Aurelia Butler

In the 16 years that Mike Zaffaroni has helmed Liberty Landscape Supply in north-east Florida, no stretch proved quite as difficult as last year. Soaring costs, supply chain bottlenecks and an acute worker shortage mounted a challenge for the lawn and garden centre, which Zaffaroni said was even worse than the early days of the Great Recession more than a decade ago and the mass shutdowns stemming from the global pandemic in 2020. But despite these hardships — made all the more potent by rapid interest rate increases from the Federal Reserve — customers continued to flock to his outlets. Revenue jumped 16 per cent in 2022 compared to the year prior and just this month the company opened another location.Florida’s economy stands out as one of the country’s strongest. The state has seen a huge influx of new residents in recent years — drawn, in part, by balmy weather and no income tax — and now leads the nation in terms of net income migration. Business applications have also boomed, making it one of the most popular places to open up shop. That has helped to keep the unemployment rate at 2.6 per cent, well below the national average of 3.7 per cent.While Florida enjoys unique tailwinds, the durability of its economy exemplifies a national trend that has flummoxed policymakers seeking to damp demand to stamp out elevated inflation. But with the collective weight of the US central bank’s forceful monetary tightening efforts to date and the ongoing retreat by regional lenders across the country in the wake of a string of bank failures, there is growing apprehension that the US economy’s resilience is finally beginning to crack.As a small-business owner, Zaffaroni said he is “always worried” about the future and warned that the second half of 2023 could become tenuous.“We are not a sexy tech company from San Francisco that is living off of the fumes of private equity or venture capital. We are a real, tangible, boring business that relies on capital in order for us to continue to invest in infrastructure, equipment, inventory and people,” says Zaffaroni. “So the cost of capital going up will cause us to grow slower for an undetermined amount of time. That’s just the reality of it.”Liberty Landscape Supply in north-east Florida has had a jump in revenues and expanded but its owner, Mike Zaffaroni, worries the second half of 2023 could become tenuous © Colby Smith/FTWhether the economy buckles enough to tip into a recession is an issue that has tormented officials at the Fed since they began aggressively lifting interest rates in March 2022. In just over a year, the Fed has raised its benchmark rate over 5 percentage points to the highest level since 2007, changes that take time to affect the economy.Now Jay Powell, the Fed chair, faces the arduous task of forging consensus across a Federal Open Market Committee that holds fractured views about the speed at which inflation will moderate from here, the impact of the recent banking stress and just how close the economy is to a cliff edge.“We’re getting to the real hard part here of how we assess trade-offs,” Loretta Mester, president of the Cleveland Fed, told the Financial Times earlier this month.Progress on getting inflation down has been slow, but the central bank is now considering a more patient approach. That is widely expected to mean foregoing additional tightening at its policy meeting this week while keeping the door open to fresh increases if warranted. Cuts are not being considered until 2024. Powell himself has said the Fed can “afford” to look at the data and make “careful assessments”.For Charles Evans, who retired from the Fed in January after serving 15 years as president of its Chicago bank, the upcoming debates boil down to one question: “What kind of policy mistake are you most comfortable making?”Where cracks are formingNestled just below Michigan in northern Indiana sits the RV capital of the world. The city of Elkhart earned that moniker for the dominant role it plays in the production of recreational vehicles, with nearly 90 per cent of all units in the US and Canada manufactured there or in the surrounding area, according to the RV Industry Association.RV enthusiasts are not the only ones keeping close tabs on Elkhart, which boasts a Hall of Fame dedicated to the industry. Economists do too. That is because the RV is the “classic disposable income and interest rate sensitive item”, Michael Hicks, an economics professor at Indiana’s Ball State University, says. A discretionary purchase that is typically financed with borrowed money, demand for RVs is acutely sensitive to business cycles, meaning that more often than not a cooling off typically augurs a weaker economic backdrop. Hicks has even gone so far as to say that RV sales are superior to economists for forecasting recessions. Right now, he says it is a close call over whether there will be a downturn. 

