![]() ![]() ![]() While they are content to hang on to workers after experiencing shortages during the Covid-19 pandemic, the pace of hiring is likely to slow and layoffs could increase as the year unfolds. Businesses face a difficult environment with revenue growth slowing and profit margins being squeezed by higher interest rates and wages. Still, it remains to be seen how long this will last. One factor buttressing consumers is that jobs are plentiful, with unemployment at a five decade low and 1.8 jobs available for each job seeker. Interest rates on credit cards have increased by 5.5 percentage points over the past year to 20%, and they are likely to rise further in line with Fed interest rate hikes. However, the environment for borrowing will be challenging, because banks have tightened their lending standards. Looking ahead, households increasingly may look to borrow to maintain their living standards. However, Goldman Sachs estimates that about one third of the excess saving was drawn down last year and that another third will be drawn this year. Although growth in personal income was negative after adjusting for inflation, households were able to maintain their standard of living by drawing down on savings, which ballooned during the Covid-19 pandemic as a result of massive government transfer payments (see chart.) They are estimated to have added a cushion of $2.7 trillion to household accounts. Housing prices also softened in the second half of last year, although a repeat of the housing bust of the mid-2000s is highly unlikely.īy comparison, consumer spending has held up very well, led by consumer services, which grew at a 3% rate in the second half of last year. Housing starts have now fallen for 11 consecutive months and are down more than 20% from a year ago. The most visible impact of Fed tightening thus far has been on the housing market, where rates for 30-year mortgage rates have surged to 7%, the highest level since November. ![]() Now the bond market is anticipating the funds rate could reach 5½% by midyear before the Fed pauses. At the start of this year, the bond market was pricing in the Fed would raise the funds rate by 50 basis points to 5% in the first half of this year and that it would then ease policy in the second half. As regards the second issue, the risk of recession persists because the Fed will be compelled to respond to the stronger-than-expected data and sticky inflation. ![]()
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