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Fading Inflation and Growth: US Economic Indicators Summary

Core Content

This report analyzes the current state of the US economy, focusing on key indicators such as consumption, labor market, and housing market trends, to assess the moderating inflation and the risk of a recession. The report suggests that while inflation is slowing, this may signal a cooling of demand, which could negatively affect corporate earnings. The US economy is experiencing a slowdown, with the housing market showing the most pronounced decline. The labor market remains strong but is showing signs of cooling, particularly in wage growth. The report also highlights potential risks including further market volatility from the Fed's rate hikes, high energy prices due to geopolitical tensions, and a possible slowdown in consumption and employment.

Main Points

• Inflation Moderation: US core PCE inflation cooled to 4.7% YoY in May 2022, the lowest since November 2021, indicating a slowing rate of price increases. However, this moderation may reflect a decline in demand rather than a stabilization of the economy.

• Consumption Shift: There is a noticeable shift from goods to services in consumer spending. While goods spending peaked in March 2021 due to stimulus packages, service spending is growing more optimistically. This shift may help to cushion the decline in demand, but the overall trend is still negative.

• Earnings Risk: The decline in goods demand and high inventory levels could lead to active destocking by companies, which may significantly impact profits. Earnings forecasts are expected to face further downward revisions.

• Labor Market Trends: The labor market remains strong, with low unemployment and a low rate of unemployed per job opening. However, there are signs of cooling, such as rising prime-age unemployment and initial jobless claims. Real wage growth is declining as nominal wage growth fails to keep up with inflation.

• Housing Market Deterioration: The housing market is in decline, with falling mortgage applications and existing home sales. The increase in median sales prices is partly due to lower-priced homes exiting the market, not necessarily due to increased demand.

Key Information

• Consumption Data:

  • The Michigan Sentiment Index reached a record low of 50 in June 2022.
  • US advance retail sales fell by 0.4% MoM in May 2022, but showed a 7% YoY increase.
  • Consumer spending on services is growing more optimistically than on goods.

• Economic Indicators:

  • Markit's manufacturing PMI hit a 23-month low of 52.4 in June 2022.
  • The composite PMI for services and manufacturing was at a five-month low of 51.2.
  • Retail inventories have been high, and the decline in goods demand could lead to destocking.

• Labor Market Data:

  • Unemployment rate and unemployed per job opening remain low.
  • Prime-age unemployment rate and initial jobless claims are rising.
  • Real wage growth is falling due to the lag in nominal wage growth relative to inflation.

• Housing Market Data:

  • Mortgage rates have risen sharply, reaching 6% for the 30-year fixed rate in June 2022.
  • New home sales showed a slight moderation in their YoY decline in May 2022.
  • Building permits have been declining since March 2022.
  • Existing home sales have been declining since August 2021, with a notable drop in lower-priced home sales.

Risks Highlight

• Fed Rate Hikes: Could lead to increased market volatility.
• Geopolitical Risks: May keep energy prices high, affecting inflation.
• Consumption Decline: Could negatively impact corporate earnings.
• Labor Market Cooling: Potential for further employment slowdown.

Conclusion

The US economy is experiencing a slowdown, with inflation moderating but not necessarily stabilizing. The shift in consumption from goods to services may help to mitigate some of the demand decline, but the overall economic picture remains concerning. The labor market is strong but showing signs of cooling, and the housing market is deteriorating. Investors should closely monitor employment trends and the Fed's ability to tighten monetary policy without triggering a recession.