Persistent Price Pressures Erode Consumer Confidence

The latest consumer confidence readings paint a picture of an increasingly pessimistic American consumer, battered by stubborn inflation and growing concerns over the economic outlook. The plunge in sentiment comes at a pivotal time for the Federal Reserve as it grapples with getting price rises under control without sending the economy into a recession.

The Conference Board’s consumer confidence index fell to 97 in April, down sharply from 103.1 in March and marking the lowest level since the souring moods of summer 2022. The dismal April print missed economist estimates of 104 as elevated price pressures, especially for essentials like food and gasoline, weighed heavily on household psyches.

Perhaps more worrying for the economic outlook, consumers also grew markedly more downbeat about the trajectory for business conditions, job availability, and income prospects over the next six months. The expectations index plummeted to levels not seen since last July, with the survey’s written responses making clear that persistent inflation is taking a major toll.

“Elevated price levels, especially for food and gas, dominated consumers’ concerns, with politics and global conflicts as distant runners-up,” according to the Conference Board’s analysis. Consumers earning under $50,000 a year have remained relatively steady in their confidence, while middle- and higher-income households have seen sharper declines.

The gloomy outlook on the economy’s path comes as recent data has offered a mixed bag. Inflation has remained stubbornly high, defying the Fed’s projections for a steady decline. The core Personal Consumption Expenditures (PCE) price index, which strips out volatile food and energy costs and is the Fed’s primary inflation gauge, rose 2.8% over the past year in March.

Not only did that overshoot estimates, but core PCE accelerated to a concerning 4.4% annualized pace in the first quarter. This has cast doubt on the Fed’s ability to wrestle inflation back down to its 2% target in a timely manner using just rate hikes alone.

Fed Chair Jerome Powell acknowledged as much in April, stating “The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence” that inflation is sustainably moving back to 2%.

This means the Fed’s fight against inflation is likely to grind on for longer, with interest rates projected to remain elevated well into 2024 and potentially longer. The federal funds rate currently sits in a range of 5-5.25% after over a year of aggressive rate hikes by the central bank.

While higher borrowing costs have slowed some sectors like housing and manufacturing, the impacts on services inflation and consumer prices have lagged. Consequently, the risk of overtightening by the Fed and precipitating a recession rises with each stubbornly high inflation print.

Complicating the outlook, first quarter GDP growth came in at a sluggish 1.6% annualized pace, missing estimates of 2.5% expansion. The deceleration from 3.4% growth in Q4 has sparked fears that excessive Fed tightening is already dragging on the economy.

This weakening backdrop is likely amplifying consumer unease over the potential for job losses and income hits, sapping the willingness to spend freely. While household balance sheets remain solid overall from the pandemic recovery, the renewed bout of pessimism bears close watching as consumer spending accounts for over two-thirds of economic activity.

The Fed now faces a tricky challenge in quelling the inflation psychology that has taken hold without crashing growth entirely. Restoring price stability will require keeping monetary conditions tight for some time and accepting the economic pain that entails. But if consumer spirits remain depressed for too long, the subsequent pullback in spending could exacerbate any potential downturn. Threading that needle will be one of the central bank’s toughest tasks this year.

Billionaire Leon Cooperman Sounds the Alarm on Looming Financial Crisis

In a characteristically blunt assessment, billionaire investor Leon Cooperman painted a grim picture of the current economic landscape during his recent appearance on CNBC’s Squawk Box. The legendary investor, known for his storied career at Goldman Sachs and the success of his hedge fund Omega Advisors, did not mince words as he expressed grave concerns about the state of the nation’s leadership, fiscal policies, and the potential for an impending financial crisis.

Cooperman’s remarks kicked off with a scathing critique of the upcoming presidential election, describing the choices as “bad and worse.” This sentiment underscored his belief in a broader “leadership crisis” within the country, which he believes is exacerbating the already precarious economic situation.

At the forefront of Cooperman’s concerns is the ballooning federal debt and the persistent trade deficit plaguing the nation. “The evils of trade and debt deficit,” as he put it, are a ticking time bomb that could potentially trigger a financial crisis of unprecedented proportions. He emphasized that “deficits matter,” and the current trajectory is unsustainable, warning that the consequences of unchecked borrowing and spending could manifest in the form of higher interest rates, rampant inflation, and a weakened currency.

