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A flurry of controversial economic signals coupled with plummeting tech stocks saw financial markets end April at lows last seen at the start of the pandemic in March 2020.
Uncertainty about the trajectory of the economy played a role in market turmoil on Friday, as the tech-heavy Nasdaq closed the day down 4.2 percent and the Dow Jones Industrial Average slipped 939.18 points, or 2.8 percent. The S&P 500 was down 3.6 percent on Friday and was down 9.1 percent in April, its worst month since March 2020. And it fell 13.8 percent in 2022, the worst start to the year since World War II.
The economy is being pulled in multiple directions simultaneously, weighed down by rising energy, food and real estate prices while being sustained by a massive labor market, pent-up demand, high-saving consumers and continued strong business investment. The next few weeks could dictate which economic forces will prevail and shape the fortunes of households and businesses as we head into the midterm elections.
“The market is concerned about a very fragile economic outlook, as it should be,” said Joe LaVorgna, chief Americas economist at Natixis and former Trump White House economic adviser. “The economy is fundamentally weak: the Fed will hike next week, the situation in Ukraine isn’t getting any better and high inflation is weighing on costs.”
At the same time, vacation bookings are soaring, auto sales are booming and Americans continue to spend happily thanks to higher wages and brisk hiring. Still, the economy contracted unexpectedly in the first quarter, led by trade deficits and a slowdown in inventory purchases.
The diverging trajectories of the economy were evident on Friday in a trade report that showed a rise in both consumer spending, which rose more-than-expected in March, and inflation, which surged in March at the highest rate in more than 15 years years no more.
Dow tanks 900 points as S&P 500, Nasdaq post worst month since March 2020
“There are so many factors pulling on our economy right now — the uncertainty and the low numbers — despite the fact that demand is so high,” said Tara Sinclair, an economics professor at George Washington University. “This can be worrying because when businesses and decision makers – from the household level to Fortune 500 companies – start worrying about the ‘R’ word, it can become a kind of self-fulfilling prophecy. ”
On Capitol Hill, politicians are pouncing on widely divided numbers to support their political efforts ahead of the critical 2022 midterm election. Two years after the worst economic crisis in generations, no issue is likely to motivate Americans more than the state of their own finances.
Democrats this week insisted the annual 1.4 percent contraction in gross domestic product reflected broader economic tailwinds — from fresh bottlenecks in global supply chains to the developing aftermath of Russia’s invasion of Ukraine. As they had for months, party lawmakers instead sought to highlight other, more encouraging indicators, including a sustained surge in hiring, a low unemployment rate and sustained consumer spending, all under Biden’s watch.
“It’s not a good sign,” Senator Richard J. Durbin (D-Ill.), the majority leader, said during a brief interview on the GDP numbers. “[But] There are enough positive signs that things can change.”
The economy contracted by 1.4% in the first 3 months of the year, fueling fears of a recession
Meanwhile, the economic crisis has provided Republicans with fresh fodder to ramp up their opposition to Democratic legislative solutions in the face of a possible sea change this November that could put them in the majority power. For example, few GOP lawmakers are expected to support Democrats’ anti-inflation efforts, which Republicans instead blame on Biden’s spending policies.
“They’re hurting our economy,” said Sen. Rick Scott (R-Fla.), the chair of the National Republican Senatorial Committee, which aims to elect party lawmakers to the chamber. “It makes it difficult for people to go back to work.”
Companies in all sectors are feeling the economic side wind. For example, buoyant sales of Apple Watches, iPhones, and MacBooks in the first three months of the year helped propel Apple’s revenue to an all-time high of $97.3 billion. But looming concerns about the war in Ukraine and the coronavirus lockdown in China, including supply chain pitfalls, could end up costing the company $8 billion this quarter, Apple reported. Apple closed down 3.7 percent on Friday.
And Amazon led Friday’s market losses with a 14 percent drop, its biggest one-day selloff in 16 years. This followed a weaker earnings report as the company this week posted its first major quarterly loss since 2015 on a loss on its investment in electric vehicle maker Rivian.
“There is no question that the market is pricing in a recession,” said Anthony Chukumba, an analyst at Loop Capital Markets. “When you see leaders like Netflix and Amazon missing numbers by a country mile, that’s concerning — especially when it’s happening in the technology space, which has been a leader for so long.” (Jeff Bezos, Amazon’s founder, owns The Washington Post.)
Farm and construction machinery company Caterpillar, which on Thursday reported a 14 percent increase in first-quarter sales, also warned that widespread coronavirus lockdowns in China could depress demand for excavators later this year. The company said it was also struggling with ongoing shortages and delays in components such as semiconductors. Caterpillar closed Friday down 1 percent.
“The environment remains challenging due to supply chain restrictions and recent Covid-19-related shutdowns in China,” Chief Executive Jim Umpleby told analysts during a earnings call this week.
The only bright spot for the economy has been the job market – which has added 1.7 million jobs so far this year. The US unemployment rate is near a record low at 3.6 percent and wages continue to rise.
“The economy has hit a speed bump, but if you look under the hood, there are a lot of things to like,” said Ken Kim, US senior economist at KPMG. “The good thing is that the job market is strong. We remain bullish on US expansion for 2022 and do not see a recession on the horizon this year or next.”
But some economists say momentum is likely to slow later this year, especially as the Federal Reserve continues to hike interest rates in hopes of curbing inflation.
The Fed Board is expected to meet next week and is expected to hike rates another 0.5 percentage point, which will be the largest hike since 2000 and is expected to do so again in June. Investors are concerned that the bad economic news could affect future rate hikes, also rocking markets.
Fed officials, including Chairman Jerome H. Powell, have said they aim to guide the economy to a “soft landing” and avoid a recession by raising interest rates just enough to cool inflation, though Economists say finding the right balance will be difficult.
“It’s hard to get from here to where the Fed wants to be on inflation without the unemployment rate going up or there’s a risk of a recession,” said Diane Swonk, chief economist at accounting firm Grant Thornton, which thinks unemployment is rising 2023 will end at over 5 percent. “When you’re skating on thin ice, it’s not hard to fail.”
Business owners say they also feel insecurities.
At Delta Children’s Products, consumers have traditionally been happy to splurge on baby and toddler furniture — even though the company has increased prices by up to 25 percent to offset rising raw material and shipping costs. Sales of the company’s cribs, mattresses and strollers, which are sold at major retailers like Walmart, Pottery Barn and Buy Buy Baby, are up 12 percent this year.
But President Joe Shamie says he is worried about the future. Birth rates are falling, meaning it has a shrinking buyer base, and lockdowns in China continue to weigh on production and shipping. He’s also concerned that consumers could soon start backing down as they start worrying about their own financial prospects.
“We’re very concerned about what’s going to happen next,” Shamie said. “There are many holes in the economy that need to be patched.”
Aaron Gregg contributed to this report.