Third, surveys conducted by both the National Federation of Independent Business and the Labor Department still show a huge surplus of job openings relative to unemployed people. Even if this surplus begins to decline, (as we expect it will), it should help keep employment growth broadly positive for months to come.
It should be noted, however, that these forces supporting the economy could weaken if consumer and business confidence remains at today’s very gloomy levels. Growth, which looks solid in the second quarter and looks shaky in the third, could roll over entirely by the fourth.
On the inflation side, the Commerce Department will release May data for the personal consumption deflators on Thursday. We expect to see headline PCE inflation of 6.5% year-over-year and core inflation of 4.8% year-over-year. Both of these would be only slightly below their peaks and still far above Federal Reserve targets.
Moreover, an early read on June inflation suggests something similar, with a spike in gasoline prices at the start of the month pushing the AAA average to above $5 per gallon. Natural gas prices also surged in early June adding to inflation for the month. Overall, we expect another hot CPI reading to be released on July 13, with a consequent strong monthly read on June PCE being published on July 29.
Thereafter, however, there are growing signs of a potential inflation rollover. The Bloomberg Commodity Index has now fallen by 11% since peaking on June 9, reflecting broad price declines in crude oil, gasoline, natural gas, corn, wheat, copper and cotton. Average milk prices, which had jumped from $3.50 per gallon in May of 2021 to $4.20 per gallon by May 2022, also fell in June. According to the Hopper travel app, average prices on booked airfares have been falling in recent weeks, which should reverse some of a recent extraordinary surge. Used car prices have stopped rising, according to the Manheim Used Vehicle Index, and could well fall if vehicle supplies continue to improve.
The lagged effects of higher inflation expectations, wage growth and home prices are likely to continue to add to inflation in the months ahead. However, even with this, the July CPI report, due out on August 10, should show a much lower monthly gain in prices as should the August report, due out on September 13.
In short, if current trends continue, there is a good chance that the Federal Reserve will have clear evidence of an inflation rollover when they meet on September 20 and 21. At that point, they may well begin to express some more optimism on a reduction in inflation and some more concern about slowing growth. Unfortunately, monetary policy works with a lag, and a more dovish stance by the Federal Reserve by the fall may not be enough to prevent the U.S. economy from stumbling into recession.
It is, at best, a close call and, if inflation doesn’t roll over before growth turns negative, both the economy and financial markets are in for a tough second half of the year. However, for long-term investors, it’s important to recognize that, even if we can’t predict the sequencing of economic trends with great confidence, it is much easier to forecast that both growth and inflation will ease in the year ahead, allowing long-term interest rates to stabilize or fall and thus supporting both the bond and equity markets.
A wise spectator at a local sack race would probably not want to bet heavily on which of two favored contestants would win but could place a more confident wager that both contestants would hit the turf before either hit the tape.
David Kelly is chief global strategist at JPMorgan Funds. Stephanie Aliaga is a research analyst at JPMorgan Funds.