Author: smarttalksucce

Corporate executives are taking a dim view of their prospects, with a majority now expecting a recession ahead, according to a closely watched business survey released Wednesday.

The Conference Board measure of CEO sentiment showed that 57% of respondents expect inflation to come down “over the next few years” but the economy to sustain a “very short, mild recession.”

Those results reflect an overall pessimistic tone from the quarterly gauge, as the board’s Measure of CEO Confidence fell to 42, a steep drop from the first quarter’s 57 and the lowest since the early days of the Covid pandemic. Anything below 50 represents a negative outlook, as the number measures the level of respondents expecting expansion over those seeing contraction.

That reading “is consistent with slowing for sure,” Roger Ferguson, vice chairman of the Business Council and a trustee of The Conference Board, told CNBC’s “Squawk Box” in an interview following the report’s release.

“All of this is telling us that the combination of inflation that is much too high, to quote [Federal Reserve Chairman] Jay Powell, wages that are increasing but not keeping up with inflation, and then the inability to pass all this along is creating a very, very challenging dynamic,” said Ferguson, a former Fed vice chair.

The recession expectation reading wasn’t the only bad news out of the report.

Just 14% of CEOs reported that business conditions had improved in Q2, down from 34% in the first quarter. Sixty-one percent said conditions were worse, compared with 35% in the prior reading. Only 19% see improvement ahead, down from 50%, while 60% expect things to worsen, up from 23%.

One piece of good news was that 63% expect to hire in the next quarter, down only slightly from 66% in Q1. However, some 80% said they were having problems getting qualified workers, down just slightly, while 91% see wages rising by more than 3% over the next year, up from 85% in the first three months of the year.

Also, just 38% expect to increase capital spending, a sharp decline from 48% previously. Some 20% see stagflation conditions of low growth and high inflation.

Powell said in an interview Tuesday with The Wall Street Journal that he remains determined to tamp down inflation, insisting that he will need to see conditions change “in a clear and convincing way” before the Fed stops raising rates and tightening monetary policy.

Ferguson said the survey “suggests that this set of circumstances is not likely to get better anytime soon and consequently pressures on the middle line and the bottom line for businesses, pressures on the household sector, pressures at CEO level, and, frankly, pressures on the Federal Reserve.”

U.S. households are now spending the equivalent of $5,000 a year on gasoline, up from $2,800 a year ago, according to Yardeni Research.

In March, the annual rate of gasoline spending was at $3,800, Yardeni noted. During the week of May 16, the national retail price for gasoline reached a record $4.59 per gallon, the firm said.

“No wonder that the Consumer Sentiment Index is so depressed. The wonder is that retail sales have been so surprisingly strong during April and May,” Yardeni said in a note.

Yardeni said consumers’ inflation-adjusted incomes are barely growing, but they have accumulated a lot of savings, and they are charging more on credit cards.

But Yardeni said don’t bet against the U.S. consumer: “When we are happy, we spend money. When we are depressed, we spend even more money!”

Retail sales data for April, released Tuesday, was surprisingly strong. On a year-over-year basis, retail sales rose 8.2% for the month.

Gasoline sales actually declined in April from March, as prices temporarily fell before ramping up to record levels in May. Spending on gasoline in April surged almost 37% from a year ago, according to Commerce Department data.

The price of gasoline was $3.04 per gallon a year ago, according to AAA. This week, the average price rose above $4 a gallon in all 50 states, according to AAA data.

The national average Wednesday was $4.57 per gallon, according to the AAA website.

Mortgage rates actually fell slightly last week, but the damage has already been done to housing affordability. Both refinance and purchase loan demand dropped, pulling total mortgage application volume down 11% for the week, according to the Mortgage Bankers Association’s seasonally adjusted index.

Mortgage applications to purchase a home declined 12% week to week and were 15% lower compared with the same week one year ago. That was the first weekly drop in homebuyer demand since the third week in April. Mortgage rates have risen over 2 full percentage points since the start of the year, and home prices are up more than 20% from a year ago.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 5.49% from 5.53%, with points increasing to 0.74 from 0.73 (including the origination fee) for loans with a 20% down payment.

Inflation isn’t helping consumers feel particularly flush either.

“General uncertainty about the near-term economic outlook, as well as recent stock market volatility, may be causing some households to delay their home search,” said Joel Kan, an MBA economist.

Applications to refinance a home loan continued their landslide, falling another 10% week to week. Refinance demand was 76% lower than the same week one year ago. Two years of record-low interest rates during the Covid pandemic incited a refinance boom which has now gone bust. There is simply a very small pool of borrowers who can now benefit from a refinance.

While dropping very slightly from the week before, the adjustable-rate mortgage share of total applications remained high at 10.5%. It was around 3% at the start of this year. ARMs offer lower interest rates and can be fixed rate for up to 10 years.

Mortgage rates moved higher again Tuesday, after strong retail sales data and comments from Federal Reserve Chairman Jerome Powell, who said the Fed would not hesitate to continue boosting interest rates until inflation came down.

The weekly drop in homebuyer mortgage demand concurs with another report out Tuesday from the nation’s homebuilders. They reported a considerable drop in both buyer traffic and current sales conditions, according to the National Association of Home Builders. Builder sentiment dropped to the lowest level in nearly two years.

Federal Reserve Chair Jerome Powell emphasized his resolve to get inflation down, saying Tuesday he will back interest rate increases until prices start falling back toward a healthy level.

“If that involves moving past broadly understood levels of neutral we won’t hesitate to do that,” the central bank leader told The Wall Street Journal in a livestreamed interview. “We will go until we feel we’re at a place where we can say financial conditions are in an appropriate place, we see inflation coming down.

“We’ll go to that point. There won’t be any hesitation about that,” he added.

Earlier this month, the Fed raised benchmark borrowing rates by half a percentage point, the second increase of 2022 as inflation runs around a 40-year high.

Powell said following that increase that similar 50 basis point moves were likely to come at ensuing meetings so long as economic conditions remained similar to where they are now.

On Tuesday, he repeated his commitment to getting inflation closer to the Fed’s 2% target, and cautioned that it might not be easy and could come at the expense of a 3.6% unemployment rate that is just above the lowest level since the late 1960s.

“You’d still have a strong labor market if unemployment were to move up a few ticks,” he said. “I would say there are a number of plausible paths to have a soft as I said softish landing. Our job isn’t to handicap the odds, it’s to try to achieve that.”

The U.S. economy saw growth contract at a 1.4% pace in the first quarter of 2022, due largely to ongoing supply side constraints, spread of the omicron Covid variant and the war in Ukraine.

However, tighter monetary policy has added to concerns about a steeper downturn and has sparked an aggressive sell-off on Wall Street. In addition to the 75 basis points in interest rate hikes, the Fed also has halted its monthly bond-buying program, which is also known as quantitative easing, and will begin shedding some of the $9 trillion in assets it has acquired starting next month.

Powell said he still hopes the Fed can achieve its inflation goals without tanking the economy.

“You’d still have a strong labor market if unemployment were to move up a few ticks. I would say there are a number of plausible paths to have a soft as I said softish landing. Our job isn’t to handicap the odds, it’s to try to achieve that,” he said.

He added that “there could be some pain involved to restoring price stability” but said the labor market should remain strong, with low unemployment and higher wages.