Will the US Economy Experience a Hard Landing?.. Fed Also Warns of Possible "Vicious Cycle" Risk

Increasing Number of Companies Warning of Weak Demand... Store Visitors Down 11%
Fed "Rising Liquidity Squeeze Risk Leads to Greater Price Volatility"

[Photo by EPA Yonhap News]

[Asia Economy Reporters Byunghee Park and Hyunjin Jung] Although Jerome Powell, chairman of the U.S. Federal Reserve (Fed), said last week that the U.S. economy is likely to avoid a recession and achieve a soft landing, the New York stock market has been plunging for consecutive days since then. This indicates that the financial market does not trust Chairman Powell's remarks. In fact, signals indicating the risk of a hard landing in the U.S. economy are being detected one after another in the real economy. Voices from companies warning of weak demand are growing louder, and the number of store visitors is also sharply declining. In its semiannual Financial Stability Report, the Fed pointed out increased risks of financial market liquidity tightening, mentioning economic uncertainties that differ from Chairman Powell's statements last week.

During this earnings season, the number of times companies mentioned weak demand is the highest since the second quarter of 2020, right after the COVID-19 pandemic, Bloomberg reported on the 9th (local time), citing Bank of America (BOA) analysis.

BOA analyzed companies' comments on the economy when announcing their earnings. The analysis of positive mentions such as economic improvement and strengthening, and negative mentions such as deterioration and weakening, showed that the gap between positive and negative mentions has narrowed to the smallest since the second quarter of 2020. This means negative mentions have increased.

Bloomberg also reported that the number of store visitors at the end of last month decreased by nearly 11% compared to a year ago. Bloomberg analyzed that the decline in visitors is due to consumers hesitating to purchase because of product price increases.

The contraction in the real economy is leading to instability in the financial markets.

On the same day, the Fed released its semiannual Financial Stability Report, warning of liquidity tightening risks by stating, "Although recent financial market liquidity is not at an extreme level as seen in some past cases, the risk of sudden and significant deterioration is higher than usual."

The Fed diagnosed that "market liquidity has decreased since the end of last year," noting that "especially the liquidity of recently issued U.S. Treasury securities and stock index futures trading has notably declined."

Since the beginning of this year, most financial markets including government bonds, commodities, and securities have shown significant volatility due to U.S. monetary policy tightening, Russia's invasion of Ukraine, and concerns about China's economic slowdown. The Fed stated, "Since Russia's invasion of Ukraine, liquidity in the crude oil futures market has been somewhat pressured," and "other commodity markets have also experienced noticeable difficulties." The Fed also assessed that "increasing uncertainty and volatility can lead to a vicious cycle of liquidity deterioration, which may ultimately cause greater price volatility."

Concerns have also been raised that if economic activity decreases due to additional measures such as high inflation and interest rate hikes, it could negatively impact the financial system. The Fed sees that consumer finance could be hit by unemployment, high interest rates, and falling housing prices, while corporate finance could face rising delinquency rates and bankruptcies. It added, "Rapid interest rate hikes can increase volatility and pressure market liquidity, potentially causing significant price adjustments in asset markets and resulting in losses for financial institutions."

As the Fed pointed out, the New York stock market has recently shown sharp volatility. On this day, the New York stock market's S&P 500 index plunged 3.20% compared to the previous trading day, marking another 3% drop in just two trading days since the 5th. The S&P 500 index has fallen 16.7% from its January 3 closing high, raising concerns about entering a bear market. The Nasdaq index, which already entered a bear market in March, has expanded its decline to 26% from its previous high, falling to the level of November 2020. November 2020 was when the New York stock market rally began on expectations of a COVID-19 vaccine. This means the gains from the pandemic rally have been completely erased.

The trend of increasing corporate earnings estimates has also been broken, which is negative for the stock market. According to Bloomberg Intelligence, Wall Street's corporate earnings estimates for this year have decreased for two consecutive weeks recently. Although the decrease in earnings estimates is not large, the two-week consecutive decline is the first since June 2020, raising concerns about a bleak outlook for the stock market.

This content was produced with the assistance of AI translation services.