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The Inevitable Recession

The Inevitable Recession

By Philip Marey, Senior US Strategist at Rabobank

Summary

The negative supply shocks related to COVID and the…

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The Inevitable Recession

By Philip Marey, Senior US Strategist at Rabobank

Summary

  • The negative supply shocks related to COVID and the Russian invasion of Ukraine are causing headwinds for the US economy, which contracted in the first quarter of this year. However, as consumption and investment remain robust, the US is likely to avoid a recession this year.

  • Meanwhile, a wage-price spiral has started that will be difficult to stop without the Fed hiking the economy into recession next year.

  • Therefore, a recession seems inevitable: even if the US is able to absorb the exogenous shocks to the supply side of the economy, the response of the central bank to the wage-price spiral will cause a recession from within

Introduction: shocks to the system

Two months ago we concluded that the Fed is going to push the US economy into recession. The FOMC had finally reached the conclusion that it needed to catch up and fight inflation by taking policy rates into restrictive territory. We distinguished between exogenous and endogenous threats to the US economy. In the last two months we have gotten a sharper picture of these threats and their potential timelines. The exogenous threats to the US economy are the negative supply shocks related to Covid-19, including the most recent lockdowns in China, the Russian invasion of Ukraine, and subsequent sanctions. Our European macro strategists expect that the oil boycott announced by the EU last week is likely to push the European economy into recession by the end of 2022/early 2023. These exogenous threats could drag the US economy into recession even before the Fed is done hiking.

Note that we have already seen a negative US GDP growth figure in 2022 Q1 largely due to a large negative contribution from net exports and slower inventory accumulation. However, consumption and investment growth have remained robust, so a near-term recession will probably to be avoided. In fact, employment growth – a less ambiguous measure of economic activity than GDP – has remained strong.

Terminating the wage-price spiral

The endogenous threat to the economy is the wage-price spiral that has emerged in the US and the Fed’s mission to get inflation back to the 2% target. The Fed has admitted that it waited too long addressing high inflation. Now it is trying to catch up by taking big rate steps and going into restrictive territory. The Fed thinks that in theory it should be possible to get inflation back to 2% with only a slight rise in unemployment and instead a substantial decline in vacancies, but the probability that the Fed can pull this off is very small. The policy rate is a very blunt instrument to steer the economy and it works with a considerable lag. What’s more, it works through the demand side, while the economy is experiencing a series of negative supply shocks. More importantly, reducing vacancies without increasing unemployment is largely a matter of increasing match efficiency. This requires active labor market policies, such as training and job search support. However, these measures are outside the scope of the Fed and the prerogative of federal, state and local governments. Therefore, in order to break the wage-price spiral and get inflation back to the 2% target, the Fed will likely have to force the economy into recession and push up the unemployment rate substantially.

Another scenario that could help avoid a recession is a rebound in the participation rate that eases wage pressures, reducing the incentive for the Fed to hike into restrictive territory. However, the rebound that many expected last year is still yet to happen, which suggests that a large part of the decline in participation is permanent, as we discussed in Labor shortages: temporary or permanent?

While Powell has tried to explain the route to a soft landing a couple of times, he does not seem to believe it himself. This came to the surface in recent interviews. During a May 12 interview with Marketplace Powell said that “whether we can execute a soft landing or not, it may actually depend of factors that we don’t control”, referring to negative supply shocks. On May 17, Powell gave an interview during the Wall Street Journal’s Future of Everything Festival. He said that the Fed’s resolve in combating inflation should not be questioned, even if it requires pushing up unemployment. He said that it seemed that the unemployment rate consistent with stable inflation is probably well above 3.6%. (Note that unemployment stood at 3.6% in May.) Powell repeated his hope that the Fed can curtail high inflation without spurring a large rise in unemployment. However, he admitted that there is little from modern economic experience to suggest that outcome can be achieved. He said he wasn’t at odds with those who believe the Fed faces a difficult path to a ‘soft landing’, in which growth slows enough to bring down inflation without triggering a recession. Regarding the hiking cycle, Powell said “we need to see inflation coming down in a convincing way. Until we do, we’ll keep going.”

