Posts Tagged ‘recession’

Rising Gas Prices Raise Concerns for U.S. Economy

July 11, 2018

Drivers across the U.S. are paying as much as $2.96 a gallon on average, the most since 2014

Prices for the three grades of gasoline lighting up the pump at a Shell station in southeast Denver in late May. The average price across the U.S. is now as much as $2.96 a gallon.
Prices for the three grades of gasoline lighting up the pump at a Shell station in southeast Denver in late May. The average price across the U.S. is now as much as $2.96 a gallon. PHOTO: DAVID ZALUBOWSKI/ASSOCIATED PRESS
.

The highest retail gas prices in years are raising concerns about one of the longest-running U.S. economic expansions on record.

Drivers across the U.S. have paid as much as $2.96 a gallon on average this year, the most since 2014. Prices have climbed to $3.63 in California and $3.39 in Washington, states where prices tend to be higher because of factors such as higher taxes, environmental regulations requiring cleaner fuel and a lack of pipelines that transport oil west.

With wages in the U.S. climbing, Americans have so far been able to weather the higher prices. But analysts say that if average gas prices hit $3.50 or even $4 a gallon as global oil prices rise, that could dent growth by eating into disposable income and spending.

U.S. airlines have already increased ticket prices, and over time higher energy and manufacturing costs can eat into company profits, slowing hiring. Industrial giant 3M Co.and appliance maker Whirlpool Corp. have cited higher material costs as challenges.

The U.S. economy has entered its 10th year of expansion, one of the longest on record, but a Wall Street Journal survey shows most economists think a recession could come in 2020. Rising energy prices can also feed into inflation, which could prompt the Federal Reserve to raise interest rates more aggressively. The central bank has increased interest rates two times this year, and is expected to raise rates another two times.

“People are on the lookout for a downturn,” said Joseph LaVorgna, chief economist for the Americas at Natixis . “Tight monetary policy combined with rising energy costs is typically not a good development for U.S. households.”

While the stock market and employment trends remain strong, threats loom with the U.S.-China trade dispute. On Friday, both countries slapped levies of $34 billion on each others’ exports, kicking off America’s biggest trade battle since the Great Depression.

Investors have also spotted signs of a slowdown in other markets. Last week, a widely watched difference between Treasury yields—known as the yield curve—fell to its lowest in nearly 11 years—a development that can suggest economic weakness.

“Every recession has been preceded by two things: an inverted yield curve and rising oil and gas,” Mr. LaVorgna said.

A steady depletion of inventories and global demand have propelled oil to the highest prices in over three years. On Tuesday, U.S. oil futures closed up 0.4% at $74.11, near the highest level since November 2014.

President Donald Trump has blamed Organization of the Petroleum Exporting Countries and asked Saudi Arabia to further increase output. On July 4, he tweeted, “The OPEC Monopoly must remember that gas prices are up & they are doing little to help.”

Analysts said Mr. Trump may be trying to lower gas prices ahead of this year’s midterm elections. However, his tweets have had mixed effects.

“The gasoline story in the U.S. is very much a geopolitical story. It’s down to OPEC, its down to Saudi Arabia and it’s down to Iran,” said James McCullagh, an analyst at Energy Aspects. “Ultimately the price of crude isn’t playing ball at the moment,” he said.

A surging oil market is rarely the sole factor in triggering a downturn. Strong fuel demand is one of the reasons that crude prices have gained this year. But in recent months, rising prices have been attributed to concerns over a possible supply shock, which could pose a greater threat to the global economy than a demand-driven rally.

Other indicators on the health of U.S. energy demand are mixed. Vehicle miles traveled in April fell a seasonally adjusted 0.6% compared with the previous year, according to the Transportation Department. Gasoline demand fell year-over-year in both May and June, the first consecutive monthly decline since the start of 2017, the financial firm Cowen & Co. estimates.

Deserey Morales, who works at a nightclub in L.A., said she finds current gas prices “ridiculous.”

But she said it wouldn’t change how much she drives.

“You still have to do what you have to do,” Ms. Morales said. “I don’t really have the choice.”

Write to Stephanie Yang at stephanie.yang@wsj.com

 

Advertisements

Oil Prices Still a Problem

July 3, 2018

Oil is becoming a problem.

Image may contain: ocean, sky, outdoor and water

Nymex crude-oil futures fell a bit today, but have lately rallied to their highest levels in nearly four years, more than doubling from the bottom of a crash a couple of years ago. Prices aren’t catastrophically high yet – at about $74 a barrel, they’re still much lower than the $100 or so of earlier this decade, when the economy was on shakier ground. (And if you want society to swear off fossil fuels, then $74 isn’t high enough.)

