they have, with jobless claims remaining low last week. Many businesses are also ramping up pay as they struggle with staffing shortages.

“Wage growth is up, which is good for consumers, and that helps their balance sheet,” said

Mark Begor,

CEO of the credit-reporting company

Equifax Inc.

on an earnings call this month. “Obviously, inflation is a bad guy, and it is hurting lots of consumers. But even with inflation, consumers are still out there spending and traveling and doing all the things that they do in their lives.”

Still, consumers might be starting to crack. Many are tapping into pandemic savings and turning more to credit cards to finance spending, said

Kathy Bostjancic,

chief U.S. economist at Oxford Economics.

The consumer-sentiment index and the consumer-confidence index both try to measure the same thing: consumers’ feelings. WSJ explains why the Federal Reserve is keeping a close eye on consumer confidence in 2022. Illustration: Adele Morgan

But with higher interest rates, “there’s really a limit to how much consumers can rely on their credit cards,” she said.

Some companies—particularly in sectors that benefited from a consumer-goods binge earlier in the pandemic—are seeing a consumer pullback. Sales are down about 25% so far this year from the same period in 2021 at Altus Brands LLC, said Gary Lemanski, owner of the Grawn, Mich.-based company that manufactures and sells accessories for hunting, shooting and outdoor recreation.

Many of the factors that spurred a sales surge in 2020 and 2021—such as consumers’ extra cash from government stimulus, their time at home to go out in the woods and their lack of ability to spend money on services including travel—have since faded, he said.

Inflation is causing many consumers to cut back on discretionary purchases, which include products Altus sells, such as electronic ear muffs for hearing protection that can go for $200 to $250, Mr. Lemanski said.

“I talk with a lot of folks, and you just hear it over and over again: It’s tougher to make ends meet,” he said.

Many technology companies are feeling the effects of a slowing economy.

Facebook

parent Meta Platforms Inc. posted its second revenue decline in a row, as the social-media company wrestles with tough macroeconomic conditions that are weighing on advertiser spending.

Microsoft Corp.

said it expects a sharp decline in personal-computer sales and the dollar’s strength to continue to weigh on growth.

A series of interest-rate rises have rippled through the U.S. economy, and more are projected to be on the way. WSJ breaks down the numbers hitting Americans’ wallets this year and beyond. Photo: Elise Amendola/Associated Press

Inflation is denting some consumers’ appetite for big-ticket purchases. Most Americans say it is a bad time to buy a car or large household goods such as furniture, refrigerators or stoves, with a large share attributing their viewpoint to high prices, University of Michigan survey data show.

CarMax,

a used-car retailer, reported a profit drop of more than 50% in its most recent quarter as tough economic conditions weighed on consumers.

“This quarter reflects widespread pressure the used-car industry is facing,” said

William Nash,

the company’s chief executive, on an earnings call. Higher prices, climbing interest rates and low consumer confidence “all led to a marketwide decline in used-auto sales,” he said.

Write to Sarah Chaney Cambon at sarah.chaney@wsj.com

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Business

U.S. GDP Fell at 0.9% Annual Rate in Second Quarter

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The U.S. economy shrank for a second quarter in a row—a common definition of recession—as businesses trimmed their inventories, the housing market buckled under rising interest rates, and high inflation took steam out of consumer spending.

Gross domestic product, a broad measure of the goods and services produced across the economy, fell at an inflation and seasonally adjusted annual rate of 0.9% in the second quarter, the Commerce Department said Thursday. That marked a deterioration from the 1.6% rate of contraction recorded in the first three months of 2022.

The report indicated the economy met a commonly used definition of recession—two straight quarters of declining economic output.

The official arbiter of recessions in the U.S. is the National Bureau of Economic Research, which defines one as a significant decline in economic activity, spread across the economy for more than a few months. Its Business Cycle Dating Committee considers factors including employment, output, retail sales, and household income—and it usually doesn’t make a recession determination until long after the fact.

The GDP report offered some discouraging signs, and underscored the challenges facing U.S. businesses, consumers and policy makers—including high inflation, weakening consumer sentiment and supply-chain volatility.

Consumer spending accounts for roughly two-thirds of total economic output, and Thursday’s report showed Americans spent at a cooler clip in the second quarter. Business investment worsened slightly. The housing sector slowed as borrowing costs rose.

