How Terminal Is Terminal?

The dilemma

A tricky situation is unfolding, making it rather difficult for the Federal Reserve Bank to honour earlier promises to gradually ease off in its ongoing fight against inflation. Here is the dilemma confronting the Fed: Consumer confidence is a trustworthy indicator of economic conditions. When the expectations index falls much faster than the current situations index, a recession is usually around the corner (Exhibit 1).

Exhibit 1: Consumer confidence: Expectations index less current conditions index

Sources: Bloomberg, The Daily Shot

As you can see, we are now in recessionary territory, hence why Jerome Powell has been quite eager to ease off, but this is where his problems begin. The US labour market is telling a very different story. Despite consumer expectations having shrunk dramatically, US companies continue to recruit as if nothing has changed. As you can see in Exhibit 2, new jobs continue to be created at twice the pace of workers being dismissed.

Exhibit 2: US job openings / unemployment level

Sources: FRED, The Daily Shot