But oil is expensive enough that many people, including the most important person in the world, President Donald Trump, are noticing. Trump has tweeted his anger over this situation a couple of times, including a recent declaration that he had convinced Saudi Arabia to pump more oil. That is … not how this works; Saudi Arabia’s OPEC buddies at least have to pretend to be OK with such a thing. And they did sort of agree recently to pump more, partially in response to another Trump tweet. But oil prices have surged anyway, pushing gas prices higher, “timed exquisitely for November’s midterms,” writes Liam Denning. He notes the whole episode illustrates how little Trump controls, or even understands, the oil market.

In fact, Trump’s own policy of squeezing Iranian oil exports has the market worried about supply, at a time when  Venezuela’s ineptitude has crippled its own output, and infrastructure bottlenecks are keeping U.S. shale oil off the market (for now). Add it all up, and it starts to look like an oil-price shock that could eventually crush prices, but by destroying demand first, warns David Fickling. Oil shocks don’t last long, but they do often bring recessions with them.

Electric Feel

Another thing oil-price shocks do is make people look for alternatives. That’s why it’s a good time for an oil-buyers’ cartel to band together to boost electric-car use and other ways to consume less oil, writes Carl Pope. China and India are already talking about such a thing, and Europe and Japan might be convinced to go along (forget the U.S.; Trump’s not much of a “joiner”).

Such a club might be great news for, say, electric-car maker Tesla Inc. – although it still remains to be seen whether Tesla can ever manage to consistently produce enough cars to take full advantage. The company used a manufacturing “burst” to finally hit its Model 3 target production, but Liam Denning wonders whether this is sustainable, or profitable.

https://www.bloomberg.com/view/articles/2018-07-02/trump-tweets-can-t-stop-an-oil-shock

Unemployment Hits a Low. Then Comes the Recession.

May 15, 2018

The U.S. labor market might still have some slack in it. Let’s hope so.

Whatever one might think about the U.S. political situation, it’s hard to deny that the economy is doing just fine. In April, the unemployment rate dropped to 3.9 percent, a 17-year low. At this point, there’s a job opening for every unemployed person in the country. Not bad.

In the spirit of seeing the glass as half empty, though, it’s worth asking whether this state of affairs portends something more ominous. For economists, the unemployment rate has always been a lagging indicator: It’s like looking in the rear-view mirror. It tells us where the economy was in the not-too-distant past.

A sign of the times.  Photographer: Joe Raedle/Getty Images

But one could arguably view unemployment as a leading indicator, if a rather perverse one. If you look at the relationship between the unemployment rate and the 10 most recent recessions in the U.S., it’s striking how quickly recessions follow in the wake of the economy hitting full employment.

One commentator who has crunched the numbers for the 10 recessions that have hit since 1950 found that the average time between troughs in the unemployment rate and the onset of recessions was approximately 3.8 months, with three recessions starting a month after unemployment hit its lowest level; the longest gap was 10 months out from the low point in joblessness.

But that relationship, of course, depends on hindsight: We only know we’ve hit the trough in retrospect. But that’s where the latest unemployment figures are a little unnerving. One, they’re really low. Previous troughs have tended to be higher than 4 percent, not lower. Aside from the low levels of unemployment achieved before the recession of 1953 (when it hit 2.5 percent), the rate normally bottoms out at a much higher rate: 3.8 or 3.9 percent on a few occasions. But the majority of the time, at its lowest it is well above 3.9 percent.

In other words, barring some unusual turn of events, there’s less and less chance it will go much lower.

That wouldn’t be an issue if the unemployment rate typically plateaued for long periods of time, staying at a healthy 3.9 percent for the next few years. But that almost never happens. Instead, the rate tends to move upward as soon as it hits the final low.

The most notable exception to this pattern — the plateau before the recession that hit at the end of 1969 — took place a while ago. In short, once we hit the low, if we haven’t hit it already, a recession is more apt to follow pretty quickly.

A possible mitigating factor — the good news, if that’s the way to put it — is that the growing reliance on part-time workers may be cloaking the real levels of unemployment. That is, the “real” level of unemployment might actually be a bit higher than the official data suggests. So perhaps it’s possible there’s slack in the economy. If so, there may be more room for improvement and, with it, the opportunity to kick the can a little further until the next downturn hits.

None of this means the economy is about to tip into a recession. But the historical data suggests that even the most positive economic news may convey ill tidings.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Stephen Mihm at smihm1@bloomberg.net

To contact the editor responsible for this story:
Katy Roberts at kroberts29@bloomberg.net

https://www.bloomberg.com/view/articles/2018-05-15/recession-often-follows-when-unemployment-hits-a-low

Mnuchin on recession possibility: ‘I don’t buy that at all’

May 1, 2018

Cracks Form in Global Growth Story, Rattling Investors — Eurozone is already heading back into recession

April 8, 2018

Investor confidence has flagged amid fears that a long-expected global synchronized surge may be turning into a synchronized stall

The world’s major economies started to pick up steam last year, breaking from years of sluggish post-crisis growth, but lately the comeback has been listless. A tugboat guides a cargo ship into the port of Long Beach in California. Photographer: Tim Rue/Bloomberg
The world’s major economies started to pick up steam last year, breaking from years of sluggish post-crisis growth, but lately the comeback has been listless. A tugboat guides a cargo ship into the port of Long Beach in California. Photographer: Tim Rue/Bloomberg PHOTO: TIM RUE/BLOOMBERG NEWS

Stock-market investors, already grappling with the tech rout and the threat of a trade war, are starting to reassess a fundamental premise of the powerful rally—that world-wide economic growth is on the verge of blasting out of a long period of weakness.