Two volatile categories buffeted the headline figure: Private nonfarm inventories subtracted 1.96 percentage point from the second quarter’s GDP figure. Trade also played a large role in the second quarter. Net exports–the difference between exports and imports–added 1.43 percentage point.

Inflation hit a fresh four-decade high during the second quarter, hammering consumer sentiment and eroding Americans’ purchasing power. The Federal Reserve responded by aggressively raising interest rates, which in turn cooled the housing market, reducing brokers’ commissions and denting residential investment.

The U.S. economic recovery is following an unusual trajectory, with weakening output but strong job gains. The unemployment rate, a key barometer of economic health, held steady at a low 3.6% for the past four months, and employers continued to hire at a strong pace. Most economists in a Wall Street Journal survey expect the economy to grow in the third quarter and in 2022 as a whole, though lately they have been dropping their estimates.

“We’re in a sentiment recession. I don’t think we’re in an actual recession. The growth slowdown has been driven by inflation and price shocks—as they fade in the near term, that should allow growth to accelerate,” said

Aneta Markowska,

chief financial economist at Jefferies. She expects the economy to expand 1.7% this year, measured from the fourth quarter of last year.

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What is your outlook for the U.S. economy? Join the conversation below.

Economists say idiosyncratic factors weighed on the U.S. economy in the first half of the year, like the inventory buildup and swings in exports and imports. A shift in spending away from goods back toward services, and rising prices cutting into people’s buying power, left many companies with stockpiles of products they are now discounting to unload.

Walmart Inc.

said on Monday that it was having to cut prices to reduce merchandise levels at its flagship chain and Sam’s Club warehouse chain. Many manufacturers are also still struggling with pandemic-related supply-chain disruptions.

Business is “a little unhealthy right now” at Best Tool & Engineering Co., according to its president, Joseph Cherluck. The company, based in Clinton Township, Mich., makes tools and plastic components like welding fixtures for vehicle dashboards, and the nationwide shortage of computer chips means auto makers are pushing back orders.

“Autos are waiting for chips and we’re seeing it down the supply chain,” said Mr. Cherluck, adding that he is concerned about the economy slowing. The 15-employee company has frozen equipment purchases and scaled back hiring plans as a result. “I feel uncertain about the rest of the year,” Mr. Cherluck said.

The Fed raised interest rates on Wednesday and indicated more increases were likely coming to combat inflation. The central bank this year has lifted its benchmark rate by a cumulative 2.25 percentage points, to rein in high inflation, which has hurt consumer confidence and outpaced growth in workers’ wages.

Household spending, the linchpin of the U.S. economy, held up in the second quarter. Consumers continued to travel and shop as more people gained jobs and as their savings—boosted by federal stimulus efforts—remained above prepandemic levels.

The consumer-sentiment index and the consumer-confidence index both try to measure the same thing: consumers’ feelings. WSJ explains why the Federal Reserve is keeping a close eye on consumer confidence in 2022. Illustration: Adele Morgan

Consumers face a mixed outlook for the rest of the year, bedeviled by high inflation but supported by a strong labor market. Analysts say that a decline in gasoline prices from their mid-June high should put extra dollars in people’s pockets in the current third quarter.

Americans also have relatively healthy balance sheets. After the pandemic hit the U.S. economy in early 2020 and prompted a short but sharp recession, increased household saving, government stimulus checks and enhanced unemployment benefits boosted household finances. The resulting “excess savings”—the amount above what they would have had there been no pandemic—remain elevated. According to Moody’s Analytics, excess savings totaled $2.5 trillion in May. That propelled consumer spending and helped the economy last year post its best growth since 1984.

Some consumers are hunkering down now. Aimie Gresham of Essex, Conn., has pulled back on discretionary spending—like dining out and expensive salon visits—to pay the higher prices for basics like oil, electricity and groceries she has faced in recent months.

“Even my cat’s food has gone up” by about $10 a bag over the past year, said Ms. Gresham, who works at a retirement financial firm. Her husband’s car has 250,000 miles on it, but the couple decided not to replace it because of the current high prices. “In any other market we would be buying a new car right now,” said the 54-year-old.

Write to Harriet Torry at harriet.torry@wsj.com

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Business

There Are Signs Inflation May Have Peaked, but Can It Come Down Fast Enough?

