Markets do not yet believe we’re out of the woods as debates about whether inflation has peaked continue while the Federal Reserve (Fed) stands ready to aggressively hike its target interest rate over the next few months (at least) while shrinking its bloated balance sheet. But there have been some encouraging signs lately:

• Oil prices are down over 10% since June 8, which will likely translate into lower prices at the pump in the near term. The inflation rate implied by Treasury Inflation-Protected Securities (TIPS) over the next five years has fallen from 3.1% to 2.6% over the past month and down from the peak of3.7% earlier this year.
• The University of Michigan survey of consumers’ long-term inflation expectations fell from 3.3% to 3.1%.
• The latest data on supply chains from the New York Fed indicate supply bottlenecks are easing.

Also, consider the evidence that consumers are in pretty good shape overall heading into the latest inflation surge:

• At 3.8%, the unemployment rate is reaching 50-year lows, while wages are up more than 5% over year-ago levels, according to the latest Bureau of Labor Statistics data. While that worries the Fed, it puts consumers in a better position to weather this storm. Also, consider there are over 11 million job openings in the U.S. compared with 6 million unemployed people.
• U.S. households held $3.2 trillion more in checkable deposits on March 31, 2022 than atthe end of 2019 before the pandemic. Money market assets are also nearly $1 trillion above December 2019 levels.
• The financial obligations ratio was 14.2% as of March 31, 2022, below the pre-pandemic lows going back to 1980. Consumers’ discretionary incomes in aggregate are nicely covering debt obligations (mortgages, car loans, home equity loans, etc.).

The good news is that if the economy does contract to the point where it is officially labeled a recession (the National Bureau of Labor Statistics makes that call), the impact will likely be muted somewhat by the strong financial position enjoyed by consumers heading into it. Keep in mind that two straight negative GDP quarters is not sufficient to “qualify” for a recession. NBER’s broader definition will likely enable the economy to avoid recession in the first half regardless, though GDP may eke out a small gain anyway.

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