The world’s major economies started to pick up steam together last year, in a break from years of sluggish post-crisis growth in which the U.S. often seemed like the lone bright spot. Global output expanded by 3.7% in 2017, up half a point from 2016, according to International Monetary Fund estimates. The return of higher growth abroad gave investors hope that the long bull run could keep going, even as U.S. economic expansion entered its later stages.

Stressed Out?St. Louis Fed Financial Stress Index, whichmeasures the degree of financial stress in themarkets based on 18 indicators.Source: Federal Reserve Bank of St. LouisNote: Values below zero suggest less-than-averagestress. Value above zero mean more-than-averagestress.
S&P 500 record highJuly ’16Jan. ’17JulyJan. ’18-1.6-1.4-1.2-1.0-0.8-0.6-0.4-0.20.0Dec. 1, 2017x-1.555

But recently, the global economic comeback has been in a bit of a rut. In the U.S., gauges of manufacturing and services activity have been pulling back. Retail sales have fallen for three straight months, construction spending decelerated at the start of the year, and auto sales have largely plateaued. On Friday, government data showed a sharp slowdown in U.S. jobs creation last month, reversing some of the labor market’s recent momentum.

“There’s really nothing to write home about in this recovery,” said Lindsey Piegza, chief economist at Stifel Nicolaus & Co. “There were always these signs that we were struggling to tread water and maintain the more moderate current pace of growth.”

Investor confidence has been flagging alongside the Trump administration’s increasingly protectionist bent and China’s vow to retaliate, raising concerns that a trade spat will undermine growth.

The Dow Jones Industrial Average stumbled 2.3% on Friday after trade-war fears flared up again. The blue-chip index was down 0.7% for the week ending April 6 and down more than 10% from its Jan. 26 record high.

Other financial markets also have started to reflect a more pessimistic view of the economy. The differential between short- and long-term U.S. Treasury yields, which tends to grow and shrink alongside the economy’s prospects, was recently at its smallest in more than a decade. Copper, a commodity that also tends to move alongside the growth outlook, has dropped 6.9% so far this year. Big industrial stocks like Caterpillar Inc. and Boeing Co. have fallen harder than the broader market recently, reflecting both trade fears and signs of slower growth.

In Germany, industrial output took an unexpected 1.6% tumble in February, a reading that Citigroup Inc. economists called a “shocker” on Friday. Business and economic sentiment surveys in the euro bloc’s largest economy have pointed to worsening growth expectations. Meanwhile, years of monetary stimulus in Japan have led to only a modest pick-up in growth.

Manufacturing activity was down in March from the previous month in 21 of 30 countries, led by declines in Asia and Europe, according to Bespoke Investment Group. Though there’s little fear of an imminent global recession, the less-than-stellar numbers are forcing investors to consider that the global growth surge may be turning into a synchronized stall.

“There was nothing ever automatic about a pick-up in synchronous growth,” said Mohamed El-Erian, chief economic adviser at Allianz.

Unwelcome SurpriseCitigroup economic surprise indexes,measuring the extent to which data beat ormiss expectations.Source: CitigroupNote: Positive readings indicate data beat forecasts.Negative readings indicate data miss forecasts.
First time belowzero in 2018GlobalGroup of 10 economies2017’18-40-20020406080

Citigroup Inc.’s global surprise index tipped below zero on Friday for the first time since August, indicating that economic data in aggregate are missing economist forecasts rather than beating them. And some are reducing their forecasts: JPMorgan Chase & Co. economists on Thursday cut their global growth outlook for the first three months of the year by 0.1 percentage point to 3.3%.

For U.S. investors, much of the economic outlook hinges on trade. A trade war could have massive repercussions, such as posing new challenges for production of American goods or sparking decline in foreign demand. Even a prolonged threat could cause some companies to hold off on investment until they have more clarity.

“We were just getting to the point where businesses had confidence to spend,” said Mark Freeman, chief investment officer at Dallas-based money manager Westwood Holdings Group. Now he’s worried that uncertainty around trade could delay those plans.

Still, many investors remain bullish on global growth and U.S. corporate profits are still strong. In the first three months of the year, firms in the S&P 500 are forecast to have earnings growth of 17%, even after notching fourth-quarter profit growth at the fastest pace since the second half of 2011, according to FactSet.

“The economic backdrop is still very positive,” said Craig Hodges, portfolio manager for Hodges Funds. “The volatility has created opportunities. There were a lot of stocks that needed to come back.”