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Growing signs that price pressures are easing suggest that June’s distressingly high 9.1% increase in consumer prices will probably be the peak. But even if inflation indeed comes down, economists see a slow pace of decline.

Ed Hyman,

chairman of Evercore ISI, pointed to many indicators that  9.1% might have been the top. Gasoline prices have fallen around 10% from their mid-June high point of $5.02 a gallon, according to AAA. Wheat futures prices have fallen by 37% since mid-May and corn futures prices are down 27% from mid-June. The cost of shipping goods from East Asia to the U.S. West Coast is 11.4% lower than a month ago, according to Xeneta, a Norway-based transportation-data and procurement firm.

Easing price pressures and improvements in backlogs and supplier delivery times in business surveys suggest that supply-chain snarls are unraveling. Mr. Hyman noted that money-supply growth has slowed sharply, evidence that monetary tightening is starting to bite.

Inflation expectations also fell recently—an upbeat signal for the Fed, which believes that such expectations influence wage and price-setting behavior and thus actual inflation. The University of Michigan consumer-sentiment survey showed that longer-term inflation expectations slipped from June’s 3.1% reading to 2.8% in late June and early July, matching the average rate during the 20 years before the pandemic.

Bond investors are less worried about inflation, based on the “break-even inflation rate”—the difference between the yield on regular five-year Treasury bonds and on inflation-indexed bonds—which has dropped to 2.67% from an all-time high of 3.59% hit in late March.

Inflation-based derivatives and bonds are projecting that the annual increase in the CPI will fall to 2.3% in just a year, around the Fed’s 2% target (which uses a different price index), according to the Intercontinental Exchange.

Roberto Perli,

economist at Piper Sandler, calls such an outcome “optimistic but not totally implausible.” From February through early June, investors thought inflation would still be between 4% and 5% in a year.

“It’s a step in the right direction, but ultimately, even if June is the peak, we’re still looking at an environment where inflation is too hot,” said

Sarah House,

senior economist at Wells Fargo, who expects fourth-quarter inflation between 7.5% and 7.8%. “So peak or not, inflation is going to remain painful through the end of the year.”

And the slower it is to ebb, the larger the likelihood of a damaging downturn, said

Brett Ryan,

senior U.S. economist at Deutsche Bank.

Core inflation, which strips out volatile food and energy prices and is considered a better measure of inflation trends, was 5.9% in June, down from a peak of 6.5% in March. But Ms. House and Mr. Ryan both expect core inflation to revive and peak sometime around September, as strong price growth for housing and other services combines with low base comparisons in the 12-month calculation.

“The more persistent inflation pressures, the higher the Federal Reserve needs [interest rates] to go to address them,” said Mr. Ryan. “That argues for a larger recession risk.”

Fed Chairman

Jerome Powell

has said the central bank wants to see clear and convincing evidence that price pressures are subsiding before slowing or suspending rate increases.

“The moment of truth comes at the end of this year,” said Mr. Hyman. “If the Fed keeps on raising rates, then they’d invert the yield curve. I think that would increase the odds of recession enormously. It would probably also lower inflation, although it also seems to already be slowing, and will probably be even slower by then.”

Aichi Amemiya,

U.S. economist at Nomura, said that though it is too early to call it, his forecast sees June as the peak for the annual measure of overall inflation. However, the month-over-month change in core CPI will be key to watch in coming months, he said. If it slows from June’s pace of 0.7% to 0.3% on a sustained basis by year-end, he expects the Fed to start planning to ease up on rate increases. That, however, will be hard to achieve, said Mr. Amemiya, “which means the Fed will likely continue tightening even after the economy enters a recession.”

Around the turn of the year, economists were generally confident that inflation would peak in early 2022, as energy prices stabilized and supply-chain pressures eased. Then Russia invaded Ukraine, and energy prices soared. Buzz about  “the peak” crescendoed again when inflation slid to an 8.3% annual rate in April, from 8.5% in March. But gasoline prices flared up again, and gains in food and rent picked up, too.

There is plenty of potential for another reversal in coming months, said Ms. House.

“When we look at ongoing core inflation pressures, it wouldn’t take much in the way of a commodities price shock for us to reach another high,” she said, adding that possible examples include an escalation of the Russia-Ukraine conflict, a hurricane that shuts down an oil refinery, or an outage at a key semiconductor or auto plant. “We all hope we’re at the peak. But hope is not really an inflation strategy right now.”

