Stock markets fall as economy strains, recession risks rise

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It’s normally high season at Asurion Phone & Tech Repair, but Gean Rodriguez said foot traffic has slowed down for the past two weeks. The Chicago repairman wonders if the cooler weather is keeping customers home or if people are saving their money for the holidays.

Without answers, he waits for business to resume at more normal levels, while dealing with failed supply chains and high costs for electronic parts.

“We have almost nothing at the moment,” Rodriguez said. “We hope for more business. Some people might try to save their money for vacations, gifts, meetings, things like that.

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The downturn in Rodriguez’s shop may offer some insight into the country’s economy as it heads into the latter part of the year. Policymakers are racing to calm demand and get inflation under control, raising interest rates at the most aggressive pace in decades. Fed officials have lowered their growth expectations this year, and the risks of a recession, in the United States and around the world, seem more likely by the week. A number of economists are bracing for a slowdown in late 2022 or early 2023.

But new data in recent days suggests that the economy is not yet collapsing and that two of the main engines of the economy are still running. The labor market remains incredibly tight, according to data released Thursday. On Friday, a new government report showed that consumer spending and personal income both rose in August, although inflation remained high. Another survey showed that consumer confidence has picked up since the start of the summer, when gasoline prices were much higher.

Many households and businesses are caught in the middle of this economic strain, struggling to absorb high prices but not yet feeling the pain that some Federal Reserve officials are warning.

Economic malaise sets in. All major stock indexes ended the month on a gloomy note, and the Dow Jones industrial average was down 5.4% for the third quarter, which ended Friday. The housing market is cooling, with the highest mortgage rates in 15 years discouraging potential buyers. Retailers are already starting to offer discounted items for the holidays, hoping to attract increasingly budget-conscious shoppers.

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US stocks fell on Friday – with all three US indexes down at least 1.5% – and closed a brutal week, month and quarter. The Dow Jones Industrial Average fell 500 points on Friday and closed below 29,000 for the first time since November 2020. The S&P 500 fell 1.51% and posted its worst month since March 2020. The three indexes are down at least 21% for the year. .

On Friday morning, an analyst note summed up the mess with the headline “Wake me up at the end of September.”

There is growing evidence of nervous consumers. Apple shares tumbled this week after a report that the company was cutting a planned increase in production of its latest iPhone. In other parts of the tech industry — often seen as a proxy for the economy as a whole — normally resilient companies reported enforcing hiring freezes. Some analysts believe the industry may be preparing for a slowdown in consumer spending.

“It should come as no surprise to anyone that stocks are down and can’t really rise,” said Tom Essaye, president of Sevens Report Research. “We have to make good things happen, and not a lot of good things happen.”

“We have an economy that is starting to show signs of slowing down,” he added.

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Perhaps the most striking example is the housing market, which cooled since the Fed began raising rates this spring. And it clearly cools faster as rates rise. The average rate on a 30-year fixed mortgage, the most popular home loan product, hit 6.7% this week, data released by Freddie Mac showed on Thursday, a level not seen since July 2007.

U.S. home prices fell in July from June, marking the first month-over-month decline since January 2019, according to the closely watched S&P CoreLogic Case-Shiller National Home Price Index. . There are even early signs of lower rental prices.

Low-income people have been feeling the pressure of inflation for months. More recently, the stock market crash and investors’ fears of an imminent recession, are felt by high-income earners.

Dick Pfister, CEO of AlphaCore Wealth Advisory, said his clients — who are typically worth between $1 million and $15 million and often plan for retirement or budget on a fixed income — are starting to be more proactive with budgeting like “stock, real estate and bonds all fell together,” affecting their assets.

“It took them a little longer to feel the pain, but it’s starting to affect them too,” he said.

Still, the stock market’s tumultuous quarter came as other parts of the economy turned. The strength of the labor market continued to surprise policymakers and economists, with employers adding 315,000 jobs in August. Consumer confidence has improved since bottoming out amid soaring gasoline prices in June. And even though the economy contracted in the first two quarters of the year, it doesn’t look like the economy is in a recession — yet.

