Wall Street says a recession is coming. Consumers say it’s already here

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Calls for recession are getting louder on Wall Street, but for many households and businesses that make up the global economy, the downturn is already here.

Take Gina Palmer, who runs She Salon on Atlanta’s busy Northside Drive, west of downtown. She would normally expect her business to be bustling with the din of customers on a Friday morning. But on this day at the end of last month, it was largely empty and quiet, except for a few employees. With summer vacation in full swing, her clientele is concerned about offering summer camps for their children amid soaring food and gas prices.

“When people look at their budgets, the first thing they cut is personal care,” Palmer said. “I’ve seen my clients move from weekly appointments to bi-weekly appointments, and my bi-weekly clients now come every six weeks.”

4,000 miles away, Abbie Marshall, owner of The Buck Inn in the North of England countryside, is also trying to cope with soaring costs. When she took over the pub last year, she calculated the figures on an inflation rate of 4%, an assumption which would normally be considered conservative given that it is double the Bank’s target from England. But now it’s above 9% and rapidly heading into double digits.

Marshall has changed its menu prices four times and raised the price of a pint of beer three times.

For Palmer, Marshall and many others, the technical definitions of a recession – traditionally two quarters of contraction – are irrelevant.

Economists at Goldman Sachs Group Inc. estimate the risk of such a collapse in the United States at 30% next year. A Bloomberg Economics model sees a 38% chance over the same period, with risks increasing beyond that time frame. But for many, it is already as if it were here. More than a third of Americans think the economy is now in a recession, according to a poll conducted last month by CivicScience.

The worries of small business owners, consumers and others are illustrated by the so-called misery indices, which mix unemployment and inflation rates. The gauge for the United States is already at 12.2%, similar to levels seen at the start of the pandemic and following the 2008 financial crisis, according to Bloomberg Economics.

The UK is also high, and other metrics echo this grim outlook. US consumer expectations, as measured by the Conference Board, have fallen to their lowest in nearly a decade. Sentiment in OECD member countries has fallen for 11 consecutive months and has not been this low since 2009.

“People are getting poorer,” said Ludovic Subran, chief economist at Allianz SE. “So it’s not a recession, but it definitely looks like a recession.”

The reason? Prices are soaring around the world, especially for essential food and fuel, eroding families’ purchasing power. Central banks are reacting to the surge in inflation, but by raising interest rates, it turns the screw on those who are in debt. Workers complain that their wages are not keeping up with the cost of living, a frustration that has already led to strikes in some countries.

Quite simply, people’s money is quickly disappearing and they fear it will get worse.

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And as 2022 comes to the halfway point, new concerns are setting in. In addition to compressing inflation, growing concerns about the outlook for economic growth, not just this year, but through 2023. This has sparked talk of stagflation, an unpleasant cocktail of weak or no growth – or worse – and faster than the usual price. increase.

The situation is a far cry from what was once predicted for 2022 and beyond, which for a time included the idea of ​​a new “Roaring Twenties”. Instead, euphoria is rare and the narrative is one of downgrades.

Last month, the OECD cut its outlook for global growth in 2022 to 3% from 4.5%, with an even slower expansion next year. The World Bank lowered its projections, warning of a “danger” for the economy.

Markets are also alarmed, where the S&P 500 has plunged more than 20% from its January high, and the Stoxx Europe 600 is down around 19%. The near-constant stream of warnings, along with somber headlines, mean a recession could become a self-fulfilling prophecy, where apprehension forces consumers and businesses to hunker down and cut spending . This would suck demand out of the economy, exacerbating any downturn.

A 2021 paper co-authored by Danny Blanchflower, an economics professor at Dartmouth College and former BOE policymaker, said declines in U.S. consumer expectations of 10 points or more, from surveys by the University of Michigan or the Conference Board, are predictors of recessions dating back to the 1980s. The Conference Board measure is down nearly 30 points this year.

“The risk of a self-fulfilling recession – and one that may occur as early as the start of next year – is higher than before. Even if household and corporate balance sheets are strong, worries about the future could induce consumers to opt out, which would encourage companies to hire and invest less.

—Anna Wong, chief U.S. economist at Bloomberg Economics. Learn more here.

For the United States, the National Bureau of Economic Research is the official arbiter of recessions, which it defines as a “significant decline in economic activity that spreads throughout the economy and lasts longer than a few month”.

Such a statement will usually only come well into a crisis, or even afterwards. In the meantime, the debate rages on. Deutsche Bank AG chief executive Christian Sewing sees a 50% chance of a global recession, a prediction economists at Citigroup Inc. have also made. Federal Reserve Chairman Jerome Powell said a US recession is a possibility, but not inevitable. Morgan Stanley economists expect a mild eurozone recession at the end of 2022.

Away from this back and forth, businesses and consumers worry about their finances and try to find a way to keep their heads above water as the pressures mount.

Inflation was already on the rise heading into 2022 amid rising demand post-Covid. Then Russia invaded Ukraine, energy and food prices soared, and the world found itself facing a price spike, a highly unusual situation after years of low inflation. Gasoline in the United States topped an average of $5 a gallon for the first time last month.

Given the impact on the essentials, from filling the gas tank to running to the supermarket, few escaped the pressure.

In New Mexico’s capital, cowboys at the annual Santa Fe Rodeo last month sweated the price of fuel more than riding a 2,000-pound bull. The number of participants in the contest has dropped by a third, which President Jim Butler attributes to the price of gasoline. While farmers and truckers can pass on their fuel costs, “cowboys don’t,” he said.

The tough times also extend to Asia, where China’s Zero-Covid policy and lockdowns have plunged the world’s second-largest economy into a tailspin, compounding the damage from a housing slump.

In Beijing, 31-year-old Tian Lijun started the year by closing the two florists she ran. After finding work as a sales representative at a high-end medical clinic, she lost that job in May. To make ends meet, she took to selling flowers from stalls at community complexes and stopped buying anything beyond the necessities.

“There’s no way to make money these days. I can only repay my loans, pay the rent and feed myself,” Tian said. “Forget about entertainment or any other expense.”

Many have to make even tougher decisions about simple day-to-day expenses, sometimes having to choose between the electricity bill or food. UK grocery chain Tesco Plc says shoppers are buying fewer items and turning to cheaper own-brand versions of staples.

Just as the pandemic and its recovery have proven to be k-shaped, the next deterioration could prove to be just as uneven. In the UK, a report by the Resolution Foundation think tank said years of stagnant incomes have left the poorest families “brutally exposed” to the cost of living crisis.

Phil Storey’s recent experience as Managing Director of Hammersmith & Fulham Foodbank in London is further proof of this. With food prices up almost 9%, he saw an increase in demand.

“We’re seeing people who were on benefits but were financially stable, people who really know how to budget, who are now coming to us,” Storey said. “We are even seeing workers, those on zero hour contracts, needing help to troubleshoot them.”

At the Buck Inn, Marshall raises a similar concern as she tries to balance protecting her income with not chasing customers.

“The cost of goods is moving so quickly, I have to pass it on,” she said. “But at what point does my pricing become prohibitive? Is going out becoming so expensive that it’s only for the wealthy?

More stories like this are available at bloomberg.com

About Bradley J. Bridges

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