Several signs that a major shift in the economic narrative may be underway

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There is more evidence that the economic narrative can undergo a major shift.

For several months, we have lived in an economy where strong demand has been met with lagging supply, which has caused inflation to increase. We now appear to be shifting to a phase in which demand growth is cooling and supply chains are declining, which should lead to a fall in inflation.

According to Census Bureau data released WednesdayOrders for non-defense capital goods other than aircraft ̵[ads1]1; also known as core investments or business investments – rose 0.3% to a record high of $ 73.1 billion in April.

While the 0.3% growth rate represents a slowdown from 1.1% in March, it is the type of decline that is welcome news for people like the Federal Reserve, who are actively working to cool economic growth in their attempt to bring down inflation.

“This is in line with our view that economic activity is declining rather than breaking under the influence of higher interest rates,” Michael Pearce, senior U.S. economist at Capital Economics, said in a note Wednesday.

Growth in core investments represents a massive economic tailwind. And the fact that it continues to grow, albeit at a declining pace, is a good sign of growth throughout the economy.

According to the S&P Global Flash US Manufacturing PMI report released on Wednesday, these emerging economic trends have continued into May. More specifically, the composite output index fell to a four-month low of 53.8 in May. For this index, any reading above 50 signals growth, and therefore the declining number indicates that growth is slowing.

“Growth has slowed since the peak in March, particularly in the services sector, as demand for the reopening of the economy pent-up after the Omicron wave shows signs of slowing,” wrote Chris Williamson, chief economist at S&P Global Market Intelligence. Wednesday.

Growth in consumption expenditure slows down as excess savings are utilized

Growth also appears to be cooling on the consumer front.

According to a BEA report released on Friday, spending on personal consumption (ie consumption) increased by 0.9% in April from the previous month to new record levels. However, this was a healthy slowdown from March’s 1.4% growth rate.

Expenditure came as the savings rate (ie the difference between income and expenditure) fell to its lowest level since September 2008.

While this development in itself is disturbing, it comes after consumers have spent over two years accumulating over $ 2 trillion in extra savings.

“It seems that households have eaten at the ‘surplus savings’ that were built up in earlier stages of the pandemic to drive consumption spending in recent months,” Daniel Silver, an economist at JPMorgan, wrote in a note on Friday.

As we have often discussed at TKer, these excess savings represent a massive economic tailwind. For a while you could argue that it exacerbated inflation. But now it seems to strengthen spending as the economy slows.

News of a downturn is not exactly the kind of thing that requires a festive tone. But it is precisely such things that should help bring down inflation.

More signs that supply chains are declining

S & P’s PMI report also indicated that there could be some daylight in the disrupted supply chains.

“Manufacturers in particular also report that capacity is still limited by supply shortages these bottlenecks showed further encouraging signs of relief,Said S & Ps Williamson (highlighted).

It’s also been a while since we’ve heard of ships idling outside ports waiting to be unloaded.

“US port data suggest easing backlog,” JPMorgan economists wrote last week. “Notable examples are the ports of Los Angeles and Long Beach, which process about 40% of total imports to the United States.”

And it’s not just sea freight that is loosening. Truck freight seems to be loosening as well.

According to BofA’s Truck Shipper Survey for the week ending May 19, “shippers find it much easier to secure capacity (the highest level since June 2020).”

Unfortunately, at least some of these signs of loosening supply chains can be explained by easing the demand for goods. But again, these are the dynamics that should help ease inflation.

Several signs that the labor market is cooling down

Bloomberg reported that tech giant Microsoft slowed down employment in its Windows, Office and Teams businesses.

PayPal laid off 83 employees at its San Jose headquarters.

These are anecdotes. But the development is in line with the Fed’s goal of cooling inflation by first cooling the labor market.

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Signs that inflation peaked

Last month I wrote about how economists across the board said that inflation – measured by price increases from year to year – had peaked.

On Friday, we received several pieces of evidence to confirm that this may be the case.

The core PCE price index – the Fed’s preferred measure of inflation – climbed 4.9% in April from a year ago. This is down from 5.2% in March and the top interest rate of 5.3% in February.

On a monthly basis, the PCE core price index has risen by a cool 0.3% over the last three months.

It is still too early to claim victory over inflation

“Many have designated March as the peak of inflation and are looking for inflation to cool from here,” Grant Thornton’s chief economist Diane Swonk said Friday. “We are not as convinced given the risk we still face due to the war in Ukraine and shutdowns in China. In any case, it is important to note that all cooling we see will have a high floor. Both the overall and core PCE index remains well above the Federal Reserve’s target of 2%. “

Inflation actually has a long way to go to reach 2% from 4.9%.

So we have to keep an eye on the incoming data to see if a major shift in the economic narrative is really underway.

More from TKer:

Back overview ?

? The shares are rising, ending the 7-week losing streak: The S&P 500 rose 6.6% last week, ending a seven-week losing streak. It was the largest increase in one week since November 2020. The index is now down 13.3% from January 3, the highest closed at 4796.56, but 6.6% over May 19 closed the lowest at 3,900.79. For more on market volatility, read this and this. If you want to read up on bear markets, read on this.

? Business insiders buy the shares of their companies: From JPMorgan: “… corporate insiders have a non-consensus view across most sectors and are actively buying the downturn with net insider trading activity reaching 1STDev above trend level.”

? Mortgage rates are still high, but tick off: The average interest rate for the 30-year fixed-rate loan fell to 5.10% from 5.25% the week before. Here is Freddie Mac: “Mortgage rates fell for the second week in a row due to several headwinds that the economy is facing. Despite the recent moderation in interest rates, the housing market has clearly slowed, and the slowdown is spreading to other segments of the economy, such as consumption expenditure on durable goods. “

? Decline in sales of new homes: Sales of newly built homes fell 16.6% month-over-month to an annual rate of 591,000 units, according to Census Bureau data.

? Consumer sentiment is falling: The University of Michigan’s consumer sentiment index fell to 58.4 in May, the lowest level since August 2011. From the survey: «This latest fall was largely driven by continued negative views on current purchasing conditions for houses and durable goods, as well as consumers’ future prospects for the economy, primarily due to concerns about inflation. “

Remember that weakened sentiment has not come with a decline in spending in recent months. For more on emotions, read this.

? People do things: From Yahoo Finance’s Emily McCormick: “On Thursday, both Southwest Airlines and JetBlue raised their quarterly guidance, citing strong demand heading into the critical summer travel season. Both adjustments came just weeks after the companies first reported their forecasts last month. “

This follows a similar announcement from United Airlines last week. All in all, it is clear that people are refusing to put their lives on hold.

Up the road ?

It’s work week in America. Wednesday comes with the survey on job openings and labor turnover in April, and Friday comes with the employment report for April. Employment growth has been very strong and record high job vacancies have made it possible for workers to earn higher wages.

However, there are almost two vacancies per unemployed person. This good news is blamed for high inflation, which is bad, which is what the Fed aims to address with tighter monetary policy.

The US financial markets will be closed on Monday for Memorial Day.

Sam Ro is the founder of Follow him on Twitter at @SamRo.

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