Write to Gwynn Guilford at gwynn.guilford@wsj.com

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Business

China’s Economy Records 0.4% Growth, Weakest Since Wuhan Lockdown

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SINGAPORE—China recorded its weakest growth rate in more than two years, a measure of the costs imposed on the world’s second-largest economy by Beijing’s zero-tolerance approach to Covid-19.

Gross domestic product expanded at a 0.4% annual rate in the April to June period, China’s National Bureau of Statistics said Friday. That was the worst performance since the first quarter of 2020, when the pandemic first erupted and the economy shrank 6.9% after the Central Chinese metropolis of Wuhan became the first city in the world to lock down to stem the spread of Covid-19. Economists polled by The Wall Street Journal had forecast China’s economy to grow 0.9%.

The scale of the slowdown highlights the damage caused by stringent lockdowns that left millions of Shanghai residents confined to their homes for two months and many businesses closed as authorities tried to snuff out a coronavirus outbreak in China’s wealthiest city.

Lockdowns weren’t confined to China’s prosperous coast: Outbreaks have also closed car factories and disrupted farming in the northern province of Jilin and pummeled activity in other towns and cities. The shutdowns had strangled consumer demand and business activity, resulting in the cratering of retail sales and industrial production.

Four regions affected by city-level mobility restrictions reported outright contractions compared with the previous year. Output in Shanghai and Jilin tumbled 13.7% and 4.5% respectively. Beijing and Jiangsu, a prosperous industrial province neighboring Shanghai that relies on the city for much of its logistics and finance, also recorded year-over-year dips in economic activity. The two had placed parts of their region under some stay-at-home orders when coronavirus cases appeared.

On a quarter-to-quarter basis, China’s economy shrank 2.6%, data showed, marking only the second such contraction since comparable records began in 2010.

Official data show a modest recovery is now under way, sparked by the easing of public-health restrictions, which has released pent-up demand for Chinese goods and services. But already, there are warning signals about the future in the labor market, and from business and consumer surveys.

Even with some post-lockdown recovery, China is on course for a low-growth year, economists say. Unemployment is stubbornly high, real estate is slumping and exports are likely to weaken as Western economies shift into lower gear. Youth unemployment hit a new high in June, with almost one in five workers aged 16 to 24 out of work.

A feeble year for China would deprive the global economy of a dependable engine of expansion when rising interest rates and soaring inflation is squeezing growth in the U.S. and Europe.

“If other important parts of the global economy remain weak or go into recession, it seems highly unlikely that China can become a locomotive for global growth as was the case after the global financial crisis,” said Jonathan Ashworth, senior China economist in London at Fathom Consulting.

Beijing earlier this year set a goal of expanding around 5.5% in 2022 as a whole, a target that now looks increasingly out of reach. Most economists think it might muster about 4%.

Most of the second-quarter hit was concentrated in April, when lockdowns were at their most widespread. Retail sales plunged by an annual 11.1% in April as stores closed and shoppers stayed home, according to data already published. Industrial production shrank 2.9% as factories fell idle.

Sportswear maker

Nike Inc.

said 60% of its business in China was affected by lockdowns during its fiscal fourth quarter, which ended May 31. Executives told analysts on an earnings call that fourth-quarter revenue fell 20% compared with a year earlier after adjusting for currency fluctuations, while earnings before interest and tax were down 55%.

China lifted restrictions in most areas by May, though Shanghai stayed under lockdown until the beginning of June. The reopening helped some economic activity recover.

Data released on Friday showed retail sales rose an annual 3.1% in June, bouncing back from a 6.7% fall the previous month. Industrial production also recovered after lockdowns eased, rising an annual 3.9% in June after a 0.7% expansion in May.

Chinese retail sales rose an annual 3.1% in June.



Photo:

alex plavevski/Shutterstock

For some businesses, the disruptions persisted beyond the shutdowns.

Roy Huang,

who runs fiber-optic equipment maker Shenzhen DYS Fiber Optic Technology Co., said that even after the southern city of Shenzhen exited a lockdown in March, workers still couldn’t return to his factory because of travel restrictions.

“Our production was greatly affected by the epidemic,” said Mr. Huang, who estimates his capacity fell by half between February and April. His profit was also squeezed by rising costs for transport and raw materials, he said.

