The U.S. economy is already walking a tightrope where rising import taxes threaten to tip inflation and employment out of balance. Rarely in recent memory have the specter of stagflation seemed so imminent. This truly bad double whammy is persistent economic underperformance and worsening inflation at the same time. After all, recent statistics show that PPI inflation fell significantly in April—more than most analysts anticipated. This development leads to some crucial questions about maintaining economic prosperity going forward.
For example on Thursday, DJIA added nearly 250 points, revealing strong upside reaction from equity markets. Even with the increase, the DJIA remains well under its record high of 42,410, which it hit at the beginning of this week. Recently, it has just managed to push above that all-important 200-day Exponential Moving Average (EMA) level – 41,600. Today’s market reflects a world struggling to come to terms with conflicting economic messages. Analysts remain optimistic, but they warn potential investors of several risks to look out for.
Inflation Trends and Economic Risks
U.S. PPI inflation actually shrank by 0.5% m/m in April — a stronger contraction than most economists were expecting. Relatedly, core PPI inflation—which excludes volatile food and energy prices—declined 0.4% in the same month. These numbers were responsible for a 0.3% annualized fall in core business inflation on the year. It moderated slightly to 2.4% y-o-y, down from 2.7% in the last quarter’s release. Taken together, these figures could signal that inflationary pressures are starting to cool. Yet worries about joblessness and upcoming inflation still remain.
In case you missed it, stagflation may be the biggest buzzword of the moment. Import taxes on nearly all goods coming into the U.S. today are well above historical levels. The Trump administration has recently suspended a huge 145% tariff on Chinese products, giving meaningful immediate relief. Though a very positive outcome, this decision brings forth crucial questions regarding its long-term economic impact. On the political front, the Chinese government has reacted by rescinding its own triple-digit tariffs in the wake of the U.S. measures. Unfortunately, this tariff suspension is only set to last 90 days. This lack of clarity has both the governments and markets jumping.
“This is a market that has shifted to cautious optimism… as recession fears begin to recede and equity markets demonstrate underlying strength. However, a number of macro and micro risks continue to form a ‘wall of worry’ that investors must navigate.” – Market Analyst
Market Reactions and Future Predictions
The past few weeks of positive movement in the DJIA seems more like a hopeful thumb on the scale of market sentiment, against a shifting set of economic instructions. Despite the impressive resilience of the stock market, analysts told CNBC that the risks are still very much out there. According to a median market forecast, we can expect to see an increase in positive consumer survey findings. This follows four consecutive months of contractions, leaving the combined results at a two-year low of 52.2. This decline is a strong indicator of consumer hesitance and an indicator of the larger economic anxieties.
Many observers are left with the impression that there is enormous underlying strength in the equity markets. This all coincides with the beginning of the alleviation of recession fears. It is a time, they underscore, that investors need to stay on their toes given persistent macroeconomic headwinds that may threaten further expansion. Interestingly, inflationary pressures and the state of employment are intricately connected. Moving forward, they should be a big part of determining the direction our economy will take.
The Road Ahead for Employment and Inflation
Going forward, analysts from the Bureau and beyond stress the need to pay attention to the trends in jobs created closely. These increased tax on imports threaten already vulnerable job markets. If firms are unable to adjust to these rising costs, we may be facing a wave of unemployed workers. The balance between tariffs and domestic consumption will be an important factor as policymakers move between this delicate balance of trade.