Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro.
Inflation may have peaked, but economists continue to dial back their expectations for how quickly prices will come down this year and next.
That’s one of the main conclusions from the National Association for Business Economics quarterly outlook survey released this morning.
The NABE survey is a bit of an appetizer for the main course this week — the Congressional Budget Office on Wednesday will release new 10-year budget and economic projections, which haven’t been updated since July 2021.
The new CBO baseline forecast will clearly show huge changes to the outlook since last summer, especially around inflation and interest rates. But the NABE survey of 53 professional forecasters — including economists from banks, universities, trade groups, consulting firms and other businesses — underscores how much those expectations have changed in just the last few months.
Three takeaways from today’s report:
Inflation pressures persist — Nearly three-quarters of economists (71 percent) anticipate that core inflation, as measured by the personal consumption expenditures index, will have peaked by the end of the second quarter and start to come down. But they see much higher inflation this year than they projected in the previous survey, released in February.
Economists surveyed by NABE now expect PCE inflation will rise 4.8 percent in the fourth quarter from a year ago, up from 3.2 percent in the previous survey. And they project core PCE will remain half a percentage point above the Fed’s 2 percent target through 2023.
Forecasts for the consumer price index also rose sharply: Economists see CPI rising 5.6 percent this year, a full two percentage points higher than the median increase projected in February. (Their forecast for 2023 inflation edged up, too, to 2.6 percent from 2.4 percent in the last survey.)
Recession risks are modest — More than half of economists now forecast a 25 percent probability of recession in the next 12 months, while another 40 percent put the odds at between 11 and 25 percent. So on balance, they’re not terribly worried.
Still, forecasters slashed their expectations for real GDP this year, to 1.8 percent from the 2.9 percent projected in the previous survey. And more than three-quarters now see risks to economic growth tilted to the downside — that is, they see a greater likelihood that growth will be lower than they expect.
What’s driving the pessimism? The possibility that the Fed will slow the U.S. economy too much, or that the war in Ukraine will prompt a global growth slowdown that drags U.S. growth lower.
Cooling labor market — Economists lifted their forecast for average monthly job growth in 2022, to 363,000 from the 317,000 a month projected in February. But their quarterly estimates suggest that the biggest gains are already behind us for the year, NABE said.
Going forward, the panel expects the jobless rate will fall slightly to 3.5 percent by the end of the year but then start edging up to 3.7 percent by the end of 2023, a bit higher than the 3.5 percent projected in the previous survey.
IT’S MONDAY — Good morning, fellow budget nerds … are you as excited as we are for new CBO projections this week!? What will you be looking for in the latest outlook?
TODAY — Council of Economic Advisers Chair Cecilia Rouse and White House official Gene Sperling are speaking at a Center for American Progress event on the health of the U.S. economy at 11 a.m.
THIS WEEK — New home sales data Tuesday … CBO releases updated budget and economic projections Wednesday … Fed minutes Wednesday … Deputy Treasury Secretary Wally Adeyemo testifies before Senate Appropriations on the FinCEN budget Wednesday … Agriculture undersecretary for rural development Xochitl Torres Small testifies before Senate Banking on the Rural Housing Service Wednesday … House Financial Services hearing on reauthorizing the National Flood Insurance Program Wednesday
Investment Company Institute leadership summit Wednesday and Thursday …First-quarter GDP revised estimate and corporate profits Thursday … CBO Director Phil Swagel testifies before House Budget Committee on the CBO budget outlook Thursday … Personal consumption expenditures index and University of Michigan consumer sentiment Friday.
DAVOS DISPATCH — Our Ryan Heath is in Davos this week for the World Economic Forum, where the big focus today will be on Ukrainian President Volodymyr Zelensky, who delivers the keynote address virtually at 5:15 a.m. ET. The mayor of Kyiv Vitali Klitschkos and his brother Wladimir are also in conversation as part of the Open Forum at 6:30 ET. And the mayors of Bucha and Mariupol are also attending.
Ryan writes: “Foreign minister Dmytro Kuleba will be in town later in the week, while the official colors of the Davos-Klosters are blue and yellow, adding to the Ukrainian vibe. Ukrainian politicians were the guests of honor at last night’s media reception. ‘Do not stop backing Ukraine, otherwise this war will spill into other regions’ said Ivanna Klympush-Tsintsadze, member of the Ukrainian Parliament.”
A REFERENDUM ON DAVOS — NYT’s David Gelles: “The small ski town of Davos, high in the Swiss alps, has heightened security measure in place during the annual meeting of the World Economic Forum, when armed guards perch on hotel rooftops while world leaders and business executives sip champagne below. Yet today, everything that Davos stands for — globalization, liberalism, free market capitalism, representative democracy — seems to be under assault.”
ICYMI: SEC FINES WELLS FARGO $7M FOR AML VIOLATIONS — Our Katy O’Donnell: “Wells Fargo will pay $7 million to settle charges that its broker-dealer arm was too slow to flag potential criminal activity by customers, the SEC said Friday. St. Louis-based Wells Fargo Advisors allegedly failed to test a new version of the internal anti-money launder monitoring system it adopted in January 2019 and failed to file 25 suspicious activity reports in a timely manner as a result, according to the SEC.”
