There Could Be A Major Shift In Economic Activity Coming, Affecting Inflation

Many economists are positioning this as a good thing. And, at the end of the day, the economy will rise above all other issues

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

There’s more evidence that the economic narrative could be undergoing a major shift.

For months, we’ve been living in an economy in which strong demand has been met with lagging supply, causing inflation inflation to surge. We now appear to be shifting to a phase where demand growth is cooling and supply chains are easing, which should cause inflation to come down.

According to Census Bureau data released Wednesday, orders for nondefense capital goods excluding aircraft — a.k.a. core capex 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 slowing that’s welcome news for folks like the Federal Reserve, which is actively working to cool economic growth in its effort to bring down inflation.

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

Here’s the thing: the demand was normal, the supply chain was way down. The supply chain is not exactly getting better. Automobiles sure aren’t. Toyota recently announced a 100K worldwide care production decrease, primarily blaming the chip shortage. Anyone redesigning for 2023 will remove many things that use chips, such as XM radio, or combine multiple features per chip, which could potentially overload a chip. What you often see on the shelf is it. There’s no extra in the backroom. Supply chains are slimmed down, which is why you may not find the products you used to find. You want furniture? It could be months. Heavy machinery? Could be a year.

If demand growth is cooling, that means people are just not buying things they would normally buy, to match the lower supply availability. This may, in fact, help inflation, but, it will mean lower spending by consumers, who are already stretched from the rise in costs. Will this mean a reduction in costs? Probably not. At least not soon. Because gas and diesel are still rising. Interest rates are up (fortunately not as high as expected).

“Growth has slowed since peaking in March, most notably in the service sector, as pent up demand following the reopening of the economy after the Omicron wave shows signs of waning,” Chris Williamson, chief business economist at S&P Global Market Intelligence, wrote on Wednesday.

Yeah, the time when you couldn’t get stuff done to your house. But, you want body work on your car? You could wait at least a month. Everywhere. People can still wait weeks for a physical therapist, months to get into the dentist, and so on.

News of a slowdown is not exactly the kind of thing that warrants a celebratory tone. But it’s exactly the kind of thing that should help bring inflation down.

More pain.

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

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

The best way would be an increase in the availability of products to match the spending. But, this is the Biden Economy, hence, we need below normal spending to match below normal availability.

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5 Responses to “There Could Be A Major Shift In Economic Activity Coming, Affecting Inflation”

  1. Mrs Pico traded in her 2012 Buick Verano for a 2021 Toyota Camry SE with 7,200 miles on it; it had been a dealer demonstrator.

    We had gone to the Toyota dealership because, even though I’d much have preferred an American car, Toyota has by far the best hybrid technology. Alas! no new hybrids were available, anywhere.

    But we got a pretty good deal on an almost new Camry, which gets 39 MPG on the highway, and right now shows over 33 MPG on the console for some driving locally. Mrs Pico likes SSG Pico’s 2018 Prius hybrid, but has a bit more difficulty seeing over the tall dash.

    Have I mentioned that I married a 5’0″ munchkin?

    • UnkleC says:

      My 6’++ son and I have the opposite problem from your Mrs., we have difficulty getting into the Asian econoboxes and can’t see out well due to the generally short ‘A’ pillar. We usually wind up with mid-size domestics that fit.

  2. James Lewis says:

    Don’t look now but doubling gas prices is apt to suck up what as disposable income. It’s now “drive to work” money.

  3. Our car sellin’ host quoted:

    News of a slowdown is not exactly the kind of thing that warrants a celebratory tone. But it’s exactly the kind of thing that should help bring inflation down.

    The Carter-era stagflation was whipped in 1981-82 . . . by the mechanism of a deep recession.

    We already had a 1.4% contraction in GDP during the first quarter. If the economy contracts during the second quarter, we will officially be in a recession. Information for the third quarter won’t come until near the end of October, just a couple of weeks before the election.

    The Bureau of Labor Statistics is scheduled to release the May inflation figures on June 10th.

  4. Professor Hale says:

    Great plan. Reduce inflation by raising inflation enough to stifle economic activity. Once no one can afford to buy anything, prices will drop. Genius!

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