More evidence of a possible major shift in the economic narrative

There is more evidence that the economic narrative could undergo a major transformation.

For months, we’ve been living in an economy where strong demand has been met by supply lag, driving up inflation. It appears that we are now entering a phase where demand growth is slowing and supply chains are slowing down, bringing down inflation.

According to the data of the Census Bureau released WednesdayIn April, orders for non-defense capital goods excluding aircraft — also known as core capital expenditures or business investment — rose 0.3% to a record $73.1 billion in April.

While the 0.3% growth rate represents a slowdown from the 1.1% rate in March, that kind of slowdown is welcome news for people like the Federal Reserve, which has been actively working to cool economic growth in its efforts to bring down inflation.

“This is consistent with our view that economic activity is bending rather than collapsing under the influence of higher rates,” Michael Pierce, chief US economist at Capital Economics, said in a note on Wednesday.

The growth of core capital expenditures represents a huge economic wind. And the fact that it continues to grow, albeit at a slowing pace, is a good sign of growth for the economy as a whole.

According to the US S&P Global Flash Manufacturing PMI report released on 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 indicator, any reading above 50 indicates growth, so a decreasing number indicates growth is slowing.

“Growth has slowed since peaking in March, most notably in the services sector, as pent-up demand after the economy reopened after the Omicron wave showed signs of abating,” wrote Chris Williamson, chief business economist at S&P Global Market Intelligence Wednesday.

Consumer spending growth slows as excess savings are exploited

Growth appears to be cooling on the consumer front as well.

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

The story continues

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

While this development on its own is worrisome, it comes after consumers have spent more than two years accumulating more than $2 trillion in excess savings.

“It appears that households have been eating the ‘excess savings’ accumulated in the early stages of the pandemic in order to increase consumer spending in recent months,” JPMorgan economist Daniel Silver wrote in a note on Friday.

As we’ve discussed frequently on TKer, these extra savings represent huge economic winds. For a while, you could argue that was exacerbating inflation. But it now appears to be boosting spending as the economy slows.

News of an economic slowdown isn’t exactly the kind that calls for a festive tone. But that is exactly the kind of thing that should help bring down inflation.

More signs of a supply chain slump

The S&P PMI report also indicated that there may be some light of day in disrupted supply chains.

Manufacturers in particular have also reported that capacity remains restricted due to supply shortages These bottlenecks showed other encouraging signs of easing,S&P’s Williamson said (emphasis added).

It’s also been a while since we’ve heard of ships slowing out of ports waiting to unload.

“US port data suggests backlog is easing,” JPMorgan economists Wrote last week. Notable examples are the ports of Los Angeles and Long Beach, which handle about 40% of all imports into the United States.

And not only sea freight has been eased. Trucking seems to be starting to loosen up, too.

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

Unfortunately, at least some of the signs of supply chain slackening can be explained by easing demand for goods. But again, this is the dynamic that should dampen inflation.

More signs that the labor market is cooling

Bloomberg reported that tech giant Microsoft has been slowing hiring in its Windows, Office, and Teams businesses.

PayPal has laid off 83 employees at its headquarters in San Jose.

These are tales. But the developments are in line with the Fed’s goal of cooling inflation by cooling the labor market first.

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Evidence that inflation has peaked

Last month, I wrote about how economists across the board said inflation — as measured by annual price increases — had peaked.

On Friday, we got more evidence to confirm that this might be the case.

The core PCE price index – the Fed’s preferred measure of inflation – rose 4.9% in April of last year. This is down from the 5.2% rate in March and the 5.3% peak rate in February.

On a monthly basis, the core PCE price index has increased 0.3% over the past three months.

It is still too early to declare victory over inflation

“Many considered March the peak of inflation and are looking to cool inflation from here,” Diane Sonk, chief economist at Grant Thornton said Friday. and closures in China. Either way, it’s important to note that any cooling we see will have a raised floor. Both core and core PCE indicators remain well above the Fed’s 2% target.”

In fact, inflation still has a long way to go to reach 2% from 4.9%.

Thus, we will have to monitor the incoming data to see if a major shift in the economic narrative is already underway.

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It’s Jobs Week in America. Wednesday comes with the April employment survey and employment turnover and Friday comes with the April employment report. Employment growth has been very strong, and record job opportunities have enabled workers to earn higher wages.

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

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

Sam Ro is the founder of Tk.com, follow him on Twitter at Tweet embed.

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