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Sales and shipments have both recently declined and Elkhart employment recorded the largest year-over-year drop among the biggest US counties as of the fourth quarter of 2022. Distortions tied to Covid have muddied the signals slightly, however. Sales exploded during the pandemic as people sought alternative ways to travel, so the recent softening could simply represent a reversion to a more normal trend. However, Hicks expects the US economy to at best grow at an annualised rate of 0.5 per cent this year and warns it could even register a 0.5 per cent contraction.What has kept the economy afloat and out of the grips of a recession so far is the labour market, which roared back from the depths of the pandemic and has shown surprising strength as worker shortages have fuelled intense competition among employers. Despite waves of lay-offs in Silicon Valley and Wall Street, companies across a wide range of industries are still hiring in droves, vacancies are rising again after a recent dip and the rate at which Americans are quitting remains elevated.“People’s confidence and their willingness to spend are most importantly determined by how they feel about their job situation, and right now people are feeling very secure in their employment,” said Kristin Forbes, a former Bank of England official who now teaches at the Massachusetts Institute for Technology’s Sloan School of Management. Beneath the surface though, some of the labour market’s momentum has faded. Over the past three months, job gains have averaged about 280,000 positions, a robust monthly pace but well below the roughly 400,000 increase registered the same time last year. And while still historically low, the unemployment rate edged up in May, jumping 0.3 percentage points to a seven-month high of 3.7 per cent.Across the country, well over a dozen states are flashing warning signals, triggering the so-called Sahm rule, which links the start of a recession to when the three-month moving average of the unemployment rate rises at least half a percentage point above its low over the past 12 months.

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The Sahm rule traditionally applies to national unemployment — not state-level data, which can be distorted by small sample sizes — but the trend across the country suggests labour market conditions have softened. Still, the weakness is not yet broad-based and would need to intensify for the worst prognoses to be realised. Wage gains have cooled in tandem, offering relief to policymakers concerned that rapidly rising pay is pressuring companies to themselves raise prices.For the time being, however, consumers continue to spend, buoyed by stockpiles of savings accrued early on in the pandemic as the federal government injected $5tn to bolster household balance sheets. Americans have run down those nest eggs, but economists at the San Francisco Fed estimate there are still some $500bn in aggregate excess savings in the economy that will support consumer spending at least until the end of 2023. Some sectors initially battered by the Fed’s rapid rate rises have already begun to stabilise, including the housing market.

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Demand for services-related activities like travel or entertainment have seen little let-up, too. That has kept upward pressure on “core” inflation, which strips out volatile food and energy costs, frustrating the Fed’s attempts to get this key metric back to its 2 per cent target.In a sign that businesses are tentative about the future, however, orders placed with US factories for machinery and other “core capital goods”, which exclude aircraft and military hardware, have dipped below shipments on a three-month moving average basis.In preparation for a downturn, Matt Hirsch, president of Primus, which builds cold-storage facilities and just broken ground on a new warehouse in Jacksonville, says he is now focused on lining up three years’ worth of projects.“We have a backlog larger than we’ve ever had before and it’s easy to sit back and say, ‘let’s just execute,’” he says. “I can’t let that happen, I have to fill the bucket again because I do believe sales are going to soften.” Delinquencies are also rising as more people fall behind on payments. By the end of 2022, fewer Americans had already reported being able to cover an unexpected $400 expense using cash, savings or a credit card that could be immediately paid off. 

