It's been three months since the elevated May consumer prices report led the Federal Reserve to adopt a "whatever it takes" mentality to fight inflation. Markets are now bracing for an expected third straight 0.75% increase in the Federal Funds rate at the Fed's next policy meeting. But a funny thing has happened as markets and the economy adapted to the new policy environment: Much of the pain that Main Street was feeling has shifted to Wall Street.
The two most significant changes unfolding in the real economy over the past three months are in energy markets and the housing market. Retail gasoline prices peaked at $5 a gallon in mid-June, and have since fallen by more than $1.25 a gallon. According to Patrick De Haan of GasBuddy, American drivers are about to be saving $500 million a day on gasoline compared with what they were paying three months ago. And with gasoline futures prices continuing to fall, those savings should increase for at least the next couple of weeks.
In the housing market, transactions have slowed to a crawl as mortgage rates jumped, and home prices have begun to fall in some of the metro areas where they rose the most over the past couple years. For the relatively small share of Americans looking to buy or sell a home right now, this has become a headache, but for the tens of millions of Americans who are perfectly content to stay in their home — with a mortgage rate that's probably less than 3% — this is no problem at all.
The inventory of houses for sale is now falling, as homeowners face no financial pressure to sell their homes because their job outlook remains strong with persistent low unemployment.
Inflation is still causing pain, especially at the grocery store. And as the housing market cools, rental prices continue to surge.
But on the whole, Americans are encouraged by the recent turn of economic events as measured by a variety of surveys. Consumer confidence rose in August after three months of decline and is back to its levels from May, according to Conference Board data. The University of Michigan's measure of consumer sentiment rose in both July and August after hitting a record multi-decade low in June.
Internet polling and data analytics firm Civiqs shows a similar improvement since June, with the plunge in gasoline prices and the steady labor market seemingly overriding the general tightening of financial conditions in terms of how Americans see the state of the economy.
The same cannot be said for investors. Strategists from Morgan Stanley to Bank of America still expect stock prices to remain under pressure given their views on the trajectory of both earnings and economic growth. In the gloomy S&P services sector survey released this week, the financial sector reported the most negativity.
Wall Street's focus is on rising interest rates that are squeezing financial markets and what they think that means for the economy, while Main Street by and large sees a steady job market and falling gasoline prices as signs that conditions are no worse than they were in June, and perhaps even better.
For so long, we’ve become accustomed to looking to Wall Street as a guide for what’s likely to happen to Main Street. If investors were doing well, maybe a little of that would trickle down to workers. And if Wall Street was struggling, it inevitably meant stagnation or worse for workers. That mentality was at the root of the bailouts during the 2008 financial crisis – banks, corporations, and investors got backstopped rather than workers.
But in the current economic environment the relationship isn't so straightforward. The stock market is on pace for its worst year in over a decade at the same time the US economy has added 3.5 million jobs. So the next time you see a negative economic outlook, stop and think about whether it's truly likely to affect workers and consumers, or whether it’s just investors frustrated that they’re not making money as easily as they have in the past.
It's possible that we're just in the middle of a transition period in which consumers and workers get a little relief before the grim reality of tightening financial conditions spells doom for the labor market and economic growth down the road. But most of the squeeze that's happening right now is on Wall Street rather than Main Street, and it's also possible that inflation will ease up without any dire economic scenarios ever coming to pass.
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