JPMorgan Chase & Co (NYSE:JPM) CEO Jamie Dimon has warned of an incoming economic hurricane. Well, before a storm often one feels the wind behave in strange ways, coming from different corners, even as the weather is otherwise fair.
Winds Of Economic Change
Currently there are some bright spots in the economy. The unemployment rate is very low. (This is in large part because the labor participation is still off after the 2020 lockdowns. Over two years later the total number of jobs is slightly below the levels of January 2020, at around 152 million). Housing prices are at records.
High employment rates may be good for consumer spending but can lead to problems with hiring workers and increasing labor costs at businesses. The Federal Reserve, which controls America’s money supply, will likely aim to reduce inflation at the expense of the labor market as it has moved to increase interest rates. The Economist Intelligence Unit predicts that the Fed Funds rate will reach 2.9% in early 2023. This is higher than the recent peak of around 2.4% in the spring of 2019.
Higher expected interest rates are already causing upheaval in some industries. S&P Global will likely see revenues for its rating business decline as it is reliant on new debt issuances. New mortgage originations are down, and refinancing activity is even more so.
The tech rout *which we recently discussed in another blog post* has changed the outlook for tech employers and employees. Major companies like Meta Platforms Inc (NASDAQ:FB) (Facebook) have implemented unprecedented hiring freezes. So tech employees who often looked forward to improving compensation schemes now have less job security. Venture capital is pulling back on speculative investments; Tiger Global Management pared investments down 13% for example compared to early 2021, with others cutting down much more. Initial public offerings are down big so far this year.
Elsewhere geopolitical considerations have stimulated activity in some sectors. The domestic energy industry looks to make up for supply lost due to economic sanctions on Russia, so US rig counts are up. Supply chains are looking to move away from reliance on China. US manufacturing growth has remained fair.
Bank stocks like Bank of America Corp (NYSE:BAC) and JPM may benefit from higher interest rates as they profit from the yield differential of their debits and credits.
For now, there is a sense of suspense and unease in markets. Corporations are reconsidering their spending as access to capital becomes restricted. Investors are reconsidering their portfolios as a higher interest rate environment is expected next year, with bonds potentially becoming relatively more attractive than equities. The outlook for consumers is not great. They will either see inflation persist or poorer job opportunities if the Fed presses on with interest rate hikes.