Fixed-asset investment rose 6.1% on year in the first half of the year, data showed, down slightly from a 6.2% increase in the January-May period. China is in the grip of a real-estate slump as developers struggle with heavy debts, and a planned infrastructure boost has yet to yield big benefits.

Exports, which powered China out of its first Covid-19 slump in 2020 and again in 2021, grew strongly in May and June as cities reopened. But overseas demand for Chinese goods and services is expected to weaken as Western consumer spending slows.

Already, data from export powerhouses such as Taiwan and South Korea suggest foreign demand for manufactured goods is starting to fade. In China, business surveys showed that a gauge of manufacturers’ export orders in June remained at a level that signals order books are shrinking.

Above all, economists say a pandemic policy in which any Covid-19 outbreak is to be smothered with sharp restrictions on daily life means that consumers are hesitant to spend and businesses are nervous about investing and hiring. An index of consumer confidence in China was down 29% in May compared with January.

Unemployment in urban China eased in June, data Friday showed, to 5.5%, from 5.9% previously.

Office workers lined up at a Covid-19 testing booth in Shanghai this week.



Photo:

Qilai Shen/Bloomberg News

But joblessness among workers aged 16 to 24 rose, reaching 19.3%, up from 18.4% in May. That is the highest reading since comparable records began in 2018. Economists and policy makers fret about youth unemployment because it can have long-term effects on workers’ skills and productivity, which can squeeze an economy’s potential for growth.

Katrina Ell,

a senior economist on China at Moody’s Analytics in Sydney, said the high rate of youth joblessness suggests firms aren’t willing to take on new staff and invest in training amid the uncertainty created by the government’s zero-Covid approach.

“There’s an ongoing reluctance to invest in the future,” she said.

—Bingyan Wang and Grace Zhu in Beijing contributed to this article.

China’s Zero-Covid Approach

Write to Jason Douglas at jason.douglas@wsj.com

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Business

U.S. Inflation Hits New Four-Decade High of 9.1%

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U.S. consumer inflation accelerated to 9.1% in June, a pace not seen in more than four decades, adding pressure on the Federal Reserve to act more aggressively to slow rapid price increases throughout the economy.

The consumer-price index’s advance for the 12 months ended in June was the fastest pace since November 1981, the Labor Department said on Wednesday. A big jump in gasoline prices—up 11.2% from the previous month and nearly 60% from a year earlier—drove much of the increase, while shelter and food prices were also major contributors.

The June inflation reading exceeded May’s 8.6% rate, prompting investors and analysts to debate whether the Fed would consider a one-percentage-point rate increase, rather than a 0.75-point rise, later this month. Slowing demand is key to the Fed’s goal of restoring price stability in an economy that is still struggling with supply issues, but raising interest rates also elevates the risk of a recession.

Core prices, which exclude volatile food and energy components, increased by 5.9% in June from a year earlier, slightly less than May’s 6.0% gain, the Labor Department said.

As inflation climbs in the U.S., rising food and energy costs have pushed the nation’s most popular price index to its highest level in four decades. WSJ’s Gwynn Guilford explains how the consumer-price index works and what it can tell you about inflation. Illustration: Jacob Reynolds

On a month-to-month basis, core prices rose 0.7% in June, a bit more than their 0.6% increase in May—a sign of inflationary pressures throughout the economy.

“Inflation makes everything difficult,” said

Lara Rhame,

chief U.S. economist for FS Investments. “It erodes your savings, your wages, your profits. It’s punishing everybody.”

Stocks declined on Wednesday after wavering for much of the day, with the S&P 500 index falling by 0.5%. Bond yields jumped following the inflation report, but yields on longer-term Treasurys quickly gave up those gains.

Despite June’s inflation reading, economists point to recent developments that could subdue price pressures in the coming months.

Investor expectations of slowing economic growth world-wide have led to a decline in commodity prices in recent weeks, including for oil, copper, wheat and corn, after those prices rose sharply following the Russian invasion of Ukraine. Retailers have warned of the need to discount goods, especially apparel and home goods, that are out of sync with customer preferences as spending shifts to services and away from goods, and consumers spend down elevated savings.

“There’s a pretty serious recession fear affecting a broad range of asset prices,” said

Laura Rosner-Warburton,

senior economist at MacroPolicy Perspectives.