Cooperman also leveled criticism at the Federal Reserve, giving them a “low grade” for their handling of monetary policy. He lambasted the central bank for keeping interest rates near zero for nearly a decade, only to abruptly raise them by a staggering 500 basis points within a year. This whiplash-inducing policy shift, according to Cooperman, is symptomatic of the Fed’s missteps and lack of foresight.

Despite the stock market hovering near record highs, Cooperman warned of rampant speculation and froth in certain segments of the market. He cited the frenzy surrounding former President Trump’s social media venture and the proliferation of special purpose acquisition companies (SPACs) as examples of speculative excess. Cooperman cautioned that the current market euphoria might be misguided, as there are no clear signs that the Fed’s tightening measures have been sufficiently restrictive to rein in inflation.

Interestingly, Cooperman’s portfolio reflects a defensive posture, with 15% allocated to energy stocks and 20% invested in bonds. However, he expressed concerns about the ongoing lawsuit with Spectrum against the government, which could impact the value of his bond holdings.

In a contrarian move, Cooperman revealed a preference for equities over bonds, defying conventional wisdom that favors fixed-income assets in times of economic uncertainty. This stance underscores his belief that certain sectors and companies may offer better risk-adjusted returns than the bond market, which he views as overvalued.

Cooperman’s dire warnings and contrarian positions serve as a stark reminder of the uncertainties and potential pitfalls facing investors in the current market environment. While his views may be controversial, they underscore the importance of vigilance, risk management, and careful asset allocation in navigating the turbulent waters of the global economy.

As investors and financial professionals grapple with the challenges ahead, Cooperman’s sobering assessments demand careful consideration, even if they challenge conventional wisdom. In the end, his candor and willingness to voice unpopular opinions may prove invaluable in preparing for the potential storms on the horizon.

IMF Economic Outlook: U.S. Growth Revised Up, Europe Down

The International Monetary Fund (IMF) recently released its updated World Economic Outlook report, providing insights into global economic projections. A key theme is diverging fortunes for major economies like the United States and Europe.

The IMF upgraded its 2023 GDP growth forecast for the U.S. to 2.1%, up 0.3 percentage points from its prior estimate. The upbeat revision reflects resilience in areas like business investment and consumer spending despite high inflation and interest rates. However, growth is still seen slowing in 2023 and 2024 as the impacts of tightening policy kick in.

Meanwhile, the IMF downgraded the euro zone 2023 outlook to 0.7% growth, 0.2 percentage points lower than previously expected. Slowing trade and higher rates are severely impacting Germany, while other euro economies face varied challenges. The IMF predicts gradual euro zone growth recovery to 1.2% in 2024, though still below pre-pandemic levels.

For the U.K., the IMF upgraded near-term growth slightly to 0.5% in 2023 but lowered its 2024 forecast on expectations of lingering damage from energy price shocks. The U.K. faces a difficult road ahead.

Overall, the IMF kept its global growth outlook unchanged at 3% for 2023. This sluggish pace reflects myriad headwinds including inflation, tight monetary policy, supply chain issues, and the war in Ukraine. IMF Chief Economist Gourinchas described the global economy as “limping along” below its pre-pandemic trend.

Positives like easing supply chain bottlenecks, lower Covid impacts, and stabilizing financial conditions will provide some uplift. But manufacturing and services slowdowns, synchronized central bank tightening, and China’s property crisis will constrain growth.

For investors, the IMF outlook sends mixed signals. U.S. economic resilience and continued consumer strength provide room for cautious optimism. But Europe’s downward revision and pervasive global headwinds like inflation suggest ongoing volatility and potential bumps ahead.

This outlook underscores the importance of defensive positioning and safe haven assets to balance riskier equities. Key takeaways for investors include:

  • Focus on U.S. sectors and stocks benefitting from higher business and consumer spending.
  • Tread carefully in Europe as weaker growth hits markets. Emphasize quality multinationals with less cyclical dependence.
  • Inflation and interest rates will remain challenges influencing markets and consumer behavior.
  • China’s faltering growth and property bubble pose threats worth monitoring.
  • Pay close attention to recession signals that could shift IMF forecasts and alter market psychology.

While the global economy is still expanding, momentum is slowing with many obstacles to navigate. Investors should build resilient portfolios capable of withstanding volatile conditions, while staying alert for any deterioration that could change the IMF’s cautious optimism.