We are entering what appears to be a period of stagflation with high inflation and low economic growth. Stagflation is a rough place to be and the Fed will continue to raise rates until demand dries up and inflation cools. However, if demand drops too much or too quickly, unemployment will rise beyond acceptable levels and we’ll find ourselves with new problems. If unemployment stays under 4.5%, the market has a better change of quickly rebounding early next year. All of this needs to start happening quickly, however. If inflation gets closer or over 9%, the equities market is going to get hammered in a big, big way.
Below are a few charts that highlight the fast paced move towards a recession (we’re realistically already there). Retail sales and overall personal spending are starting to slow or go negative. I think the party will be over soon.
Take a look at the personal savings rate – it’s down to lows not seen for over 8 years. Americans are spending more of their income to pay for all of those expensive goods and services. This makes them vulnerable. Consumer spending could absolutely dry up sooner than the Fed anticipates.
U.S. Retail Sales
United States Personal Spending
United States Personal Savings Rate
United States Food Inflation