Retailers’ ability to shed unwanted inventory could test whether pricing is returning to prepandemic patterns, Ms. Rosner-Warburton said. Some retailers, such as Target, have already said they are planning big discounts. Others with robust warehouse capacity, such as Walmart Inc., could be more likely to hold on to their excess inventory, analysts say.

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“It would be really important if we do see discounting return, because it would show that we weren’t that far away from the pre-Covid environment in terms of pricing behavior,” Ms. Rosner-Warburton said.

Discounts haven’t shown up prominently in inflation figures so far: Prices for apparel and home goods both rose last month. New and used car price increases, a significant source of upward pressure on inflation, both eased on a month-to-month basis in June.

The Fed last month raised its interest-rate target by 0.75 percentage point, the largest increase since 1994. Besides tempering demand, the central bank is trying to prevent consumer expectations of higher inflation from becoming entrenched, as such expectations can be self-fulfilling. Fed Chairman

Jerome Powell

has said the central bank wants to see clear evidence that price pressures are diminishing before slowing or suspending rate increases.

Persistent high inflation is putting a strain on businesses and consumers who, after decades of price stability, aren’t used to it.

Dan Waag,

55 years old, the owner of Arlene’s Sunny Side Cafe in Alcester, S.D., made the difficult decision to close for a week after concluding that a drop in the number of customers was leaving the restaurant’s finances in the red.

“I know these are tough times with this inflation, little to no rain for the farmers, gas prices as high as they are,” he wrote to his customers on Facebook.

Mr. Waag attributes the slowing demand to a poor season for the corn and bean farmers in the area, and the added toll of higher gasoline prices that might make an outing to his restaurant an unaffordable luxury. He hasn’t changed his prices yet, but with his own rising costs and a drop in daily revenue from around $600-$700 to $300-$400, he feels he may have to soon.

High inflation and a poor farm season have driven Dan Waag to close Arlene’s Sunny Side Cafe in Alcester, S.D., for a week.



Photo:

Dan Waag

By closing for a week, he said he is betting customers will realize the value of having a non-fast food restaurant in their town of around 800 people. “I’m trying to show people, ‘This is what it will be like if I have to stay closed,’ ” Mr. Waag said.

Consumer inflation expectations have improved somewhat, according to a Federal Reserve Bank of New York survey this week. Americans expect slower inflation increases over the longer run than they had in recent months. The bank said in its June Survey of Consumer Expectations that respondents see the annual inflation rate three years from now at 3.6%, down from their expectation in May of 3.9%. The bank also said respondents expect the annual inflation rate five years from now to be 2.8%, down from their May expectation of 2.9%.

Higher interest rates won’t have the same effect on all prices simultaneously, economists say. Costs such as mortgages and rents—a big part of household budgets—respond over time to the demand-sapping effects of higher interest rates. Shelter costs rose by 0.6% in June over the prior month, the same rate as they did in May. The rent index rose 0.8% over the month, which was the largest monthly increase since April 1986.

Housing inflation is important because it represents around 40% of core CPI and around 17% of the Fed’s preferred inflation gauge, the personal-consumption expenditures price index.

“High rents are really troubling because they’re locked in once every year or once every two years, and that’s what leads people to go ask their boss for higher wages,” said Ms. Rhame.

Wages aren’t keeping up with inflation. With annual wage growth at 5.1%, average hourly earnings adjusted for inflation are declining at their fastest pace in four decades. After accounting for seasonal and inflation adjustments, average hourly earnings decreased 3.6% from June 2021 to June 2022.

Record home prices and higher mortgage rates in May made it the most expensive month since 2006 to buy a home. Those conditions are leading prospective buyers to drop out of the market for now. But with limited supply and continued demand, it may take months before housing prices see significant declines.

“We entered this year with so much more demand than supply—even with many home buyers unable to compete in the market, there’s still a lot of buyers,” said

Bill Adams,

chief economist at Comerica Bank.

Write to Gabriel T. Rubin at gabriel.rubin@wsj.com

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World

Biden Faces Fresh Domestic Challenges After Europe Summits

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President Biden returned from Europe with a deal to expand the NATO alliance and plans for the biggest U.S. military footprint in the continent since the Cold War. But awaiting him back home was a host of domestic challenges, including intraparty frustration with his response to the Supreme Court’s ruling overturning abortion rights, continuing economic worries and questions about the fate of his legislative agenda.