The timing of the recession

Having established that a recession is almost inevitable, we turn to the question of timing. When the recession hits really depends on what will cause it: the exogenous supply shocks or the Fed’s response to the inflation caused by these shocks? The economy is already being hammered by a series of negative supply shocks that could drag down the economy even without the Fed hiking policy rates into restrictive territory. In fact, the US could already be in a recession. After all, GDP growth in Q1 was -1.5%. So if Q2 GDP growth turns out negative as well, we are already in a recession according to macroeconomics textbooks. However, this does not seem very likely given robust consumption and investment. What’s more, in the US recessions are determined by the NBER which tends to focus more on employment growth than GDP. Employment growth has remained strong this year.

Meanwhile, the Russian invasion of Ukraine and subsequent sanctions are likely to push the European economy into recession by the end of 2022/early 2023. While the US economy may be strong enough to grow despite the headwinds from a recession in Europe and a slowdown in China, the Fed has no choice but to engineer a recession if inflation remains persistent. So assuming that the US manages to avoid a recession this year, we expect the Fed to push the economy over the cliff next year. The Fed is expected to reach the neutral rate in the final months of this year and to raise the target range above it early next year. With the usual lags of monetary policy this would likely get the US into recession in the second half of next year.

Conclusion

In the US, a recession seems difficult to avoid. Either the exogenous supply shocks are going to bring down business activity or the Fed’s response to high and persistent inflation is going to do the job. The timing of the recession will depend on whether it is caused by exogenous or endogenous factors. Given the strong labor market and robust consumption and investment at the moment we think that the endogenous will be decisive. This means it is more likely going to be the recession of 2023 rather than the recession of 2022

Tyler Durden Thu, 06/09/2022 - 08:07

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Economics

Reduced myocardial blood flow is new clue in how COVID-19 is impacting the heart

Patients with prior COVID may be twice as likely to have unhealthy endothelial cells that line the inside of the heart and blood vessels, according to…

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Patients with prior COVID may be twice as likely to have unhealthy endothelial cells that line the inside of the heart and blood vessels, according to newly published research from Houston Methodist. This finding offers a new clue in understanding covid-19’s impact on cardiovascular health.

Credit: Houston Methodist

Patients with prior COVID may be twice as likely to have unhealthy endothelial cells that line the inside of the heart and blood vessels, according to newly published research from Houston Methodist. This finding offers a new clue in understanding covid-19’s impact on cardiovascular health.

In a new study published today in JACC: Cardiovascular Imaging, Houston Methodist researchers examined the coronary microvasculature health of 393 patients with prior covid-19 infection who had lingering symptoms. This is the first published study linking reduced blood flow in the body and COVID-19.

Using a widely available imaging tool, called positron emission tomography (PET), researchers found a 20% decrease in the ability of coronary arteries to dilate, a condition known as microvascular dysfunction. They also found that patients with prior COVID-19 infection were more likely to have reduced myocardial flow reserve – and changes in the resting and stress blood flow – which is a marker for poor prognosis and is associated with a higher risk of adverse cardiovascular events.

“We were surprised with the consistency of reduced blood flow in post covid patients within the study,” said corresponding author Mouaz Al-Mallah, M.D., director of cardiovascular PET at Houston Methodist DeBakey Heart and Vascular Center, and president elect of the American Society of Nuclear Cardiology. “The findings bring new questions, but also help guide us toward further studying blood flow in COVID-19 patients with persistent symptoms.”

Dysfunction and inflammation of endothelial cells is a well-known sign of acute Covid-19 infection, but little is known about the long-term effects on the heart and vascular system. Earlier in the pandemic, research indicated that COVID-19 could commonly cause myocarditis but that now appears to be a rare effect of this viral infection.

A recent study from the Netherlands found that 1 in 8 people had lingering symptoms post-covid. As clinicians continue to see patients with symptoms like shortness of breath, palpations and fatigue after their recovery, the cause of long covid is mostly unknown.

Further studies are needed to document the magnitude of microvascular dysfunction and to identify strategies for appropriate early diagnosis and management. For instance, reduced myocardial flow reserve can be used to determine a patient’s risk when presenting with symptoms of coronary artery disease over and above the established risk factors, which can become quite relevant in dealing with long Covid.

Next steps will require clinical studies to discover what is likely to happen in the future to patients whose microvascular health has been affected by COVID-19, particularly those patients who continue to have lingering symptoms, or long COVID.

