Not disagreeing with the broader thrust of this article, but:
Second-hand GPU prices are not indicative of the broader chip market, certainly not the cheap-and-simple chips that the automotive industry uses by the million and is is still very short of.
I'd add another tidbit to your list: I'm starting to see a few discounts on (some types of) bicycles again. The bicycle industry saw the same supply challenges as all other manufacturing industries over the past couple of years, coupled with particularly high demand both from cash burning a hole in pockets and cycling being one of the least restricted activities.
Thanks, very useful post and in accord with some of what I've been looking at. Unfortunately, the decreases are out in the future and likely not to help the Dems this November.
If I’m reading right, several of these charts show decreases starting in the middle of 2021, which surprises me, because that’s about when I started hearing about inflation being so high worldwide.
The transient camp were right but Russia put a spanner in the works, probably intentionally timed. The perception of Team Transient being wrong is that transient on a global scale, means at least 18 months.
You cannot reboot the a global JIT supply chain that has been decades in the making (and the smoothing out) and expect it not to come back online without everything bouncing, like water-hammer in a pipe, or traffic on a highway. Any system with a long feedback loop is prone to over-compensation. Anyone with underfloor heating knows it's hard to time it right.
Yes, but food and especially energy (gas) are going to continue to stay high as long as the war in Ukraine grinds on. It’s become a war of attrition which will eventually come to an end - one way or another. Once that happens, disinflation happens even more quickly.
As you say, increasing long-term supply is good for the economy! And that's why over-reaction by the Fed can be so harmful. If they cause a recession. companies will go out of business, skills will be lost and equipment will degrade.
Curious if metal prices across the board will follow tin. Construction materials and labor are still inflated in some areas due to shortages in getting materials with exceedingly long lead times. One glass manufacturer just announced a 40%! price increase in June due to high prices of raw materials.
So, I think the downstream material price drops won't occur for a while longer. And in some instances, may not drop at all.
I'm not sure how seriously the Fed takes reducing the size of its balance sheet, but if that's really a huge priority, they may do a bit of over-contraction. In that case, rising disinflation might not put them off so quickly, perhaps?
Secondly, is deflation really an economic emergency? I feel like this narrative goes around a lot despite being supported by little hard evidence. My understanding is that this perspective comes from a historical POV, but upon closer examination, history also paints a more gray picture. (Source: https://www.bis.org/publ/work186.pdf)
I think the cause for declining inflationary pressures is very clear: namely, the rapid global slowdown in economic activity. You can see it in the retail sales (in the US, UK and EU), which showed sharp decelerations in the past couple of months. New data on retail and wholesale inventories have continued to climb, and now in nominal values they have risen by almost twice the rise in nominal GDP pre-COVID. A rapid inventory build coupled with widespread business concerns about excessive inventories for several months now suggests this build in inventories has been involuntary. In other words, firms have experienced an unexpected shortfall in consumer purchases.
Which in turn would suggest that consumers are tapped out and have been sustaining themselves via higher consumer borrowing (which until recently was also rising; this wouldn't make sense if savings rates were as high as the initial data posited. It's probably been overstated)
Add to that the fact that the BEA had already reported negative GDP for Q1. The Atlanta Fed GDPNow forecast for Q2 growth fell to 0.3% in its June 2 update, and at the time I felt it would take very little in the way of to-be-expected downward revisions and new marginally weaker data in May to take the Atlanta Fed GDPNow forecast into negative territory.
As the data for May arrived in the weeks of June the case for the onset of recession grew.
• The household survey of employment failed to recover a big decline in the employment numbers for April. For this noisy economic series, we had two months with a marginally negative average value.
• The NFIB survey of small business reported a plunge in small business expectations to the lowest level going back to the 1970’s.
• On Friday, June 10, the Michigan Consumer Sentiment Survey plunged to the lowest level ever reached going back to 1976. Also worth noting that the Conference Board Consumer Confidence expectations have fallen by more into a zone associated with recessions in the past.