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As president of Feeding Northeast Florida food bank, Susan King is already seeing this pressure first hand. Families living pay cheque-to-pay cheque who once needed assistance on an emergency basis now need it “very consistently”.“It is always in the back of our mind that a recession is looming,” she says.Banking woesOfficials at the Fed and its staff have long contended that there is a narrow path to get inflation down without causing a painful economic downturn. For staffers at the Fed, that changed following Silicon Valley Bank’s collapse.In March, they updated their forecast to a “mild” recession later this year, before the economy staged a recovery in 2024. Concerns stemmed from the immediate retreat expected by small and midsized banks, which account for 40 per cent of all outstanding loans and leases, as they confronted rapid deposit outflows, plunging share prices and the spectre of harsher regulatory scrutiny as more banks failed.

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Lending standards have since tightened, extending a trend that was already under way as the Fed raised borrowing costs. Powell has warned that tighter credit conditions could dent economic activity, hiring and inflation. It could well mean the Fed does not need to raise interest rates as much as initially expected to reach its inflation goal, he has also said. But there is considerable debate about just how much pain the banking turbulence will inflict. Former Chicago Fed president Evans is sympathetic to the view that it could have little impact on the economy. “If I were a policymaker, I’d be nervous that the credit distress channel isn’t nearly as powerful [as was first predicted],” he says, especially in light of the sheer strength of the labour market. “The banks seem to be making their way through it.”Torsten Slok, chief economist at Apollo Global Management, is among those to consider the banking crisis a “substantial event”, warning that over the next several quarters it will have a “significant negative impact” on the economy. Small businesses are already finding it more difficult to access financing and he reckons the banking stress is akin to roughly 0.75 percentage points of Fed tightening.Coupled with his concerns that inflation will prove more difficult for the Fed to tame and require the central bank to tighten more, Slok is now worried about a recession taking hold that is much deeper and more drawn out than expected.“We are waiting for Godot, and I do believe Godot will eventually arrive,” says Slok.Fed fearsAgainst this backdrop, the policy decisions confronting the central bank are becoming far more fraught.For the bulk of the monetary tightening campaign, officials have hesitated little about the appropriate path forward for policy. Having been late to react to inflation, the Fed has moved with unanimity at nearly all of its meetings since last year, repeatedly relying on jumbo half-point and three-quarter-point increases to catch up.That cohesion now risks being eroded as different policymakers draw different conclusions about when the full effects of the Fed’s actions so far will be felt and how much more to squeeze the economy — divisions that Alan Blinder, a former Fed vice-chair, said are not only “natural” at this stage but also a “problem” for Powell.“A chair likes to get as close to unanimity as he or she can,” he said.

For at least the next gathering, top leadership at the Fed appear to have forged a compromise: omit an increase this week but keep in play the prospects of a later move. Waiting would give officials more time to learn how economic activity and credit conditions are evolving, Christopher Waller, a governor, said in a May speech, as he laid out the options.Waller adds that there needs to be “clear evidence” that inflation is moving down to the desired level before he would be comfortable stopping rate rises. Individual projections from officials of the peak policy rate this year, due to be published this week, could indicate broad support for at least one more quarter-point rate rise. Economists polled in a recent FT survey reckon the Fed will eventually implement a minimum of two.Pausing rate rises prematurely and finding out in a couple of months’ time that the Fed has not done enough would be “very disappointing”, says Evans. “You can just see the regret in that kind of commentary.”Unnecessarily crushing demand and throwing an excessive number of people out of work comes with its own costs, though. “The problem is when we get to the point where the interest rate does change behaviour, if the Fed has done too much too fast, it’ll be too late,” says Claudia Sahm, a former economist at the US central bank, who developed the Sahm rule.“People on the margins will be hit first, whether it’s a minority-owned business or its Black or Hispanic workers, who typically have been on the sidelines but have jobs right now.”In terms of what the Fed could more easily correct, however, economists seem confident in the central bank redressing having overtightened.“The biggest risk now is that inflation does not come down as quickly as expected,” says Forbes. “If you hike too much today and growth slows too much, you can quickly lower rates. That’s an easier problem to fix.”An even more pernicious problem would be a stagflation scenario taking hold, in which the economy is hobbled by both an extended period of slow growth as well as stubbornly high inflation. That is increasingly a concern for Nela Richardson, chief economist at ADP, a payroll processor, who warns that it would severely limit the Fed’s latitude to respond in either direction.“It definitely means they have to sleep with one eye open.”Additional reporting by Oliver Roeder in New York

