More signs that a major shift in the economic narrative could be underway


There is more evidence that the economic narrative could be changing.

For months we have been living in an economy where high demand was met by late supply causing inflation to spike. We now appear to be moving into a phase where demand growth is slowing and supply chains are loosening, which should lead to lower inflation.

According to Census Bureau data published on Wednesdayorders for non-military capital goods excluding aircraft – alias basic investments or business investment – ​​climbed 0.3% to a record $73.1 billion in April.

While the 0.3% growth rate represents a deceleration from the 1.1% rate in March, it’s the kind of slowdown that’s good news for the likes of the Federal Reserve, which is are actively working to cool economic growth in its efforts to reduce inflation.

“This aligns with our view that economic activity is flexing rather than collapsing under the impact of higher rates,” Michael Pearce, senior U.S. economist for Capital Economics, said in a note on Wednesday.

Core investment growth represents massive economical tailwind. And the fact that it continues to grow, albeit at a slower pace, is a good sign for the growth of the economy as a whole.

According S&P Global Flash US Manufacturing PMI report released Wednesday, these emerging economic trends continued into May. Specifically, the composite production index fell to a four-month low of 53.8 in May. For this index, any reading above 50 signals growth, and so the falling number suggests growth is slowing.

“Growth has slowed since peaking in March, notably in the services sector, as pent-up demand following the reopening of the economy after the Omicron wave shows signs of waning,” Chris Williamson, chief economist at S&P Global market intelligence, wrote Wednesday.

Consumer spending growth slows as excess savings are tapped

Growth also appears to be slowing on the consumption side.

According to a BEA report released on Friday, personal consumption expenditure (i.e. consumer spending) rose 0.9% in April from the previous month to reach new record highs. However, this is a healthy deceleration from March’s 1.4% growth rate.

The spending came as the savings rate (i.e. the difference between income and spending) fell to its lowest level since September 2008.

While this development in itself is troubling, it comes after consumers have spent more than two years accumulating over $2 trillion in excess savings.

“It appears that households have tapped into the ‘excess savings’ that built up in the early stages of the pandemic to fuel consumer spending in recent months,” JPMorgan economist Daniel Silver wrote on Friday.

As we have discussed frequently on TKer, these excess savings represent a massive economical tailwind. For a while you might say that it worsened inflation. But now it seems to be increase spending as the economy slows.

The news of a slowdown is not exactly the kind of thing that deserves a celebratory tone. But that’s exactly the kind of thing that should help bring inflation down.

More signs that supply chains are easing

The S&P PMI report also suggested there could be daylight in the disrupted supply chains.

“Manufacturers in particular are also reporting that capacity continues to be constrained by supply shortages, although these bottlenecks have shown encouraging new signs of easing,said Williamson of S&P (emphasis added).

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

“U.S. Ports Data Suggests Reduction in Backlogs,” JPMorgan Economists wrote Last week. “Notable examples are the ports of Los Angeles and Long Beach, which handle approximately 40% of total imports into the United States.”

And it’s not just sea freight that’s being relaxed. Road freight also seems to be easing.

According to BofA’s truck shipper survey for the week ending May 19, “shippers are finding it much easier to secure capacity (its highest level since June 2020).”

Unfortunately, at least some of these signs of loosening supply chains can be explained by easing demand for goods. But, this is the dynamic that should lead to an easing of inflation.

More signs that the labor market is cooling

Bloomberg reported that tech giant Microsoft was slowing hiring across its Windows, Office and Teams businesses.

PayPal laid off 83 employees at its headquarters in San José.

These are anecdotes. But the developments are in line with the Fed’s objective of reining in inflation by first labor market cooling.

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Signs of an inflation spike

Last month I have wrote about how economists on all sides were saying inflation — measured by year-over-year price increases — had peaked.

On Friday, we got more evidence to confirm that might 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 the rate of 5.2% in March and the peak rate of 5.3% in February.

On a month-to-month basis, the core PCE price index rose 0.3% over the past three months.

It’s still too early to claim victory over inflation

“Many have touted March as the peak of inflation and are expecting inflation to cool from here,” said Diane Swonk, chief economist at Grant Thornton. said Friday.. “We are not as convinced given the risks we still face due to the war in Ukraine and blockages in China. Either way, it’s important to note that any cooling we’ll see will have a high floor. Both the headline and core PCE indices remain well above the Federal Reserve’s 2% target.

Indeed, inflation still has a long way to go to drop from 4.9% to 2%.

And so, we’ll have to keep an eye on the incoming data to see if a major shift in the economic narrative is indeed underway.

More TKers:

Mirror 🪞

📈 Stocks surge, ending 7-week losing streak: The S&P 500 rebounded 6.6% last week, ending a seven-week losing streak. This is the biggest one-week gain since November 2020. The index is now down 13.3% from its January 3 closing high of 4796.56, but 6.6% above its May 19 closing low of 3900.79. To learn more about market volatility, read this and this. If you want to know more about bear markets, read this.

💰 Company insiders buy their company’s stock: From JPMorgan: “…company insiders hold a non-consensus view in most sectors and are actively buying the decline with net insider buying activity reaching 1STDev above the trend level.”

📈 Mortgage rates still high, but slowing: The average 30-year fixed-rate mortgage rate fell to 5.10% from 5.25% the previous week. Here is Freddie Mac“Mortgage rates fell for the second week in a row due to multiple headwinds facing the economy. Despite recent rate moderation, the housing market has clearly slowed and the deceleration is spreading to other segments of the the economy, such as consumer spending on durable goods.


🏡 Drop in new home sales: Sales of new homes fell 16.6% month over month to an annual rate of 591,000 units, according to Census Bureau The data.

😤 Consumer confidence plummets: University of Michigan consumer sentiment index fell to 58.4 in May, its lowest level since August 2011. According to the survey: “This recent decline was largely due to persistent negative views on current buying conditions for homes and durable goods, as well as consumers’ future outlook for the economy, primarily due to concerns about inflation.”

Keep in mind that the deterioration of sentiment has not been accompanied by a decrease in expenditure These last months. To learn more about feelings, read this.

🛫 people do stuff: From Yahoo Finance’s Emily McCormick: “On Thursday, Southwest Airlines and JetBlue raised their quarterly guidance, citing strong demand ahead of the critical summer travel season. The two upward revisions came just weeks after the companies initially released their forecasts last month.

This follows a similar announcement from United Airlines Last week. Overall, it is evident that people refuse to put their lives on hold.

Up the road 🛣

It’s Jobs Week in America. Wednesday comes with the April Job Openings and Labor Rotation Survey and Friday comes with the April Employment Report. Employment growth has been very strong and record job offers enabled workers to earn higher wages.

However, there are almost two job offers per unemployed person. This good news is blamed for causing high inflation, which is badthat’s what the Fed aims to respond with tighter monetary policy.

US financial markets will be closed Monday for Memorial Day.

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

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