• Shortly thereafter the May retail sales report showed an outright real decline. With downward revisions real retail sales were now flat for 6 months with a fall in May.
• Housing starts for May plunged 15%.
• In his commentary on the S&P Global (formerly Markit) PMI, economist Chris Williamson said that the economy fell in June and was entering a second half recession. He also indicated that the conditions were as bad as anything he had seen since June 2008 in the eurozone.
Late last week, we got the third Q1 GDP growth estimate. Real PCE growth was revised down drastically in Q1 from 3.1 percent to 1.8 percent. Almost all of the downward revision was in services.
The real PCE trend so far this year now looks weaker. The Atlanta Fed’s current Q2 GDP growth estimate of 0.3 percent is positive only because of a huge estimated 5.4 percent increase in real PCE for the quarter. That looked preposterous before this Q1 revision. We are sure that real services PCE growth will come in much less.
A weaker consumer will turn Q2 GDP into another non-negligible negative number. Two negative GDP quarters might be considered a technical recession, but sometimes – as happened from December 2007 to mid-summer 2008 - a mild but sustained economic decline sets the stage for a more powerful cumulative contraction, which is I think more likely, given the sharp deceleration of fiscal spending, higher interest rates and prevailing high private debt levels. It could get very ugly.
Love this write up! Would love to hear some thoughts on next steps for the Fed and their current monetary policy framework. Should the Fed ease up on the magnitude of rate hikes henceforth given that inflation expectations are tempering and the yield curve is essentially flat?
Also, one sentence stood out to me - “It’s not clear how severe a recession we’re going to get.” Hope this isn’t pedantic but does this mean you actually think a recession is unavoidable at this point? If so, would be curious what percentage you would assign to the probability of a recession.
Not disagreeing with the broader thrust of this article, but:
Second-hand GPU prices are not indicative of the broader chip market, certainly not the cheap-and-simple chips that the automotive industry uses by the million and is is still very short of.
I'd add another tidbit to your list: I'm starting to see a few discounts on (some types of) bicycles again. The bicycle industry saw the same supply challenges as all other manufacturing industries over the past couple of years, coupled with particularly high demand both from cash burning a hole in pockets and cycling being one of the least restricted activities.
Thanks, very useful post and in accord with some of what I've been looking at. Unfortunately, the decreases are out in the future and likely not to help the Dems this November.
If I’m reading right, several of these charts show decreases starting in the middle of 2021, which surprises me, because that’s about when I started hearing about inflation being so high worldwide.
Good post.
good news, Barry Ritholz wrote similar yesterday with positive data as well.
The transient camp were right but Russia put a spanner in the works, probably intentionally timed. The perception of Team Transient being wrong is that transient on a global scale, means at least 18 months.
You cannot reboot the a global JIT supply chain that has been decades in the making (and the smoothing out) and expect it not to come back online without everything bouncing, like water-hammer in a pipe, or traffic on a highway. Any system with a long feedback loop is prone to over-compensation. Anyone with underfloor heating knows it's hard to time it right.
https://twitter.com/lukepuplett/status/1470151107645087746?s=20&t=R84YyIkTcp-gprWyW3F0jQ
Yes, but food and especially energy (gas) are going to continue to stay high as long as the war in Ukraine grinds on. It’s become a war of attrition which will eventually come to an end - one way or another. Once that happens, disinflation happens even more quickly.
As you say, increasing long-term supply is good for the economy! And that's why over-reaction by the Fed can be so harmful. If they cause a recession. companies will go out of business, skills will be lost and equipment will degrade.
Would it be good to have an explainer of why deflation is bad? I mean, prices go down, can't beat that.
(I know why it's bad. At least I think I do.)
Curious if metal prices across the board will follow tin. Construction materials and labor are still inflated in some areas due to shortages in getting materials with exceedingly long lead times. One glass manufacturer just announced a 40%! price increase in June due to high prices of raw materials.
So, I think the downstream material price drops won't occur for a while longer. And in some instances, may not drop at all.