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Argentina’s increasingly desperate government is trying to stave off a currency crisis by going cap in hand to China and the IMF, presenting the Washington-based lender with a dilemma over how to support its largest debtor.Inflation in the South American nation is expected to reach 145 per cent this year, a recession is looming and the central bank’s net reserves of hard currency are negligible. The peso has fallen almost 40 per cent against the US dollar on the black market this year.The Peronist government is striving to avoid a big devaluation or a lapse into hyperinflation during the politically turbulent season before presidential and congressional elections in October — and economy minister and would-be presidential candidate Sergio Massa has emerged as a central figure. Massa has announced a welter of emergency measures to keep the economy afloat, including special exchange rates to encourage soy exporters to ship their crops and swaps of domestic debt for longer maturities. He will travel to Washington later this month to seek extra IMF funds, but his task has been complicated by a severe drought, which has hit farm production and agricultural exports. A soup kitchen in Buenos Aires, Argentina. Numerous people come to the soup kitchen every day, while inflation is rampant in the country © Florencia Martin/picture-alliance/dpa/AP ImagesA trip by Massa to China earlier this month yielded Beijing’s agreement for Argentina to access an additional $5bn from an existing renminbi currency swap agreement. Massa is also trying to persuade the New Development Bank, the Shanghai-based lender for the Brics nations, to allow Argentina to join.Argentina has been cut off from international markets since its 2020 default and needs to fund a budget deficit estimated by JPMorgan at 3 per cent of its gross domestic product this year. With net international reserves estimated at close to minus $1.5bn, according to Buenos Aires-based analysts Ecolatina, Massa’s hopes for dollars rest on the IMF.“Massa’s [plan], which is to do the impossible to keep the economic situation from spiralling out of control before the elections, has become really tough to achieve because of the drought’s impact on soy exports,” said Salvador Vitelli of business consultancy Romano Group. “But the macroeconomic instability we are facing isn’t because of the drought, it’s about a chain of failures and mismanagement.”Federico Sturzenegger, a central bank head under the previous conservative government of Mauricio Macri, was blunt: Massa’s “strategy is to get more in debt to sustain a very large fiscal deficit that the government hasn’t corrected. It’s not a lot more complicated than that”. Massa’s labours also serve another purpose: the minister has made no secret of his desire to be the Peronist movement’s presidential candidate, and a decision is imminent. Nominations for nationwide primaries close on June 24 and both President Alberto Fernández and Cristina Fernández de Kirchner, his powerful deputy and a former president, have said they will not run. Argentina’s economy minister Sergio Massa meets Chinese commerce minister Wang Wentao during his visit to Beijing © Argentine Ministry of Economy/Handout/ReutersThe push for a greater cash injection from the IMF comes despite Argentina’s failure to meet many of the targets set out in a $44bn loan programme agreed with the fund last year, including on reducing the fiscal deficit, raising revenue and accumulating reserves, according to a May report by economists at the University of Buenos Aires. Yet IMF-watchers expect the fund to approve more money in its next review, due by early July, to avoid a bigger crisis and allow Argentina to repay money to the Washington-based lender.“The fund does not want to be responsible for Argentina going down the drain,” said Alejandro Werner, a former head of the IMF’s western hemisphere department. “It also does not want Argentina in arrears for a long period . . . so there are a lot of incentives for the fund to conclude the review.”The IMF said fund staff had been engaging “very closely” with Argentina on the latest review of the programme. “The focus has been on policies to strengthen the programme to safeguard stability, by enhancing reserves and fiscal sustainability, while recognising the impact of the drought,” the IMF said.An economy ministry source in Buenos Aires said Argentina wanted funds to compensate for the loss of export income triggered by the drought, with the amount still under discussion. Controversially, it also wants to use part of the IMF money to intervene in markets to prop up the peso. “What’s being discussed is how much will be available to use to intervene,” the source said. “At the moment, that discussion is looking good.”Hector Torres, a senior fellow at the Center for International Governance Innovation and former IMF executive director, was sceptical. “Argentina’s central bank has run out of dollars and the official exchange rate is clearly unsustainable,” he said. “The fund wants to avoid pushing the country into default . . . but I cannot see the fund’s executive board allowing the use of IMF resources to buy pesos on the foreign exchange market.”A source familiar with the IMF talks said there was considerable frustration over Argentina. “There’s very little support for more muddling through,” the source said. “Massa should have made a big adjustment when he took office.”Sturzenegger said the fund might lend Argentina enough to meet upcoming repayments to the IMF itself, but not larger sums. “I think what the fund will do, instead of disbursing [all] of the rest of the funds from the program, will just give money in line with what Argentina has to return to them . . . So I think the fund will defer the issue of Argentina’s [broader] package to talk about it with the next government.”The risks are political as well as economic. Hard-right candidate Javier Milei is polling strongly and may top the primary elections in August, which are held simultaneously for all political parties. Milei has advocated dollarising the economy, so a strong result for him could destabilise the situation further by increasing expectations of a big devaluation.“If this guy would dollarise the economy and has a third of the vote in polls, why would you hold domestic debt?” asked a person familiar with the IMF talks.Long viewed as the villain by many Argentines for its past role in austerity programmes, the IMF has few good options.“The fund will probably be criticised for doing something awful on top of an awful programme,” said Werner, who oversaw a previous 2018 IMF bailout. “But at the end of the day they wouldn’t have been repaid anyway. Either you lend to Argentina so they repay or they won’t repay. Both sides will extend and pretend.”  More