WHY BIDEN HASN’T KILLED TRUMP’S CHINA TARIFFS — WaPo’s David Lynch: “With the stroke of a White House pen, President Biden could lower the cost of thousands of consumer and industrial products and strike a blow in the anti-inflation fight that he calls ‘his top domestic priority.’ All he has to do is lift the tariffs on imported Chinese products that President Donald Trump imposed starting in 2018.
“But with his advisers split, the potential economic gains limited and the danger of Republican attacks for being ‘soft on China’ looming, Biden is unconvinced.”
HIGHER RATES RAISE RISK OF FUTURE FED LOSSES — WSJ’s Nick Timiraos: “The Federal Reserve’s plans to raise interest rates aggressively to combat high inflation could have an overlooked and uncomfortable side effect for the central bank: capital losses.
“The potential for losses hinges on obscure monetary plumbing. The Fed’s $9 trillion portfolio, sometimes called a balance sheet, is full of mostly interest-bearing assets—Treasury and mortgage-backed securities—with an average yield of 2.3%. On the other side of the ledger—the liability side of the Fed’s balance sheet—are bank deposits held at the Fed known as reserves, which are also interest bearing, as well as currency in circulation.”
BIDEN URGES HYUNDAI, SAMSUNG TO EMBRACE UNION WORKERS — Bloomberg’s Jennifer Jacobs and Sohee Kim: “President Joe Biden encouraged Hyundai Motor Co. to partner with unionized US workers following a meeting with the company’s chief executive.
“‘Hyundai and any company investing in the United States would benefit greatly from entering into partnerships with some of the most highly skilled, dedicated and engaged workers in the world,’ Biden said in a joint appearance with Hyundai’s Executive Chairman Euisun Chung. ‘And that is American union members.’”
RISING RISK OF RECESSION CREATES NEW HEADACHE FOR BIDEN — WSJ’s Amara Omeokwe: “The Federal Reserve’s efforts to slow inflation are raising the possibility of higher unemployment, a slower-growing economy and a recession, prospects that could create new headaches for the Biden administration.
“As the country heads into midterm-election season, much of the political discussion has centered around solid economic growth and robust employment versus the damaging impact of inflation. More recently, warnings about the prospect of an economic downturn—which could come in 2023 according to some estimates—have complicated the economic picture in a new way.”
GLOBAL LEADERS WARN OF ECONOMIC DANGERS — WaPo’s Jeff Stein: “The financial leaders of the world’s most powerful countries warned this week of the potential for a global economic slowdown, as the threats caused by Russia’s invasion of Ukraine continued to multiply.
“Globally, the war is sending energy and food prices soaring. In the United States, Britain and Europe, central banks determined to curb inflation are moving to hike interest rates, which risks pushing nations into recession. The developing world faces an emerging debt crisis on top of a growing hunger problem sparked by the war.”
SMALL BUSINESSES LOSE CONFIDENCE IN US ECONOMY — WSJ’s Ruth Simon: “Small businesses are flashing warning signs on the U.S. economy as inflation, supply-chain snarls, a shortage of workers and rising interest rates darken the outlook for entrepreneurs. Fifty-seven percent of small-business owners expect economic conditions in the U.S. to worsen in the next year, up from 42% in April and equal to the all-time low recorded in April 2020, according to a survey of more than 600 small businesses conducted in May for The Wall Street Journal by Vistage Worldwide Inc., a business-coaching and peer-advisory firm.”
CRYPTO MIGHT HAVE AN INSIDER TRADING PROBLEM — WSJ’s Ben Foldy and Caitlin Ostroff: “Public data suggests that several anonymous crypto investors profited from inside knowledge of when tokens would be listed on exchanges. Over six days last August, one crypto wallet amassed a stake of $360,000 worth of Gnosis coins, a token tied to an effort to build blockchain-based prediction markets. On the seventh day, Binance—the world’s largest cryptocurrency exchange by volume—said in a blog post that it would list Gnosis, allowing it to be traded among its users.
“Token listings add both liquidity and a stamp of legitimacy to the token, and often provide a boost to a token’s trading price. The price of Gnosis rose sharply, from around $300 to $410 within an hour. The value of Gnosis traded that day surged to more than seven times its seven-day average.”
LAGARDE: CRYPTO SHOULD BE REGULATED — Bloomberg’s Cagan Koc: “European Central Bank President Christine Lagarde said crypto-currencies are ‘based on nothing’ and should be regulated to steer people away from speculating on them with their life savings.
“Lagarde told Dutch television that she’s concerned about people ‘who have no understanding of the risks, who will lose it all and who will be terribly disappointed, which is why I believe that that should be regulated.’”
The world’s richest nation is waking up to an unpleasant and unfamiliar sensation: It’s getting poorer. — Bloomberg’s Ben Steverman
U.S. stocks are in the midst of their longest selloff in decades. Whether they are close to bottoming is anyone’s guess. — WSJ’s Akane Otani
Stocks, bonds and other assets are getting hammered this year as investors wrestle anew with the possibility that the U.S. is headed toward recession. — WSJ’s Justin Baer