July 2022 Economic and Market Review

Economic and Market Review

July 30, 2022

Recession Concerns Remain High

Recession concerns are rising as company earnings, employment data, and economic growth estimates continue to demonstrate an expected slowdown in the economy. Second quarter Gross Domestic Product (GDP) released in July showed a -0.9% decrease in GDP, following a -1.4% decline in the first quarter of the year. Traditional economic credence views two consecutive quarters of negative GDP as constituting a recession. However, NBER, the organization that decides this for the United States – does not have a specific criteria for a recession.

Markets were anxious in July as company earnings revealed uncertainty surrounding inflation and true economic conditions. Higher operating expenses hindered profit margins for many companies yet allowed other companies to maintain margins as they continued to pass along elevated costs to consumers in the form of higher prices.

Inflation data showed that overall prices rose 9.1% in the past year, the fastest rise since 1981. Economists believe that the data is being muddled by record-level gasoline and food prices. With fuel prices having eased somewhat in July, upcoming inflation numbers may start to signal a pullback in inflationary pressures as we approach the fall.

The European Central Bank (ECB), the equivalent of the Federal Reserve, increased rates in July in order to help stifle rising inflationary pressures throughout Europe. Consumers in Europe are experiencing little if no respite from rapidly rising prices due to the Russian invasion of Ukraine.

The euro reached parity with the U.S. dollar in July for the first time in twenty years. The equal valuation of the two currencies has made it less costly for Americans buying European products and for those traveling to Europe.

Longer-term bond yields fell in July, even as the Fed increased short-term rates. Longer-term interest rates are essentially dictated by the markets, whereas short-term rates are set by the Federal Reserve. When short-term rates are higher than long-term rates, economists view this dynamic as indicative of slowing economic growth in the future.
The Federal Reserve imposed its second 0.75% rate increase this year, which acts as a tool for the Fed to combat inflation. Analysts have a growing consensus that the Fed may eventually pause or even reduce rates should the economy start to falter.

Is There too Much Money in the Economy?

Since the start of the COVID-19 Pandemic, the U.S. money supply has grown at an above-average rate. M2, which measures the supply of U.S currency in circulation, is important to analyze why there has been a jump in the money supply. Economists view an increase in the money supply as an indication of rising inflation and conversely an indicator of deflation when M2 decreases.

M2 includes M1, which is currency held by the public, checkable deposits, and travelers’ checks, plus savings deposits and shares in money market mutual funds.

M2 has risen by $6.3 trillion since the start of 2020 of which $4.8 trillion has come di­rectly from the Federal Reserve and a net $1.5 trillion has come from banks. M2 has in­creased an astounding 41% in only 2½ years, meaning an av­er­age an­nual growth rate of 16.3%. In fact, in 2020-2021, the growth rate of U.S. currency jumped a historical 26%, which is the largest jump in the money supply since 1943. To put that into perspective, M2 grew, on average, around 5% between 2010 and 2019.

Since this historic jump, the M2 growth rate has been severely constrained, with a swift 20% drop in growth. From its 2020-2021 peak of around 26%, it has fallen to 6% as of April 2022. In its strategy to raise rates and begin quantitative tightening, the Fed has, in the three months before June, al­lowed M2 growth to plunge to an anemic annualized growth rate of 0.1%. When broad money supply growth falls, then spending con­tracts which historically has led to recessionary environments.

Rising Food Prices Pose a Risk

In the U.S., as well as other advanced economies around the world, much of the public is not fully aware of the severity of the world’s hunger crisis. Not only has this crisis been prevalent, but it has increasingly worsened over the past 15 years.

Hunger and undernourishment had been quite high at the turn of the century, with the UN Food and Agriculture Organization reporting that 13.4% of the world and 32.2% of the least developed countries were undernourished. This share began to fall into the early 2010s and stabilized around 8.9% from 2012 to 2017. However, this improvement did not characterize much of the world. Even before the COVID-19 Pandemic, undernourishment rates rose in Sub-Saharan Africa, Latin America, the world’s least developed countries, and much more of the world. 

Three factors behind recent rises in global hunger are skyrocketing food prices, the invasion of Ukraine, and the pandemic, which has changed the lives of almost everyone across the globe affecting those in already poor situations the most. 

The UN Food and Agriculture Organization’s Food Price Index is a measure of change in food commodities, measured monthly based on international prices of meat, dairy, cereals, vegetable oil, and sugar. In 2016, this measure reached its lowest since 2009, a decline that had a very short stay. Not only did this index rise in the years up to 2020, but it also skyrocketed in 2021 and reached an all-time high in March 2022. At its peak just this year, the Food Price Index was more than double its value just 18 years sooner. Simply put, food prices are on a steep incline, reaching levels far higher than in other recorded years.

Food prices were not alone in raising global hunger, with the COVID-19 Pandemic having extremely severe effects. In its breakout year, 2019-2020, the State of Food Security and Nutrition in the World reveals that about 160 million people fell into hunger, meaning 811 million people around the world regularly went to bed hungry, roughly one in every ten people. Not only that, but over 48 million people face emergency levels of hunger according to the World Food Programme. The Global Network Against Food Crises reports that the number of people facing acute food insecurity rose by 40 million people in 2020-2021, with an estimated 193 million people facing this extreme level of hunger in 2021.

Copper Down on Possible Economic Slowdown

Copper is amongst the most actively traded commodities worldwide, and is a vital piece of global economic growth. It is a crucial commodity in major industries like construction, power generation & transmission, transportation, and technology.

Copper’s price per pound as of July 11th reached a low of $3.23, down from its historic high of $4.94 in late February of this year, which is a drop of around 34%. Copper is a signal of the worldwide economic status, with copper’s current fall being indicative of a global economic slowdown.

As European economies are in a clear decline with Russia limiting its suppliance of national resources, gas shortages have caused additional slashes in copper’s price. Copper is extremely useful, especially in the fast-expanding electric and environmentally sensitive markets, yet shortages of energy and natural resources have extended its fall.

Financial Markets Show Some Weakness

Stock earnings have become indirect indicators of where the economy may be headed. Companies that have thus far released earnings for the 2nd quarter are revealing slowing growth trends and heightened expenses hindering profitability. Various companies have announced pullbacks in job hiring, wage freezes, and layoffs in order to maintain margins.

Major equity indices were resilient in July, with the Dow Jones Industrial Average, the S&P 500, and the Nasdaq all posting positive trends for the month. Volatility was subdued as inflation fears eased, yet expectations of a recession still remained faint.

Overall bond yields fell in July, as uncertainty surrounding the economic environment was more concerning than inflationary pressures. The yield on the 10-year Treasury bond fell to 2.67% in July, down from 2.98% in June. Analysts expect the Fed to eventually halt rate increases and even reduce rates should economic conditions worsen, leading to lower rates.

Mortgage rates eased with the average 30-year conforming rate falling below 5.5%, a slight buffer to the rapidly rising loan rates from the beginning of the year.