Even if economic growth moderates, that isn’t necessarily a bad sign for stocks. Major U.S. indexes have managed to reach scores of record highs during the current bull market, based partly on the premise that the economy is neither too hot to risk overheating nor too cold to fall into a recession.

But questions about global growth come at a time when investors are already on edge about central banks’ withdrawal of monetary stimulus. Additionally, the U.S. government has been ramping up borrowing to fund a widening budget deficit and a $1.5 trillion tax overhaul, recently drawing concern from credit raters. As the Treasury borrows and the Fed trims, less money will be available for stocks and other risky assets, economists say.

“We have seen the peak in terms of financial conditions,” said John Fath, a managing partner at BTG Pactual .

Write to Ben Eisen at ben.eisen@wsj.com, Michael Wursthorn at Michael.Wursthorn@wsj.com and Daniel Kruger at Daniel.Kruger@wsj.com

.
***************************************
.

The eurozone is already heading back into recession – and that could be catastrophic

By Matthew Lynn
The Telegraph
April 8, 2018

eurozone

There are worrying signs the exporting powerhouse at the centre of the eurozone is slowing down sharply CREDIT: GETTY

Retail sales are falling sharply. Industrial production is slumping. Construction is sluggish and the government is weak and clueless with little idea of how to respond to falling demand. No, don’t worry, you haven’t accidentally stumbled across a hardcore remoaner rant about a declining, irrelevant Britain. That is actually a description of what is meant to be the eurozone’s strongest economy – Germany.

Very few people seem to have noticed it yet but there are worrying signs the exporting powerhouse at the centre of the eurozone is slowing down sharply. True, it might only be a blip. Then again, that is how most recessions start. If that is what is happening, and the evidence is mounting all…

Read the rest (Paywall):

 https://www.telegraph.co.uk/business/2018/04/08/eurozone-already-heading-back-recession-could-catastrophic/

Larry Summers: Next U.S. Recession Could Outlast Previous One

February 28, 2018

Bloomberg

By Catherine Bosley

 Updated on 
  • ‘Already shot’ monetary, fiscal policy weapons, he says
  • Powell in ’balance’ between stimulating growth, inflation goal
Former U.S. Treasury Secretary Lawrence Summers suggests “in the next few years a recession will come.”

The next U.S. recession could drag on longer than the last one that stretched 18 months. That’s the assessment of former Treasury Secretary Larry Summers.

With the economy in its ninth year of expansion, even if one were to take a hawkish view of upcoming Federal Reserve tightening, it would be some time before the level of interest rates rates gets high enough to allow them to again be reduced by the 500 basis points typical for a U.S. recession, Summers said at a conference in Abu Dhabi.

“That suggests that in the next few years a recession will come and we will in a sense have already shot the monetary and fiscal policy cannons, and that suggests the next recession might be more protracted,” he said during a panel with Bloomberg Television’s Erik Schatzker on Wednesday.

Later in an interview with Bloomberg Television, Summers said the economic situation the new Federal Reserve Chairman Jerome Powell faces is “a difficult balance between the legitimate desire to stimulate the economy and to get as much employment and growth as possible, and certainly to assure that inflation gets back to 2 percent.”

“At the same time I think he has to worry about the financial foundation for recovery if you’re the Fed chair, so I think there’s a balance to be struck,” Summers said.

— With assistance by Lorenzo Totaro, and Kevin Costelloe

https://www.bloomberg.com/news/articles/2018-02-28/summers-warns-next-u-s-recession-could-outlast-the-previous-one

Brazil opens huge swathe of Amazon rainforest to mining

August 24, 2017

President Michel Temer has signed a decree abolishing a rainforest reserve that straddles Brazil’s northern states of Pará and Amapá, and opening the area to mineral exploration and commercial mining.

Brasilien Entwaldung des Urwaldes (picture-alliance/Demotix/K. Hoffmann)

A decree from President Michel Temer published Wednesday abolished the protected status of the National Reserve of Copper and Associates (Renca) – an area that is bigger than the size of Norway.

The reserve, which was established in 1984, covers about 18,000 square miles (46,610 square kilometers) and is thought to be rich in minerals such as copper and gold.

The government framed the decision as an effort to bring new investment and jobs to a country that recently emerged from the longest recession in its history. It also said that just under a third of the reserve would be opened up to mining, and that permissions would only be granted in specific areas.

“Permission to develop research and mining applies only to areas where there are no other restrictions, such as protection of native vegetation, conservation units, indigenous lands and areas in border strips,” a statement by the government said.

Wednesday’s decree comes as the country reported a 21-percent fall in deforestation rates within the country’s Legal Amazon region, which includes Amapá and Pará, in the two years from August 2015.

Diverse tropical rainforest

In July, Brazil announced a plan to revitalize its mining sector, and increase its share of the economy from four percent to six percent. The industry employs 200,000 people in a country where a record 14 million are out of work.

However, activists argue that the move could damage the world’s largest and most diverse tropical rainforest. Opposition politician Randolfe Rodrigues called it “the biggest crime against the Amazon forest since the 1970s.”