This work was supported, in part, by grants from the National Institutes of Health under contract numbers R01 HL133254, R01 HL148338 and R01 HL157790.

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For more information: Coronary microvascular health in patients with prior COVID-19 infection. JACC: Cardiovascular Imaging. (online Aug. 16, 2022) Ahmed Ibrahim Ahmed, Jean Michel Saad, Yushui Han, Fares Alahdab, Maan Malahfji, Faisal Nabi, John J Mahmarian, John P. Cook, William A Zoghbi and Mouaz H Al-Mallah. DOI: www.doi.org/10.1016/j.jcmg.2022.07.006

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Spread & Containment

War, peace and security: The pandemic’s impact on women and girls in Nepal and Sri Lanka

The impacts of COVID-19 must be incorporated into women, peace and security planning in order to improve the lives of women and girls in postwar countries…

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Nepalese girls rest for observation after receiving the Moderna vaccine for COVID-19 in Kathmandu, Nepal. (AP Photo/Niranjan Shrestha)

Attention to the pandemic’s impacts on women has largely focused on the Global North, ignoring countries like Nepal and Sri Lanka, which continue to deal with prolonged effects of war. While the Nepalese Civil War concluded in 2006 and the Sri Lankan Civil War concluded in 2009, internal conflicts continue.

As scholars of gender and war, our work focuses on the United Nations Security Council Resolution 1325 on women, peace and security. And our recently published paper examines COVID-19’s impacts on women and girls in Nepal and Sri Lanka, looking at policy responses and their repercussions on the women, peace and security agenda.

COVID-19 has disproportionately and negatively impacted women in part because most are the primary family caregivers and the pandemic has increased women’s caring duties.

This pattern is even more pronounced in war-affected countries where the compounding factors of war and the pandemic leave women generally more vulnerable. These nations exist at the margins of the international system and suffer from what the World Bank terms “fragility, conflict and violence.”

Women, labour and gender-based violence

Gendered labour precarity is not new to Nepal or Sri Lanka and the pandemic has only eroded women’s already poor economic prospects.

Prior to COVID-19, Tharshani (pseudonym), a Sri Lankan mother of three and head of her household, was able to make ends meet. But when the pandemic hit, lockdowns prevented Tharshani from selling the chickens she raises for market. She was forced to take loans from her neighbours and her family had to skip meals.

Some 1.7 million women in Sri Lanka work in the informal sector, where no state employment protections exist and not working means no wages. COVID-19 is exacerbating women’s struggles with poverty and forcing them to take on debilitating debts.

Although Sri Lankan men also face increased labour precarity, due to gender discrimination and sexism in the job market, women are forced into the informal sector — the jobs hardest hit by the pandemic.

Two women sit in chairs, wearing face masks
Sri Lankan women chat after getting inoculated against the coronavirus in Colombo, Sri Lanka, in August 2021. (AP Photo/Eranga Jayawardena)

The pandemic has also led to women and girls facing increased gender-based violence.

In Nepal, between March 2020 and June 2021, there was an increase in cases of gender-based violence. Over 1,750 incidents were reported in the media, of which rape and sexual assault represented 82 per cent. Pandemic lockdowns also led to new vulnerabilities for women who sought out quarantine shelters — in Lamkichuha, Nepal, a woman was allegedly gang-raped at a quarantine facility.

Gender-based violence is more prevalent among women and girls of low caste in Nepal and the pandemic has made it worse. The Samata Foundation reported 90 cases of gender-based violence faced by women and girls of low caste within the first six months of the pandemic.

What’s next?

While COVID-19 recovery efforts are generally focused on preparing for future pandemics and economic recovery, the women, peace and security agenda can also address the needs of some of those most marginalized when it comes to COVID-19 recovery.

The women, peace and security agenda promotes women’s participation in peace and security matters with a focus on helping women facing violent conflict. By incorporating women’s perspectives, issues and concerns in the context of COVID-19 recovery, policies and activities can help address issues that disproportionately impact most women in war-affected countries.

These issues are: precarious gendered labor market, a surge in care work, the rising feminization of poverty and increased gender-based violence.

