Recent economic data has been the Fed’s ‘worst nightmare’, economist says

The economy looks pretty dire, and that won’t make the job of the Federal Reserve any easier as it tries to engineer a soft economic landing, a Wall Street economist warns.

“I would say recent economic data has been central bankers’ worst nightmare,” Nathan Sheets, Citi’s global chief economist, said on Yahoo Finance Live (video above). “On the one hand, I would say there is very clear evidence of a slowdown in global demand. And on the other hand, there is also clear evidence that inflationary pressures persist.

Economic readings have collectively painted a picture of a slowing US economy struggling with stubbornly high inflation.

The sun rises over New York City during a solar eclipse on June 10, 2021, as seen from The Edge Observatory Deck at The Hudson Yards. (Photo by Noam Galai/Getty Images)

The Bureau of Economic Analysis (BEA) said last week that second-quarter GDP fell 0.9% as consumers and businesses cut spending due to higher prices for goods and services. This is the second consecutive quarter of economic contraction after a 1.6% drop in GDP in the first quarter.

The ensuing economic contraction intensified rumors that the United States was in recession.

“I wouldn’t be surprised if they [NBER] actually pushing the start of the recession back to late last year,” Dreyfus Mellon chief economist Vincent Reinhart said on Yahoo Finance Live. “So we could become one of the longest recessions never recorded.”

Over the past month, investors have also received significant profit warnings from major retailers such as Target, Walmart and Best Buy, as consumers grapple with rising prices for gasoline, food and rent. These significant earnings warnings are an unwanted signal about consumer spending decisions.

Bottom line: The Conference Board’s consumer confidence measure has fallen for three straight months, stocks remain in a bear market, and huge companies from Tesla to Meta to Amazon are announcing layoffs.

And to top it all off, the consumer price index for June posted its strongest rise since November 1982 at 9.1%.

Despite the economic downturn, the Federal Reserve made it clear at its last meeting that it would go ahead with further interest rate hikes this year to stifle inflation. In turn, Sheets added, this could lead us to a situation where unemployment rises while the economy slows, but inflation also remains elevated for some time.

“It feels like we’re going through a period of transitional stagflation right now,” Sheets said.

Brian Sozzi is editor-in-chief and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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