Brazilian public policy coordinator of the World Wide Fund for Nature (WWF), Michel de Souza, described the announcement as a “catastrophe,” which failed to consult the public and could leave the region vulnerable to corruption and conflict.

A report released by the WWF last week also warned that mining in the area would cause “demographic explosion, deforestation, the destruction of water resources, the loss of biodiversity and the creation of land conflict.”

The Amazon rainforest covers an area of 1.2 billion acres and produces 20 percent of the world’s oxygen. But deforestation and mining have destroyed it at an alarming rate. Non-profit organization The Rainforest Foundation estimates that about one acre (4,046 square meters) is wiped out every second, and an estimated 20 percent of the rainforest has been destroyed over the past 40 years.

http://www.dw.com/en/brazil-opens-huge-swathe-of-amazon-rainforest-to-mining/a-40225550

Brazil President Weakened by Graft Charge, Losing Fiscal Battle

August 12, 2017

Aug. 11, 2017, at 3:29 p.m.

Reuters

Image may contain: 1 person, sky and closeup

Brazil’s President Michel Temer reacts during a ceremony in Sao Paulo, Brazil August 8, 2017. REUTERS/Leonardo Benassatto REUTERS

By Anthony Boadle

BRASILIA (Reuters) – Brazilian President Michel Temer has burned through political capital fighting corruption charges and is struggling to push forward his economic agenda meant to rein in a gaping budget deficit.

Even allies in Congress now doubt he can achieve anything but watered-down measures, likely delaying any fix to Brazil’s fiscal crisis until the economy recovers from deep recession.

With continued deficits, Brazil risks further downgrades in its credit rating. It lost its investment grade two years ago, adding to the cost of financing mounting public debt.

In a sign of Temer’s failure to restore fiscal health, the government is expected to revise upward its 2017 and 2018 deficit targets on Monday due to falling tax revenues in an economy that is barely growing.

More pessimistic analysts worry the insolvency already faced by some Brazilian states that cannot pay employees or provide basic services will reach the federal government.

Temer had a window to pass a pension overhaul earlier this year, but it closed in May when allegations emerged that he condoned bribes in a taped conversation with the then CEO of the world’s largest meatpacker JBS S.A..”We are dancing samba at the edge of the precipice,” said Sao Paulo-based wealth manager Fabio Knijnik. “I don’t see the political class at all concerned with resolving this.”

The deeply unpopular president won enough backing in Congress on Aug. 2 to block a corruption charge that could have led to his suspension pending trial by the Supreme Court. To survive, he approved about $1.5 billion in pork barrel spending to keep lawmakers happy.

His closest ally in Congress, the center-right Democrats Party of Speaker Rodrigo Maia, does not believe Temer has the 308 votes, or three-fifths of the lower chamber, needed to pass pension reform, the key measure in his fiscal rescue plan.

Speaking in Rio on Friday, Maia said Temer’s political troubles and lower-than-expected tax revenues had created the crisis. He said Brazil had no alternative but to seek whatever pension fix it could, given Congress would not raise taxes.

Congressman Efraim Filho, the Democrats whip, told Reuters Temer must dilute the pension bill to get it past Congress. He said the measure had to be stripped down to its most important provision, a minimum age for retirement of 65 years for men and 63 for women in a country where people only work on average until age 54.

CRUMBLING COALITION

Temer’s government coalition is in disarray. Parties who stood by the president are now demanding they be rewarded with cabinet positions, such as the big-budget Cities Ministry. It is now controlled by the Brazilian Social Democracy Party (PSDB), which split over whether to abandon the scandal-plagued president.

Until they get their way, the allies at the core of his coalition have said they will not put his proposed pension bill to the vote. Maia said the “climate” was not right to move to a floor vote and the bill could languish and miss a legislative window likely to close in December as an election year approaches in 2018.

The government has already made concessions on the pension bill provisions that will reduce planned fiscal savings by up to 25 percent in 10 years and nearly 30 percent in 30 years, according to Finance Minister Henrique Meirelles.

The pension overhaul is vital for Brazil to comply with a 20-year spending cap that was Temer’s first move to restore fiscal discipline, albeit without a full impact on accounts until 2019.

“That ceiling was like saying you are going on a diet two years from now,” said Daniel Freifeld of Callaway Capital, a Washington D.C.-based investment firm.

(Reporting by Anthony Boadle; Editing by Andrew Hay)

Optimism in Financial Markets Fails to Show in Real Economy

July 15, 2017

“Hopes for a prolonged period of 3% GDP growth sparked by Trump’s victory have largely vanished.”

Image may contain: 1 person, standing

By Ben Leubsdorf

The Wall Street Journal
July 14, 2017 3:08 p.m. ET

.

Optimism in financial markets isn’t showing up in the real economy.

Though stocks have been hitting records and big U.S. banks reported stronger-than-expected earnings Friday, consumers pulled back their spending at midyear and became less optimistic about the future, while inflation on consumer purchases softened.

