So here we are: When investors aren't worried about inflation, they're worrying about recession. Tech companies are announcing hiring freezes and job cuts in growing numbers. Homebuilders are starting to talk about slowing demand and the supply of existing homes is rising. Walmart reported this week that it has excess inventories.
Isn't this exactly what we wanted?
With the exception of some geopolitical shocks — the war in Ukraine's impact on food and energy, and another round of COVID-19 lockdowns in China — the rebalancing we've seen in the U.S. economy in recent months reflects trends that were expected and desired when forecasters were thinking about 2022 at the end of last year. The changes in the economy that have people so worried are in large part what, six months ago, economists were hoping to see.
Let's start with the housing market. It was overheating as recently as March, with conditions that were stagflationary. Inventories were at record lows and home prices were soaring even as mortgage rates had risen from below 3% to above 4%.
At some point affordability was going to be an issue, but it wasn't clear what level of home prices or mortgage rates it would take to cool things down. Two months later, we know — current asking prices and mortgage rates of around 5.5% have finally led to a rebalancing in the market. It's too soon to tell whether this is a temporary pause or something worse, but the unhealthy pandemic boom in the housing market appears to be over for now.
Another trend economists were looking for was a shift from goods spending back to services spending as consumers took fewer pandemic-related cautions and got back to more normal behavioral patterns. We're now seeing this happening. Amazon said in its quarterly earnings report that it found itself overstaffed in March, and Walmart is in the process of working down excess inventories. Meanwhile, airline and hotel companies are reporting strong demand and pricing power. Yet investors have become more anxious about signs of softness in goods consumption than they've been cheered by the boom in leisure.
For years, market watchers have been concerned about signs of froth in Silicon Valley and the cryptocurrency ecosystem. Countless numbers of companies with dubious business models went public over the past two years via either the Special Purpose Acquisition Company or the traditional IPO process.
Now in 2022 we're seeing all of that fall back to Earth. Stock prices and the value of cryptocurrencies have been hammered. Cash-burning companies like Peloton Interactive Inc. and Carvana Co. have announced layoffs. Venture capitalists are telling anyone who will listen to prepare for a more sober environment for the foreseeable future. The heady days for tech companies and crypto appear to be over for now.
All these shifts are necessary because inflation was running too hot and the Federal Reserve had to do something to rein it in. At the beginning of the year the market was priced for the Federal Reserve's target rate to be 1% in March 2023. Based on the booming signals throughout the economy, that didn't appear to be enough to rein in inflation. Today, expectations for the Fed Funds rate in March 2023 are more like 3%. We don't yet know if that will be enough to get inflation back to where the Fed wants it to be. But based on the slowing in the housing market, the reining in of tech and crypto excesses and tightening conditions priced into the stock market, and extra capacity at Amazon.com Inc. and Walmart Inc., it's now at least a possibility in a way it wasn't at the start of 2022.
The question investors are wrestling with is whether the Fed can manage this process and rein in inflation without the economy tipping into recession. The irony is that if you asked forecasters in December what a healthy rebalancing of the economy and monetary policy would look like in the first half of 2022, they would probably say something exactly like what we're seeing now.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Conor Sen is a Bloomberg Opinion columnist. He is founder of Peachtree Creek Investments and may have a stake in the areas he writes about.