With some fellow Democrats calling for him to be more forceful on abortion, Mr. Biden endorsed making an exception to filibuster rules to pass legislation codifying Roe v. Wade into law, as he wrapped up his trip. And on his first day back, he met virtually with Democratic governors, some of whom continued to push Mr. Biden to make more use of federal resources to protect access to abortion.

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Business

Stocks Open Higher Ahead of Powell Testimony

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U.S. stocks advanced ahead of a second day of testimony from Federal Reserve Chairman

Jerome Powell

after he warned that rapidly rising interest rates threatened a recession. 

The S&P 500 added 0.4% in early trading Thursday. The technology-heavy Nasdaq Composite Index rose 0.4% while the blue-chip Dow Jones Industrial Average also edged up 0.4%. 

Investors have mostly shed riskier assets in recent days, prompted by growing concerns that efforts by the Federal Reserve to bring inflation under control will take a toll on the economy. Investors are growing less optimistic that the Fed can engineer a so-called soft landing, whereby interest rates rise to curb inflation without pushing the economy into a recession. 

Mr. Powell acknowledged those risks in testimony to lawmakers Wednesday, saying that a recession was possible and that a soft landing for the economy would be “very challenging.” Mr. Powell is set to continue that testimony Thursday in front of a second group of lawmakers. 

Federal Reserve Chairman Jerome Powell said that interest rates would continue to rise until the central bank sees clear proof that inflation is slowing, but conceded that elevated rates could lead to a recession. Photo: Elizabeth Frants/Reuters

The S&P 500 closed down 0.1% Wednesday following Mr. Powell’s remarks, while the Dow Jones Industrial Average lost 0.2%. 

“Markets are in a real state of flux right now,” said Stephen Innes, managing partner at SPI Asset Management. “I don’t think the market is moving into bullish territory by any means.”

Large technology companies were leading gains premarket, with

Nvidia,

Snap

and

Amazon

each up around 0.9%.

The Labor Department said 229,000 Americans applied for unemployment benefits last week. Jobless claims—one of the earliest indicators of weakness in the labor market—remain at historically low levels. A gauge of activity in the manufacturing and service sectors is due shortly after the opening bell. 

In bond markets, Treasury yields declined for a second day though remained close to their highest level in more than a decade. The yield on the benchmark 10-year U.S. Treasury note fell to 3.099% from 3.155% on Wednesday. Bond yields fall as prices rise.

The U.S. dollar firmed, with the WSJ Dollar Index, which measures the currency against a basket of its peers, rising 0.1%.

In Europe, the pan-continental Stoxx Europe 600 was flat. Business surveys released Thursday showed Europe’s economy slowed sharply in June as soaring consumer prices undercut demand for a range of goods and services. 

“Inflation is at the center of all this, but there is also fading growth, and interest rates are going up. All of that together is a horrible cocktail and you just need to step aside and wait for that to work itself out,” said Hani Redha, a portfolio manager at PineBridge Investments.

A trader at the New York Stock Exchange on Wednesday.



Photo:

BRENDAN MCDERMID/REUTERS

European gas prices jumped after Germany took a step closer to rationing gas by triggering the second step of an emergency plan to deal with curtailed Russian supplies. The region’s gas prices gained more than 5% to €134.25 a megawatt hour, their highest level since March. 

Bitcoin rose 3.9% from its 5 p.m. ET level on Wednesday to $20,668.90. The cryptocurrency has steadied in recent days after a sharp selloff earlier in the month.

In commodity markets, oil prices wavered after sharp losses Wednesday. Brent crude, the international oil benchmark, weakened 0.5% to $108.16 a barrel. Other commodities whose demand is closely correlated to the economy also slipped. Copper prices in London fell 2.6% to $8,555.50 a metric ton.

Soaring energy prices have been a key contributor to the multidecade high inflation currently roiling global economies. Concern that a recession would see demand for oil fade was prompting investors to sell the commodity, said Mr. Redha. 

“I have said for a while there will be no bottom in equities without also a sustainable top in oil prices and bond yields,” he said. “I think that is potentially under way.”

In Asia, stock markets mostly rose. In Hong Kong, the Hang Seng Index rose 1.3% while in mainland China the Shanghai Composite Index rose 1.6%. In Japan, the Nikkei 225 added 0.1%.

Write to Will Horner at william.horner@wsj.com

Navigating the Bear Market

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