Taken together, the indicators pointed to an economy that is entering the ninth year of expansion steady and still creating jobs at a healthy clip, but without obvious additional momentum. President Donald Trump has set out an agenda to push economic growth beyond the 2% pace that has prevailed since the recession ended in 2009, but so far there is little sign of a real breakout happening.

Modest price pressures are a possible sign of slower underlying economic momentum and a headache for the Federal Reserve, which has struggled to reach its 2% annual inflation goal since the 2007-09 recession.

“To be sure, the data do not suggest an impending recession,” said Richard Curtin, chief economist for the University of Michigan’s consumer-sentiment survey. “Rather, the data indicate that hopes for a prolonged period of 3% GDP growth sparked by Trump’s victory have largely vanished, aside from a temporary snapback expected in the second quarter.”

On the positive side, factory output picked up in June, and domestic energy production is rebounding. Overall economic activity appeared to accelerate in the second quarter following a weak start to 2017, when gross domestic product expanded at a 1.4% annual rate during the first quarter.

For the recently ended second quarter, forecasting firm Macroeconomic Advisers on Friday projected 2.3% growth and the Federal Reserve Bank of Atlanta’s high-profile GDPNow model predicted a 2.4% growth pace.

Reports on Friday offered fresh insights into the state of the economy, a broadly healthy picture with some downbeat signals headed into the second half of 2017.

Several of the biggest U.S. banks released mixed reports that, while showing stronger-than-expected earnings, sent their shares lower.

J.P. Morgan Chase & Co., the largest U.S. bank by assets, reported record quarterly profit of $7.03 billion. But it also trimmed forecasts for growth in loans and net interest income.

Wells Fargo & Co. reported a $6.7 billion decline in average loans from the first quarter. The company’s chief financial officer, John Shrewsberry, noted “softness across the industry,” but also cited specific actions the bank has taken “primarily driven by our own risk discipline which have caused our growth to slow.”

The bank has pulled back, for example, in auto lending, part of an $11.1 billion drop in the San Francisco bank’s consumer loan portfolio from a year earlier.

Retail sales — a gauge of consumer spending at stores, restaurants and websites — decreased a seasonally adjusted 0.2% in June after falling 0.1% in May, the Commerce Department said. It was the first back-to-back sales drop since July and August 2016.

Sales excluding motor vehicles and gasoline fell 0.1% last month, the first decline for the measure in almost a year.

In the second quarter, total retail sales were up just 0.2% from the first three months of the year. But more broadly, sales rose 3.9% in the first half of 2017 compared with the year-earlier period.

Fed Chairwoman Janet Yellen told lawmakers this past week that growth in household outlays “continues to be supported by job gains, rising household wealth and favorable consumer sentiment.”

But the University of Michigan’s sentiment gauge dropped in July for the second straight month, with a preliminary July reading of 93.1 versus 95.1 in June and 97.1 in May. The decline was driven by weaker expectations for future economic gains, though the overall index was still 3.4% higher in June from a year earlier.

On inflation, the Labor Department said its consumer-price index was unchanged in June from the prior month. Excluding the often-volatile categories of food and energy, so-called core prices rose just 0.1% for the third straight month.

On an annual basis, overall inflation softened to a 1.6% annual gain in June, while core inflation was steady at 1.7% annual growth.

The Fed is tasked with achieving maximum sustainable employment and stable prices. With unemployment at 4.4% in June, it appears the Fed has closed in on half of its mandate. Inflation, however, remains well shy of its 2% target.

The Fed’s preferred inflation gauge, the Commerce Department’s price index for personal-consumption expenditures, poked above the central bank’s 2% goal in February for the first time in nearly five years. It has settled lower each month since. The most recent data, for May, showed a 1.4% year-to-year gain.

“We’re starting to see some signs of cyclical weakness,” said Laura Rosner, senior economist at research firm MacroPolicy Perspectives. She said recent soft inflation data “really raise questions about whether we will get to 2% on a sustained basis before the next recession, and I think that raises very thorny questions for the Fed.”

The Fed has penciled in one more increase for short-term interest rates this year, and also plans to begin shrinking its $4.5 trillion asset portfolio. Continued soft readings on core inflation could damp enthusiasm for higher rates, though Ms. Yellen has said she expects the current weakness will prove transitory and inflation will firm alongside a tightening labor market.

Speaking in Mexico City on Friday, Federal Reserve Bank of Dallas President Robert Kaplan reiterated he would like to see more evidence that inflation is moving toward the 2% target. The Fed’s policy-making committee is expected to remain on hold at its July 25-26 meeting, but Mr. Kaplan said the Fed should begin the process of shrinking its balance sheet “very soon,” as early as the U.S. central bank’s September policy meeting.

The industrial side of the economy looked a bit stronger last month. Industrial output — a measure of production by manufacturers, mining companies and utilities — grew 0.4% in June from May, the Fed said. Production rose 2% over the past year.

