The Federal Reserve must believe inflation is overwhelming the economy as they voted today to raise the federal funds rate by 3/4% (the market expected the rate to raise 1/2%). This is the largest increase since 1994. Part of the FOMC statement:

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1‑1/2 to 1-3/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

Advance real (inflation-adjusted) retail and food services sales declined 0.4% year-over-year in May 2022 – and remains in a contraction trend since March 2022. Much of the reason for the contraction is that the data is being compared to a surge period of retail sales following the opening of the economy after the COVID lockdown. Having said that, surges normally happen after recessions – but three months of contraction could be considered a recession flag. At a minimum, it is a signal of a weak economy.

Import prices continued to moderate year-over-year in May 2022 but remains in the range seen since May 2021.

The New York Fed’s June 2022 Empire State Manufacturing Survey remained in contraction for the second consecutive month.

Business sales-to-inventory ratios continued their modest upward trend in April 2022 – but remain within their historical range for times of economic expansion.

The number of changes of CEOs has increased 52% from May 2021. Per Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc.:

The CEO exodus continues. Economic conditions, rising inflation, and recession concerns are making boards rethink leadership and leaders rethink if they want to take on these challenges. The ready capital that was available to Tech companies the last few years is starting to slow, and job cuts are following. Generally, new leaders are brought in during a period of uncertainty. Former leaders often remain with the company for a period of time, either as a consultant or continue as a Board Member or Chair to maintain institutional knowledge and have the appearance of a seamless transition.

The small business (NFIB) optimism index fell for the fifth consecutive month – and is well below the average index value of 98. Worse is that small business owners six month projection of business conditions now is at the lowest level ever recorded in the 48 years of this index.

The May 2022 Producer Price Index Final Demand has inflated 10.8% year-over-year. Of course, it was energy prices which caused the current month to surge. Note that this index’s growth has been marginally slowing for the last two months,

U.S. mortgage delinquencies hit a new low in March 2022 – and the national foreclosure rate remains the lowest in 20 years.

 

Today a recession red flag waved as the yield curve inverted – and many believe a recession follows in one to two years. The last time the yield curve inverted was in early April, and it quickly recovered. At that time, Morgan Stanley predicted that the yield curve would soon invert again and should remain inverted for the rest of 2022. Note that every recession is different, and an inverted yield curve alone usually does not result in a recession. We are currently seeing a modest slowing of employment growth and real income – but industrial production and retail sales remain relatively strong. According to Bloomberg, the current inversion was caused by “investors dumping short-term debt on concerns that aggressive rate hikes will lead to an economic slowdown.”

The market expected the Consumer Price Index (CPI) to moderate – but instead, the May 2022 CPI reverted back to the previous March peak of 8.6% year-over-year. Recent increases by the Federal Reserve to the federal funds rate are yet to have the desired effect igniting market fears of more aggressive actions by the Federal Reserve to drive down inflation.

The biggest drivers of inflation continue to be energy (automotive fuels, fuel oil, and natural gas). This month all sectors EXCEPT medical experienced high inflation.

The NFIB Vice President of Federal Government Relations Kevin Kuhlman issued the following statement:

With inflation reaching a near 40-year high, small businesses continue to be plagued by rising prices with little hope for relief on the horizon. As recent data shows, inflation remains the top problem for one-third of small business owners, has a direct impact on small business optimism, which is at a near 50-year low, and continues to harm the small business recovery. With the detriment of inflation, worker shortages, and supply chain disruptions, the Biden administration and Congress must adopt a do no harm approach and rule out any tax increases and mandates on small businesses, and specifically promote policies that would strengthen the small business recovery.

Because of the high inflation, real average hourly earnings for all employees decreased 0.6 percent from April to May, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today.

Preliminary June 2022 Michigan Consumer Sentiment declined 14% from May (down 41.3% year-over-year) and reached a value comparable to the trough reached in the middle of the 1980 recession.