Let’s start with a positive approach this time  

Dan North | July 5, 2022

Manufacturing is hanging tough. The unsustainable hot housing market is starting to cool off. Personal consumption is still growing. And the Fed is unsheathing its “terrible swift sword” against the scourge of inflation.

Now let’s look at some numbers.

New orders for durable goods rose a sharp +0.7% m/m in May, much better than expectations of only +0.4%. New orders for non-defense capital goods ex-aircraft (core orders), often seen as a proxy for business spending, grew +0.5% exceeding expectations of only +0.3% m/m. On a y/y basis, new orders are growing 10.6% y/y far exceeding the long-term average of 3.2%. Similarly, core orders are increasing by 9.8%, also far exceeding the long-term average of 2.8%.

new orders for durable goods y/y
The June Institute of Supply Management (ISM) manufacturing survey showed similar results as the durable goods orders report. The overall index remained in positive territory, even though it did slip from 56.1 to 53.0. However, some of the details were disturbing. Critical new orders fell to 49.2, below the 50-level signaling contraction. And the backlog of orders tumbled to 53.2 from 58.7. Finally, employment also fell into a contractionary territory to 47.3. Falling new orders and slowing backorders are giving employers reason to slow their hiring. Prices did fall but remain at astronomical levels.
ISM manufaturing index
ISM manufaturing index
ISM manufaturing index
Housing prices in April eased, just barely, but they are still beyond belief. The Case Shiller home price index rose 1.5% m/m, well below the record set in March of 2.6% m/m. But 1.5% m/m is still 5 times as large as the long-term average. And on a y/y basis, prices are running at 20.4%, just off of last month’s high of 20.6%.
Housing prices y/y
However, there is some evidence from private analysts that suggest demand is slowing, probably because of rising mortgage rates (first two charts).
Evercore ISI homebuilders sales survey
Redfin homebuyer demand index
And that should lower pricing pressure. This chart shows the percentage of listings that had to lower their prices. It was 2% at the beginning of the year and is now at 4.8%.
5% of listings had price drops
Consumer confidence fell to 98.7, the lowest in 17 months. Most of the decline came from the survey’s respondents whose expectations of the future dropped sharply to the lowest level in over 9 years. The difference between future expectations and the assessment of the current situation fell to -80.7. That’s in the worst 99th percentile of all readings. Consumers are increasingly worried about the future, and as we have seen before, this measure correlates well with a weaker economy.
Conference board consumer confidence
Consumer confidence survey
Perhaps the most important data point released this week came from the Personal Income (PI) and Personal Consumption Expenditures (PCE) report. After all, PCE drives 70% of all economic activity, and it is fueled by PI. But to understand what consumers really have to spend, we have to strip out inflation and taxes, and that gets us to real Disposable Personal Income (DPI). And that was a disappointment, shrinking at -0.1% m/m versus expectations of growing at +0.2% m/m. And real (after inflation) PCE was worse, falling -0.4% m/m versus expectations of rising +0.3% m/m. On a y/y basis real DPI is falling at a forlorn -3.3% rate. And that driver of the economy, real PCE, is only growing at a limp 2.2% rate, just below the 2.3% rate for the 10 years before Covid. For another comparison, just three months ago real PCE was growing at 6.5% y/y. U.S. consumers are not stopping, but they are slowing down, no doubt because of inflation. 
Real personal consumption expenditures
In fact, that same report has two measures of inflation, the PCE deflator and the core PCE deflator, which strips out volatile food and energy prices. The PCE deflator is running at 6.3% y/y, just below the high in March of 6.6%. Even without that month, the current 6.3% is the highest in over 40 years. The core PCE deflator is running at 4.7% y/y, and that is down from the February high of 5.3%. But without the past few months, the 4.7% is the highest in 33 years. Inflation is still nuclear hot, and it’s ravaging consumers.
PCE deflator y/y
Core PCE deflator y/y

And that brings us to the Federal Reserve Bank which is charged with balancing inflation against unemployment. The Fed has taken very aggressive action against inflation recently, raising the Federal Funds rate by 0.75% at the June meeting, the biggest hike in 28 years. And it is expected that at the July meeting the Fed will hike another 0.75%.

In fact, Fed Chair Jerome Powell has recently been rather emphatic about extinguishing inflation, even if it risks a recession. In testimony to Congress on June 22nd, Powell made some rather frank comments. “It’s not our intended outcome (a recession) at all, but it’s certainly a possibility… We are not trying to provoke and do not think we will need to provoke a recession, but we do think it’s absolutely essential” to stamp out inflation… “We’re looking for…compelling evidence that inflation is coming down, and we don’t have that”.  Then on the 29th of June, Powell made equally forceful remarks at the European Central Bank’s annual economic policy conference. “Is there a risk we would go too far? Certainly there’s a risk… The bigger mistake to make—let’s put it that way—would be to fail to restore price stability…. because of the multiplicity of shocks, you start to transition into a higher-inflation regime. Our job is literally to prevent that from happening, and we will prevent that from happening.” “There’s a clock running here.”

So let’s take the positive view here. Manufacturing is hanging tough. The unsustainably hot housing market is starting to cool off. Personal consumption is still growing. And the Fed is unsheathing its “terrible swift sword” against the scourge of inflation.

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