The economy is on course to expand 0.4% this year and 1.8% next year, the CBI said, compared with its previous forecast for a 0.4% contraction followed by growth of 1.6% in 2024.Falling energy prices, the reopening of China’s economy from COVID-19 restrictions and easing supply chain disruptions were the main reasons for the upgrade, the CBI said.Other forecasters like the Organisation for Economic Co-operation and Development and International Monetary Fund have also bumped up their growth forecasts for Britain recently.”While encouraging, there’s no getting away from the fact that this year will be another tough one for both businesses and households,” CBI lead economist Alpesh Paleja said, noting that the Bank of England looks likely to raise interest rates to a peak of 5% by August from 4.5% now.”It’s also concerning that the UK is underperforming on many of the areas crucial to our long-term prosperity, such as business investment and trade intensity,” he said.The CBI does not expect business investment – a weak spot for Britain’s economy since the Brexit vote of 2016 – to return to its pre-pandemic level before the end of next year.”Making our business environment more attractive to firms at home and abroad must be front of mind in the months ahead,” Paleja said. More

Sunak, speaking at the start of London Tech Week, will say the “tectonic plates of technology are shifting”.”We must act – and act quickly – if we want not only to retain our position as one of the world’s tech capitals … but to go even further, and make this the best country in the world to start, grow and invest in tech businesses,” Sunak will say, according to advance extracts released by his office.”That is my goal. And I feel a sense of urgency and responsibility to make sure we seize it.”Governments around the world are now trying to find a balance whereby they can assess and rein in some of the potential negative consequences of AI without stifling innovation.Britain in March opted to split regulatory responsibility for AI between those bodies that oversee human rights, health and safety, and competition, rather than creating a new body dedicated to the technology.Sunak will say the tech sector is at the heart of his priority to grow the economy and outline how the government will work with businesses to capitalise on opportunities presented by transformative technologies, such as AI, which proponents have compared with the arrival of the internet.During a visit to Washington last week, Sunak said Britain would host a global summit on artificial intelligence safety later this year to consider the risks of AI and discuss how they can be mitigated through internationally coordinated action.”The possibilities are extraordinary. But we must – and we will – do it safely,” he will say on Monday. “I want to make the UK not just the intellectual home, but the geographical home of global AI safety regulation.” More

