With extreme supply shortages stroking producers’ prices, gasoline prices rising on the back of the Russia-Ukraine war, consumer spending falling despite rising wage growth and persistent rising inflation, it is impossible not to ask, is a recession coming in 2023 or 2024? Most can probably see the answer is yes, with the current economic fundamentals and monetary policy stance, even without Deutsche Bank saying so.
Despite wage growth rising by 5.6% year-on-year and the unemployment rate moderating to a two-year low of 3.6% in March, inflation-adjusted consumer spending declined by 0.4%. That indicates that the 40-year-high 7.9% inflation rate recorded in February has started weighing on consumer demand.
Yet, rising commodity prices caused by the ongoing Russia-Ukraine war, high inventory demand and the unusual supply constraints caused by Covid-19-induced scarcity continued to bolster prices.
The question is, can the Federal Reserve address all of these with rates increase?
Presently, the United States is experiencing demand-pull inflation, a situation where more money is chasing fewer goods. However, the more-money part of the definition comes in part from the free Covid-19 stimulus money and explains why businesses are struggling to lure people back to work after the lockdown.
The inability to get desirable workers created employee shortages across a range of businesses and compelled firms who were still enjoying near-zero interest rates to start raising wages to attract new applicants.
Here is the logic.
The availability of free money, both in businesses and citizens bank accounts, created this economic enigma. Businesses are accumulating inventories in order to stay afloat in case another wave of Covid-19 hits or for when the American households that reportedly saved 75% of their portion of the $4.6 trillion in pandemic stimulus start spending.
The problem now is that Americans now prefer to save up, especially with global uncertainty and risks at a record high due to the ongoing war in Ukraine. A recent report puts Walmart (NYSE:WMT) and Target (NYSE:TGT) inventories at $72.4 billion in the third quarter of 2021.
With consumer spending waning, disposing of these large inventories will become a problem and drag on new job creation, as these businesses won’t just be facing sales issues but also rising interest rates. According to Deutsche Bank, unemployment could rise to 4.9% by 2024 while interest rates could hit 3.5% if the Fed moves by 50 basis points in each of its next meetings.
This will not just hurt new job creation but could also force businesses to start cutting existing jobs and wages in order to cut costs. Retail sales, consumer spending and household income will drop with jobs and wages. Similarly, exports will drop as an increase in interest rates strengthens the U.S. dollar, hence American goods will become expensive to overseas customers.
To take advantage of the situation focus on gold-backed stocks. Gold is a safe-haven asset and tends to appreciate in value during a crisis. For instance, the Dow Jones, Nasdaq and Tesla (NASDAQ:TSLA) have returned -5.1%, -11.2% and -1% year-to-date while these gold-backed stocks Barrick Gold Corp (NYSE:GOLD), Newmont Corporation (NYSE:NEM) and Royal Gold, Inc (NASDAQ:RGLD) have gained 29.5%,28.3% and 36.1% year-to-date despite the ongoing crisis.
On the date of publication, Samed Olukoya did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.