Former U.S. Treasury Secretary Lawrence Summers said there was evidence the Fed’s actions were having an impact on the U.S. economy, with some signs of a shift in labor demand and a rise in companies stockpiling goods.

Summers said:

We are seeing some signs that some companies are no longer reporting huge labor shortages as they used to. Also, we are seeing some signs of inventory build-up.

Summers’ remarks echoed those of some observers, all of whom noted changes in economic indicators that were not immediately apparent. The U.S. jobs report for May on Friday showed payrolls rose more than expected and more Americans joined the labor force, while the unemployment rate remained at a near 50-year low.

Rick Rieder, BlackRock’s chief investment officer of global fixed income, cited a “long list” of companies ending hiring plans earlier on Friday, spanning tech, health care and other industries, while also suggesting that the company’s labor supply it has been improved. Rieder also warned that employment could shrink in three or four months.

Summers said he saw “strong resilience ” in the jobs report, as well as ” some evidence that monetary policy is coming into play . “ Overall, the overall picture remains “very tight on the economy” .

recession risk

The former finance minister reiterated that history shows that when inflation exceeds 4% and unemployment falls below 4%, a recession occurs within two years. Summers said:

My best guess is that we’ll see that this time around. After the fiscal stimulus in 2021 has created excess demand, I don’t think we have the tools to smoothly reduce demand.

Fed Vice Chairman Brainard last week reiterated his expectation that the Fed will raise rates by 50 basis points in June and July. She also said the case for pausing rate hikes in September was “hard to make.”

Summers said that while the Fed cannot directly influence supply-side shocks, this should not be a stumbling block preventing the Fed from reducing consumer demand. He says:

If production capacity falls, we have to lower the level of demand. Wage inflation is responsible for much of the current spike in consumer prices.

While the Fed will do what it can, there may not be any monetary policy avenue to bring inflation down to the 2%-3% range while maintaining rapid economic growth.

The Atlanta Fed’s GDP forecast estimate also fell, suggesting a recession is likely.

After the retail sales report on May 17, the GDP Now forecast for the second quarter of 2022 was still at 2.5%, but as of June 1, the forecast has fallen to 1.3%, and it is still falling rapidly .

As U.S. GDP shrinks along with real final sales in the first quarter of 2022. According to MishTalk analyst Mike Shedlock:

Actual final sales were negative in the first quarter, and I expect that to be the case in the second quarter as I don’t believe retail sales will hold up.

Shedlock noted that while the Commerce Department’s retail sales report topped expectations, reports from Target and Walmart strongly hinted at a different story. Both retail giants reported quarterly earnings that while earnings beat expectations, profits fell sharply as supply chain and logistics costs climbed.

In addition, car sales are a mess. Several automakers showed signs of declining sales in May due to supply chain disruptions.

Add these factors together and retail sales will drop significantly in the second quarter, with a deep recession expected this quarter or early in the third , Shedlock believes.

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