(Reuters) – A look at the day ahead in Asian markets from Lewis Krauskopf.Asian markets will turn their attention to a series of central bank meetings after ending last week on a buoyant note.MSCI’s gauge of world stock markets on Friday hit its highest point in 13 months. Wall Street was upbeat as the S&P 500 notched its fourth straight weekly gain and a 20% rise from its October low, meaning the benchmark index had confirmed a bull market, according to the definition of many investors.Meanwhile, Japan’s Nikkei has posted nine straight weekly gains. Even beaten-up China stocks managed to end higher on Friday, buoyed the automobile and technology sectors, even as disappointing inflation data weighed on investor sentiment.Of course, a busy week could quickly change the mood. Producer price data in Japan is expected. In India, inflation and industrial production reports are also due out on Monday. But investors will largely be girding for the run of major central bank meetings later in the week. The Federal Reserve is expected to pause its rate-hiking cycle when it issues its policy decision on Wednesday — although a U.S. consumer price inflation report out on Tuesday could complicate those plans if it comes in hot.A day after its U.S. counterparts, the European Central Bank is expected to raise rates by another 25 basis points, with traders seeking clues about next steps. On Friday, the Bank of Japan meets as recently-appointed BOJ Governor Kazuo Ueda has signaled ultra-easy policy will remain until wage gains and inflation are stable and sustainable. Ahead of the central bank bonanza, the U.S. dollar had slid back after strengthening in May. In other asset price action, oil prices fell on Friday to record a second straight weekly decline, as disappointing Chinese data added to doubts about demand growth.Here are key developments that could provide more direction to markets on Monday: – Japan producer prices (May)- India CPI data (May)- India industrial production (April) (By Lewis Krauskopf; Editing by Diane Craft) More

Bloomberg News reported on Saturday that the emergency takeover of Credit Suisse by UBS will close on Monday.UBS has come up with a list of nearly two dozen “red lines” that prohibit Credit Suisse staff from a range of activities, which include taking on clients from countries such as Libya, Russia, Sudan and Venezuela and launching new products without approval from UBS managers, the FT report added.Ukrainian politicians and state-owned enterprises will also be blocked to prevent potential money laundering, the report said.The Swiss government agreed on Friday to guarantee up to 9 billion Swiss francs ($9.96 billion) of losses UBS may incur from the sale of its rival’s assets beyond 5 billion francs the lender is due to cover itself.Credit Suisse declined to comment, while UBS did not immediately respond to a Reuters request for comment.($1 = 0.9038 Swiss francs) More

The spokesperson confirmed the details from an interview with Soros published in The Wall Street Journal on Sunday.A hedge fund manager turned philanthropist and major backer of liberal causes, Soros, 92, said he previously didn’t want his Open Society Foundations (OSF) to be taken over by one of his five children. But speaking of his decision to turn over the foundation and the rest of his $25 billion empire to his 37-year-old son, who goes by Alex, the elder Soros said: “He’s earned it.”Also interviewed by the newspaper, Alex said he’s “more political” than his father and that he plans to continue donating family money to left-leaning U.S. political candidates. He told the Journal that he would broaden the foundation’s priorities to include voting and abortion rights as well as gender equity.”As much as I would love to get money out of politics, as long as the other side is doing it, we will have to do it too,” Alex said. The OSF board elected Alex as its chairman in December, and Alex now directs political activity as president of Soros’ political action committee. The foundation directs about $1.5 billion a year to groups such as those backing human rights around the world and helping build democracies, the Journal reported. More