But as Johnson surveys his 30,000 square foot operation, all he sees are busy workers rushing to fill new orders for a variety of vital steel and copper components, including those used in electrocardiograms and cable TV hookups. His biggest problem is finding enough manpower to handle all the metal bending jobs that come his way.
“There’s so much pent-up demand, and everyone I talk to — our suppliers and our customers — is saying the same thing,” he said. “We’re up 40% from last year and we’re climbing. This month we have increased by 100% compared to last year. It’s incredible.”
Johnson’s optimistic outlook contrasts sharply with the growing gloom of high-profile figures. On Wednesday, Jamie Dimon, chief executive of JPMorganChase, warned that “a hurricane” is hitting the US economy.
Tesla chief Elon Musk and Lawrence Summers, a former Treasury secretary, also warned of an impending recession. At a college in Quinnipiac According to a poll last month, 85% of Americans agreed that a downturn was “very” or “somewhat likely” next year.
Still, Marion Manufacturing’s good fortune – reflected by continued strength in consumer spending and signals from Wall Street – suggests that such dire assessments could be wrong. On Friday, the Labor Department said the economy gained 390,000 jobs in May, beating analysts’ expectations, while the jobless rate remained at 3.6%.
“I don’t know what’s driving all the talk about the recession,” Johnson said. “There’s a lot of negativity out there that isn’t well-founded.”
The Federal Reserve’s recent shift in monetary policy is the main source of recession fears. After repeatedly assuring investors last year that inflation would prove “transient,” Fed Chairman Jerome H. Powell this year steered the central bank on a path of higher rates. interest rates designed to slow the economy and ease pressure on consumer prices.
The Fed’s about-face has already been bad news for financial markets. Rising interest rates near zero prompted investors to rethink their portfolios, sending stocks tumbling and cementing the idea that something in the economy has gone seriously wrong.
But recent indicators suggest the two-year expansion – while slowing from an unsustainable annual growth rate of nearly 7% at the end of last year – shows few signs of receding. The labor market produces “help wanted” signs faster than employers can add workers. Consumers and businesses are teeming with money. And by some metrics, the bond market seems less concerned about inflation than many pundits.
“After a rocket rebound from the pandemic, there must be some moderation in growth,” said Ian Shepherdson, chief economist for Pantheon Macroeconomics. “But there is an important distinction between moderation and recession.”
Economists describe recessions as a general decline in activity affecting production, incomes, industrial production and retail sales. The term is generally understood to imply two consecutive quarters with a decline in gross domestic product, although there is no official definition.
Despite Americans’ bitter mood, economists polled by Bloomberg in May expect the economy to grow at an annual rate of 2.7% this year. That’s down from the 3.3% forecast in April, but far from a recession.
In April, layoffs hit their lowest level since the Labor Department began tracking in 1999. The economy has added an average of 408,000 jobs in each of the past three months. And first-time jobless claims, although up from their all-time low in March, are about half their average over the past 50 years.
Continued economic strength is a double-edged sword. That means more people who want work are likely to find it. But it increases the odds that the Fed, which has already hiked rates twice and signaled plans for two more half-point hikes, will do too much and trigger a recession.
Summers, a Democrat who has been critical of the Fed, said at a Washington Post Live event this week that rates needed to rise faster and higher than central bank plans. Inflation will not be brought under control without “higher unemployment”, he said.
Dean Baker, senior economist at the Center for Economic and Policy Research, said the Fed’s initial rate hikes were working. The financial markets’ response to the Fed’s actions further tightens financial conditions and could reduce the need for further rate hikes.
“I’m usually not the big optimist,” Baker said. “But things are generally going in the right direction. I don’t see the basis for a recession.
Even before the Fed began raising rates in March, financial conditions were tightening. First, banks started charging more for mortgages. On Thursday, the rate on a 30-year conventional home loan was 5.39%, up more than two percentage points since January, according to Bankrate.
Then, stocks stumbled. The tech-heavy Nasdaq index is down more than 20% this year, which could help slow the economy as suppressed investors cut spending.
At least for now, investors also seem to be siding with the Fed over the summers. Wall Street expects annual inflation of 2.76% over the next 10 years, up from more than 3% at the end of April, according to a popular market indicator derived from 10-year US Treasury yields.
This is a signal that investors believe the Fed will suppress inflation before expectations of future price increases turn into a self-fulfilling prophecy. The central bank’s favorite measure of inflation, the core personal consumption expenditure price index, has also fallen for two straight months.
“The path can be narrow. But we think the Fed can still thread that needle to a soft landing,” said Michael Pond, global head of inflation research at Barclays.
Americans are less optimistic. The University of Michigan’s monthly consumer confidence reading for May is at its lowest level in 11 years.
It’s not hard to see why consumers are upset. The retail price of gasoline appears to be heading towards $5 per gallon. Ongoing supply chain headaches have left buyers facing a series of product shortages, including for critical items such as infant formula. And even where wages are rising, they are not keeping pace with prices.
The economy also faces an unusually complex combination of risks.
The war in Ukraine has pushed up the price of key global commodities, including wheat and oil, and increased the risk of recession in Europe. Meanwhile, China’s inflexible zero covid policy has triggered repeated shutdowns that have disrupted factories in the world’s top exporting nation and left global supply chains in limbo.
These geopolitical forces are immune to an increase in interest rates, which could put the Fed in a difficult position if inflation remains high even after a significant increase in borrowing costs.
Further shocks from the European war or troubled Asian production networks could also drag the United States into a slump.
But even though polls show consumers and executives worried about the recession, they are spending as if they expect the good times to last. In late May, Macy’s raised its profit forecast after announcing that net profit in its latest quarter nearly tripled from the same period last year.
Although Americans have started to dip into their savings to support their spending, they still have over $2 trillion in reserve. That should put a floor under growth, economists said.
“Fears of a decline in economic activity this year will prove to be overblown unless further negative shocks materialize,” Goldman Sachs economists concluded in a May 30 client note.
At DHL’s North American supply chain unit, CEO Scott Sureddin said he saw no signs of slowing down. The company added new warehouses and bypassed the tight labor market by filling them with autonomous forklifts and smaller robots that grab packages. This year, he will spend hundreds of millions of dollars on such efforts.
“We are still seeing good growth. We continue to make major investments in technology,” he said. “There is nothing idling that forces us to stop investing.”
Indeed, the financial imbalances that often precede a recession are absent. On the eve of the Great Recession of 2008, for example, consumers were struggling to pay their bills, spending the largest share of their income in history on their monthly loan and credit card fees. Today, Americans’ debt service payments consume just 9.3% of disposable income, near a 41-year low, according to the Federal Reserve.
The corporate debt burden is also remarkably light. Twenty years ago, interest payments consumed almost 25% of the cash flow of non-financial companies, according to Moody’s. Today, the figure is less than 10%.
At Marion Manufacturing, Johnson is spending several hundred thousand dollars this year on new factory equipment to process stainless steel and beryllium copper into a variety of industrial parts. He sees no reason to reconsider these plans.
“Our business as a whole has never been stronger than it is today,” Johnson said. “We are quite optimistic.”
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