A girl in a face mask stares out a window
The women, peace and security agenda can help address the needs of some of those most marginalized. (AP Photo/Niranjan Shrestha)

Policies could include efforts to create living-wage jobs for women that come with state benefits, emergency funding for women heads of household (so they can avoid taking out predatory loans) and increasing the number of resources (like shelters and legal services) for women experiencing domestic gender-based violence.

The impacts of COVID-19 must be incorporated into women, peace and security planning in order to achieve the agenda’s aims of improving the lives of women and girls in postwar countries like Nepal and Sri Lanka.

Luna KC is a Postdoctoral Researcher at the Research Network-Women Peace Security, McGill University. This project is funded by the Government of Canada Mobilizing Insights in Defence and Security (MINDS) program.

Crystal Whetstone does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Economics

Target Sets Sights on Holiday Season, Has Plan for High Inventory

Target said that it still expects spillover from inventory rightsizing to the tune of $200 million in the third quarter.

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Target said that it still expects spillover from inventory rightsizing to the tune of $200 million in the third quarter.

Target's  (TGT) - Get Target Corporation Report strategy is paying off as the company's stock falls on heavy volume following its earnings release. 

Normally, a profit miss as wide as Target's, 39 cents per share vs. expectations of 72 cents per share, would result in a bigger drop than Target's, but the retailer has been prepping the market for this miss all summer. 

The inventory the company built up during the height of the pandemic, as Americans shopped more from home, needs to go, and the only way get rid of the excess product is deep discounts. 

"Back in June, we announced that our team would be undertaking a bold effort to rightsize our inventory position in the categories for which demand patterns have radically changed," CEO Brian Cornell said during the company's earnings call. "While this decision had a meaningful short-term impact on our financial results, we strongly believe it was the best path forward."

Now, looking forward the company sees some overhang for the third quarter, but expects a big holiday season ahead. 

While some fear a recession and what it might do to the economy, Target is convinced that the holiday season will be strong.

Image source: John Smith/VIEWpress.

Target Aims for Holiday Season

While Target is focused on the back-to-school season currently underway, the company expects "spillover" from its inventory issues to be present during the third quarter to the tune of $200 million. 

But the company's own checks suggest that its shoppers are excited about the holiday season. 

"The one thing that seems to be very consistent is a guest and consumer who says they want to celebrate the holiday seasons so we certainly expect that they are going to be celebrating Halloween this year and actively trick or treating and hosting parties with friends and family," Cornell said.

"We know they're looking forward to Thanksgiving and they're going to look forward to celebrating the Christmas holidays and that comes down each and every week as we survey consumers and talk to our guests so that gives us great optimism for our ability to perform during these key holiday seasons"

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Not only does Target expect a strong quarter, but the company also expects favorable comps as fourth quarter headwinds from a year ago aren't present this time around. 

"Guests already have their sights set on upcoming holidays and seasonal moments in Q3 and beyond," Cornell said.

Target's Q2 Collapse

Target said adjusted earnings for the three months ending in July were pegged at 39 cents per share, down 89% from the same period last year and well shy of the Street consensus forecast of 72 cents per share.

Group revenues, Target said, rose 3.5% to $26 billion, essentially matching analysts' estimates of a $26.04 billion tally. Target said same-store sales rose 2.6%, again shy of the Refinitiv forecast of 3.2%, while operating margins fell to 1.2%, below the group's July guidance of a 2% level. 

Earlier this summer, Target cautioned that its bigger-than-expected 35% build-up in overall inventories over the first quarter would trigger price cuts, adding that deeper discounts would be needed to shift the excess goods onto a customer base that was already pulling back on discretionary spending.

Walmart  (WMT) - Get Walmart Inc. Report, Target's larger big box rival, said Tuesday that improving spending trends, as well as actions the group has taken to shift excess inventory, will ease some of the pressures it expects to face in terms of overall profits over the back half of the year.

Walmart said adjusted earnings for the three months ended in July came in at $1.77 per share, down one penny from the same period last year but well ahead of the Street consensus forecast of $1.62 per share.

Group revenues, the company said, were tabbed at $152.9 billion, an 8.4% increase from last year that topped analysts' estimates of $150.81 billion. U.S. same-store sales rose 6.5% from last year, the company said, firmly topping the Refinitiv forecast. 

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