So, Is It Recession and Inflation or Good Times Ahead? Here's How to Tell
Who is correct about the direction of the economy and prices, consumers or the 'experts'?
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
A series of economic readings and market takes has caught my eye recently as they point to a huge divergence between where consumers think the economy and inflation are going and where the market and economic pundits see them heading. The most recent University of Michigan consumer sentiment reading in mid-May showed consumers' inflation expectations in the year ahead jumped from 6.5% to 7.3%. This is the highest reading since 1981. Higher than even June of 2022 when the official consumer price index reading was 9.1%.
According to another recent survey, two thirds of consumers now expect unemployment to rise over the next 12 months. This is the highest level since the Great Financial Crisis in 2009. Meanwhile, the April Bureau of Labor Statistics Jobs Report that came out early this month was stronger than expected. While consumers believe tariffs will boost inflation significantly, that is not what is being reflected in the market. Since "Liberation Day," U.S. inflation swaps have barely moved. The 1-year U.S. inflation swap closed at 3.40% on April 2 and stood at just 3.36% last week. The 5-year inflation swap also remained essentially flat.
Goldman Sachs was just out with commentary that it saw personal consumption expenditure inflation rising to 3.6% by the end of this year. But the investment bank sees this tariff impact as a one-time price level adjustment and not a new inflation surge. Inflation should return to its current path in 2026 once this non-recurring event takes place in their eyes. The investment bank cited a weakening economy and a much looser jobs market as key reasons why inflation is not going to skew higher over the longer term.
Data from the Conference Board Tuesday did show consumer confidence improving significantly in May after five-straight months of decline. The measure bumped up over 12 points to a 98 reading. I would imagine a good deal of this improvement was due to the administration suspending most tariffs 90 days in April while trade deals or at least trade arrangements can be reached with myriad trading partners.
So, who is right about the direction of the economy and inflation? Pundits or consumers? That is a key $64,000 question for investors that should be answered in the coming months. And this depends on how quickly and what kind of trade agreements are reached by the administration. Based on the framework with the U.K., it looks like every country exporting to the United States will face at least a 10% tariff rate.
The other outstanding question is how much of that additional tariff tax will be passed onto consumers and how much the importer and exporter of the goods hit with the tariffs eat. This will, of course, impact profit margins. My view is if numerous trade deals are agreed to by summer, the pundits will be correct on the economy and inflation. If not, reality will look more like the dire scenario consumers are currently envisioning. As a prudent investor, I am hoping for the former but prepared for the latter.
At the time of publication, Jensen had no position in any security mentioned.
