EDITOR'S NOTE: Citi Global Chief Economist Nathan Sheets is right in saying that “the recent economic data have been central banks' worst nightmare." But he’s a bit off in attributing the nightmarish part to the actual data. What’s terrifying about it is that the Fed will have a much harder time spinning the story on the current state of the economy, and any prognostication would take place atop its heap of failed outlooks and assurances since the beginning of the pandemic. With inflation no longer “transitory,” the inflation rate well above a 2% average, an economic slowdown that’s global in scale, and a war in Ukraine that’s likely to keep food and energy prices elevated, there isn’t much the Fed can do. The good news for proponents of sound money is that gold tends to rise when people lose faith in the Fed. And confidence in the Fed is rapidly waning.
The economy is looking pretty dreadful, and that won't make the Federal Reserve's job any easier as it tries to engineer a soft economic landing, one top Wall Street economist warns.
"I would say that the recent economic data have been central banks' worst nightmare," said Citi Global Chief Economist Nathan Sheets on Yahoo Finance Live (video above). "On the one hand, I would say there is very clear evidence of a slowing in global demand. And on the other hand, there is also clear evidence that inflation pressures are persisting. You kind of put that together, it's really hard for central banks to fight that."
The reads on the economy have collectively painted a picture of a slowing U.S. economy stuck with stubbornly high inflation.
The Bureau of Economic Analysis (BEA) said last week that second-quarter GDP fell 0.9% as consumers and businesses pulled back on their spending due to rising prices for goods and services. This marked the second-straight quarter of economic contraction after GDP in the first quarter declined by 1.6%.
The back-to-back economic contraction ratcheted up talk that the U.S. was in a recession.
"I wouldn't be surprised if they [NBER] actually push the start of the recession to the end of last year," Dreyfus Mellon Chief Economist Vincent Reinhart said on Yahoo Finance Live. "So we might wind up being in one of the longer recessions on record."
Within the past month, investors also received major profit warnings from big-name retailers such as Target, Walmart, and Best Buy as consumers battle through rising prices for gas, food, and rent. These material profit warnings are an unwelcome sign about consumers' spending decisions.
Bottom line: Conference Board's consumer confidence measure has slipped for three-straight months, stocks remain in bear market land, and massive companies from Tesla to Meta to Amazon are announcing hiring pullbacks.
And to top it all off, the June Consumer Price Index saw its largest gain since November 1982 at 9.1%.
Despite the economic slowdown, the Federal Reserve made it clear at its latest meeting that it would move forward with more interest rate hikes this year to stomp out inflation. In turn, Sheets added, that may lead us towards a situation where unemployment rises while the economy slows down but inflation also remains elevated for a period.
"It feels at the moment that we are going through a period of transitory stagflation," Sheets said.
Originally published on Yahoo Finance.