The rebound has been driven by mining output, which grew 1.6% in June and has risen nearly 10% over the past year as energy companies boost oil and gas extraction. Growth in manufacturing output has been more modest, with factory production climbing 0.2% in June and up 1.2% on the year

–Aaron Lucchetti, Jeffrey Sparshott, Josh Mitchell, Josh Zumbrun and Anthony Harrup contributed to this article.

Write to Ben Leubsdorf at ben.leubsdorf@wsj.com

https://www.wsj.com/articles/optimism-in-financial-markets-fails-to-show-in-real-economy-1500059325

Related:

Why Soaring Assets and Low Unemployment Mean It’s Time to Start Worrying

July 5, 2017

Today’s conditions expose vulnerabilities that make a recession or market meltdown more likely

Image result for janet yellen, photos

 

.

Updated July 5, 2017 10:00 a.m. ET

 

If you drew up a list of preconditions for recession, it would include the following: a labor market at full strength, frothy asset prices, tightening central banks, and a pervasive sense of calm.

In other words, it would look a lot like the present.

Those of us who have lived through economic mayhem before feel our muscle memory twitch at times like this. Consider the worrisome absence of worry. “Implied volatility” measures the cost of hedging against big market moves via options. When fear is pervasive, options are expensive so implied volatility is high. At present, implied volatility in bonds, stocks, currencies and gold sits near its lowest since mid-2007, the eve of the financial crisis, according to a composite measure maintained by Variant Perception, a London-based investment advisory.

The economic expansion is now entering its ninth year and in two years will be the longest on record. The unemployment rate sits at 4.3%, the lowest in 16 years, suggesting the economy has reached, or nearly reached, full capacity.

Expansions don’t die of old age, economists like to say. On the other hand, should we really assume this one will be a record breaker? From a level this low, unemployment has more room to go up than down. Another ominous sign: Central banks are tightening monetary policy, which has preceded every recession. The Fed has raised rates three times since December and last week central banks in Britain, the eurozone and Canada all hinted that years of easy money were coming to an end.

Still, the presence of recession preconditions isn’t enough to say one is imminent. To understand implied volatility, think of hurricane insurance. Right after a storm, homeowners are more anxious to have coverage, even as insurers withdraw, which of course means premiums spike. As years go by without another hurricane, homeowners let their coverage lapse, insurers return and premiums drop. Similarly, implied volatility is low today because years without a financial calamity have sapped demand for hedging while enticing sellers with the prospect of steady income in exchange for potentially huge losses. But just as hurricane premiums don’t predict the next hurricane, low implied volatility tells us nothing about whether or when a downdraft will actually come.

Similarly, when unemployment got nearly this low in 1989 and again in 2006, a recession was about a year away; but in 1998, it was three years away, and in 1965, four years. A narrowing spread between short-term interest rates and long-term rates comparable to the present has happened 12 times since 1962, and only five times did recession follow within two years.

But if today’s conditions don’t dictate a recession or a market meltdown, they expose vulnerabilities that make either more likely in the face of some catalyzing event.

When growth is steady and interest rates are low for years, investors and businesses behave as if those conditions will last forever. That’s why even with muted economic growth, stocks are trading at a historically high 22 times the past year’s earnings. It’s also why home prices have returned to their pre-crisis peaks in major American cities. Real estate has scaled even greater heights in Australia, Canada and parts of China, which exhibit some of the same lax lending and wishful thinking that underlay the U.S. housing bubble a decade ago.

Companies meanwhile have responded to slow, stable growth and low rates by borrowing heavily, often to buy back stock or pay dividends. Corporate debt as a share of economic output is at levels last seen just before the past two recessions.

When everyone acts as if steady growth and low volatility will last forever, it guarantees they won’t. Once asset prices fall, the flow of credit that sustained them dries up, aggravating the correction. Corporate leverage is at levels that in the past led to weakening corporate bond prices and greater equity volatility, says Jonathan Tepper, founder of Variant. “A high proportion of companies won’t be able to pay back debt.” A selloff in corporate bonds and stocks could become self-reinforcing as those who insured against such a move sell into it to limit their own losses.

Of course, some things are different this time. The postcrisis regulatory crackdown means if asset prices fall, they probably won’t take banks down with them. Last week Janet Yellen, the Fed chairwoman, said she thought there wouldn’t be another financial crisis “in our lifetimes.” Fair enough: crises as catastrophic as the last happen twice a century. But small crises are inevitable as risk migrates to financial players who haven’t drawn the attention of regulators. “Elevated asset valuation pressures today may be indicative of rising vulnerabilities tomorrow,” Fed vice chairman Stanley Fischer warned last week.

Inflation is uncomfortably low rather than too high as in previous cycles, which makes it less likely central banks will have to raise interest rates sharply or rapidly. But in a world with permanently lower inflation and growth, businesses will struggle to earn their way out of debt, and interest rates will bite at lower levels than before. This confronts the Fed with a dilemma. If bond yields remain around 2% to 2.5%, the Fed may be playing with fire by pushing rates to 3%, as planned. If it backs off those plans, it could egg on excesses that make any reversal more violent.