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With uncertainty over what’s next, companies are showing signs they’re bracing for a possible fall in consumer spending if inflation persists at high levels and the stock market remains choppy.

Bloomberg reported this week that Apple is turning away from a planned increase in production of its new iPhone. Apple has not confirmed the report or comment.

Bank of America downgraded the stock in the days following the report, saying “weaker consumer demand” could pose a risk to Apple’s business. Apple shares have fallen more than 7% since Monday afternoon, dragging other tech stocks down.

Big tech companies are also tightening their budgets, especially when it comes to hiring.

The caution of tech companies could spook other industries, which are waiting to see if consumer spending will decline.

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“[The tech giants] don’t do this for fun,” Essaye said. “They do it because whatever they’re modeling, they see a drop in demand coming.”

It could just be careful planning. It’s too early to tell whether Apple’s reported production cut is a judgment on overall consumer demand, said consumer tech analyst Carolina Milanesi, who noted that Apple will see higher demand for its iPhones. more expensive.

“If Apple sees the impact of the economic downturn, that’s really bad news for everyone, because Apple controls a lot of the high-end market,” she said. “But at the same time, I think it’s a bit early to draw conclusions.”

Target and Walmart are trying to ease consumer budget concerns by launching holiday discounts early this year, major retailers said last week. And Amazon seems to be following suit. The e-commerce giant announced this week that it will hold a “Prime Early Access Sale” on October 11 and 12 for members of its subscription program. The sale bears similarities to Amazon’s annual Prime Day, which took place in July. (Amazon founder Jeff Bezos owns The Washington Post.)

Early offers from retailers could be, in part, attributed to companies ensuring they don’t have too much inventory if consumers have less money in the coming months, said Sucharita Kodali, an analyst at Forrester Retail. Shares of Nike fell this week after the athletics retailer said it was increasing discounts and facing excess inventory.

Retailers aren’t panicking, Kodali said, and business is still going strong. But, like other industries, they are wary that consumer spending could be “reduced” in the future.

“Everyone seems to be hunkering down anticipating a recession,” she said in an email.

Federal Reserve signals help explain why. Last week, the Federal Reserve raised rates another 0.75 percentage points, and the bank is expected to raise rates twice more before the end of the year. Since the spring, the Fed has noted that rates from near zero to between 3 percent and 3.25 percent, and is expected to increase rates to 4.25 percent to 4.5 percent by the end of the year.

Policymakers say they won’t back down on their rate hikes until there are clear signs that inflation is easing, despite recession risks. Economists say such aggressive hikes heighten the risk of the Fed going too far, especially as monetary policy operates with a lag and global central banks are all raising rates at the same time.

Tom Barkin, president of the Richmond Fed, outlined two paths. If the Fed doesn’t raise rates enough, he said, inflation could escalate and force the central bank to act more aggressively later. Or, he said, the Fed could intervene aggressively now and try to bring inflation closer to normal levels.

“The analogy that I experience in my head is that you shoot at a stuck door, and you have to open the door, and so you keep shooting at it,” Barkin said in an interview with The Post. “If you pull too hard you might trip, but hopefully stay up. What you don’t want to do is pull so hard that you pull the door handle.

In Santa Monica, Calif., Bundy Auto Sales has yet to feel the consequences of the Fed opening the door. Owner Sylvester Villareal said his business, which specializes in used cars and rentals, has a stable fleet and plenty of bookings, especially longer-term rentals for customers waiting for their Tesla to arrive. .

Around town, Villareal sees other signs of an economy not yet reversing. Costco is busy. The same goes for a local high-end grocery store. Homes are still selling at high prices.

“Around where I work it’s not a blue-collar area, but it’s not a wealthy area,” Villareal said. “The houses sell immediately. It’s just supply and demand. Due to interest rates, payments are higher. But I don’t see anything slowing down.

Gerrit De Vynck and Naomi Nix contributed to this report.

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