The Fed Reserve and inflation have been primary market talking points. Today we will take a look at recent trends in GDP and consumer demand. While the Fed is doing all it can - with its tools - to put the breaks on consumer demand and inflation, the data - across multiple key indicators - shows clear signs that the economy is starting to slow.
After two consecutive negative GDP growth quarters, The GDPNow forecast for the the third quarter of 2022 has been falling steadily since August when it was projected at 2.5% to sub 0.3% as of last week, Tuesday. We will have a better estimate of GDP for the third quarter by the end of October. The trend and forecast shows consecutive declining growth.
The trend in slowing growth is also reflected by declining activity in inbound containers at major US ports. This is considered a coincident demand indicator and reflective of immediate shifting trends in consumer demand. Global commodity and food prices are showing some signs of price easing but remain high year over year. Jonathan Golub, Credit Suisse;s chief U.S. equity strategist maintains that: "Futures indicate that Food and Energy prices should fall -5.7% and -11.8% by year end 2023, while Goods inflation has declined from 12.3% to 7.0% since February,” he wrote. “Over the past year, Services and Rents are up less than Headline CPI (5.5% and 5.8% vs. 8.5%).”
Souring consumer sentiment regarding the economy will likewise continue to impact consumer behaviour and demand. While prices, rents and commodities may be trending lower, they remain high year over year. A slowing economy and mild recession could accelerate - with ongoing aggressive Fed action - into a harsher recession. That would accelerate price declines as well as put more breaks on inflation.
Indicators are showing that the US economy and likewise Europe and Asia are slowing. Over the coming months we will see if the trends discussed in this article will be reflected in the hard inflation data. It may take more time for the trends to be substantiated. At such time inflation data shows a consistent declining trend the Federal Reserve will begin to adjust it's outlook and consequently it's stance on rate hikes. Realizing their goal of sub-2% inflation per annum will take time.
While optimism over initial shrinking inflation data may reflect in market activity, the consumer is still facing higher relative costs coincident with shrinking wage increases.Sentiment is critical to consumer behaviour but so is disposable income. Markets are forward looking however and operate on a different wavelength. The net impact of inflation to date however may have unforseen implications that impact demand and GDP for longer than expected. This of course remains to be seen. Meaningful decreases in food, oil and other commodity prices would provide more objective data for optimism and a return to a new normal.