Ms. Yellen and Mr. Fischer, both veterans of past mayhem, need to be on guard for a repeat. So should everyone else.

Write to Greg Ip at greg.ip@wsj.com

Corrections & Amplifications

This story was corrected at 10:03 a.m. ET because it misspelled the name Variant in the 11th paragraph.

If you drew up a list of preconditions for recession, it would include the following: a labor market at full strength, frothy asset prices, tightening central banks, and a pervasive sense of calm.

In other words, it would look a lot like the present.

Those of us who have lived through economic mayhem before feel our muscle memory twitch at times like this. Consider the worrisome absence of worry. “Implied volatility” measures the cost of hedging against big market moves via options. When fear is pervasive, options are expensive so implied volatility is high. At present, implied volatility in bonds, stocks, currencies and gold sits near its lowest since mid-2007, the eve of the financial crisis, according to a composite measure maintained by Variant Perception, a London-based investment advisory.

The economic expansion is now entering its ninth year and in two years will be the longest on record. The unemployment rate sits at 4.3%, the lowest in 16 years, suggesting the economy has reached, or nearly reached, full capacity.

Expansions don’t die of old age, economists like to say. On the other hand, should we really assume this one will be a record breaker? From a level this low, unemployment has more room to go up than down. Another ominous sign: Central banks are tightening monetary policy, which has preceded every recession. The Fed has raised rates three times since December and last week central banks in Britain, the eurozone and Canada all hinted that years of easy money were coming to an end.

Still, the presence of recession preconditions isn’t enough to say one is imminent. To understand implied volatility, think of hurricane insurance. Right after a storm, homeowners are more anxious to have coverage, even as insurers withdraw, which of course means premiums spike. As years go by without another hurricane, homeowners let their coverage lapse, insurers return and premiums drop. Similarly, implied volatility is low today because years without a financial calamity have sapped demand for hedging while enticing sellers with the prospect of steady income in exchange for potentially huge losses. But just as hurricane premiums don’t predict the next hurricane, low implied volatility tells us nothing about whether or when a downdraft will actually come.

Similarly, when unemployment got nearly this low in 1989 and again in 2006, a recession was about a year away; but in 1998, it was three years away, and in 1965, four years. A narrowing spread between short-term interest rates and long-term rates comparable to the present has happened 12 times since 1962, and only five times did recession follow within two years.

But if today’s conditions don’t dictate a recession or a market meltdown, they expose vulnerabilities that make either more likely in the face of some catalyzing event.

When growth is steady and interest rates are low for years, investors and businesses behave as if those conditions will last forever. That’s why even with muted economic growth, stocks are trading at a historically high 22 times the past year’s earnings. It’s also why home prices have returned to their pre-crisis peaks in major American cities. Real estate has scaled even greater heights in Australia, Canada and parts of China, which exhibit some of the same lax lending and wishful thinking that underlay the U.S. housing bubble a decade ago.

Companies meanwhile have responded to slow, stable growth and low rates by borrowing heavily, often to buy back stock or pay dividends. Corporate debt as a share of economic output is at levels last seen just before the past two recessions.

When everyone acts as if steady growth and low volatility will last forever, it guarantees they won’t. Once asset prices fall, the flow of credit that sustained them dries up, aggravating the correction. Corporate leverage is at levels that in the past led to weakening corporate bond prices and greater equity volatility, says Jonathan Tepper, founder of Variant. “A high proportion of companies won’t be able to pay back debt.” A selloff in corporate bonds and stocks could become self-reinforcing as those who insured against such a move sell into it to limit their own losses.

Of course, some things are different this time. The postcrisis regulatory crackdown means if asset prices fall, they probably won’t take banks down with them. Last week Janet Yellen, the Fed chairwoman, said she thought there wouldn’t be another financial crisis “in our lifetimes.” Fair enough: crises as catastrophic as the last happen twice a century. But small crises are inevitable as risk migrates to financial players who haven’t drawn the attention of regulators. “Elevated asset valuation pressures today may be indicative of rising vulnerabilities tomorrow,” Fed vice chairman Stanley Fischer warned last week.

Inflation is uncomfortably low rather than too high as in previous cycles, which makes it less likely central banks will have to raise interest rates sharply or rapidly. But in a world with permanently lower inflation and growth, businesses will struggle to earn their way out of debt, and interest rates will bite at lower levels than before. This confronts the Fed with a dilemma. If bond yields remain around 2% to 2.5%, the Fed may be playing with fire by pushing rates to 3%, as planned. If it backs off those plans, it could egg on excesses that make any reversal more violent.

Ms. Yellen and Mr. Fischer, both veterans of past mayhem, need to be on guard for a repeat. So should everyone else.

Write to Greg Ip at greg.ip@wsj.com

.