"Deflation is an economic emergency"
Sounds simplistic considering you're in favor an abundance mindset.
What would be the emergency if we had a larger supply of housing, healthcare, energy, and transportation, and they all got cheaper?
I'm not sure how seriously the Fed takes reducing the size of its balance sheet, but if that's really a huge priority, they may do a bit of over-contraction. In that case, rising disinflation might not put them off so quickly, perhaps?
Secondly, is deflation really an economic emergency? I feel like this narrative goes around a lot despite being supported by little hard evidence. My understanding is that this perspective comes from a historical POV, but upon closer examination, history also paints a more gray picture. (Source: https://www.bis.org/publ/work186.pdf)
Related to this: Harvard Prof Benjamin Friedman said that the 2% inflation targeting norm reflected a "professional embarrassment", and called the number arbitrary. (Source: https://medium.com/@monetarypolicyinstitute/about-that-2-inflation-target-6548bc370ce5)
If anyone has any papers/articles to recommend that argue otherwise, please do so.
Otherwise, great piece!
I also enjoyed Cory Doctorow's piece on the bullwhip effect and supply chains.
https://pluralistic.net/2022/07/01/whip-it-good/#deflation
I think the cause for declining inflationary pressures is very clear: namely, the rapid global slowdown in economic activity. You can see it in the retail sales (in the US, UK and EU), which showed sharp decelerations in the past couple of months. New data on retail and wholesale inventories have continued to climb, and now in nominal values they have risen by almost twice the rise in nominal GDP pre-COVID. A rapid inventory build coupled with widespread business concerns about excessive inventories for several months now suggests this build in inventories has been involuntary. In other words, firms have experienced an unexpected shortfall in consumer purchases.
Which in turn would suggest that consumers are tapped out and have been sustaining themselves via higher consumer borrowing (which until recently was also rising; this wouldn't make sense if savings rates were as high as the initial data posited. It's probably been overstated)
Add to that the fact that the BEA had already reported negative GDP for Q1. The Atlanta Fed GDPNow forecast for Q2 growth fell to 0.3% in its June 2 update, and at the time I felt it would take very little in the way of to-be-expected downward revisions and new marginally weaker data in May to take the Atlanta Fed GDPNow forecast into negative territory.
As the data for May arrived in the weeks of June the case for the onset of recession grew.
• The household survey of employment failed to recover a big decline in the employment numbers for April. For this noisy economic series, we had two months with a marginally negative average value.
• The NFIB survey of small business reported a plunge in small business expectations to the lowest level going back to the 1970’s.
• On Friday, June 10, the Michigan Consumer Sentiment Survey plunged to the lowest level ever reached going back to 1976. Also worth noting that the Conference Board Consumer Confidence expectations have fallen by more into a zone associated with recessions in the past.
• Shortly thereafter the May retail sales report showed an outright real decline. With downward revisions real retail sales were now flat for 6 months with a fall in May.
• Housing starts for May plunged 15%.
• In his commentary on the S&P Global (formerly Markit) PMI, economist Chris Williamson said that the economy fell in June and was entering a second half recession. He also indicated that the conditions were as bad as anything he had seen since June 2008 in the eurozone.
Late last week, we got the third Q1 GDP growth estimate. Real PCE growth was revised down drastically in Q1 from 3.1 percent to 1.8 percent. Almost all of the downward revision was in services.
The real PCE trend so far this year now looks weaker. The Atlanta Fed’s current Q2 GDP growth estimate of 0.3 percent is positive only because of a huge estimated 5.4 percent increase in real PCE for the quarter. That looked preposterous before this Q1 revision. We are sure that real services PCE growth will come in much less.
A weaker consumer will turn Q2 GDP into another non-negligible negative number. Two negative GDP quarters might be considered a technical recession, but sometimes – as happened from December 2007 to mid-summer 2008 - a mild but sustained economic decline sets the stage for a more powerful cumulative contraction, which is I think more likely, given the sharp deceleration of fiscal spending, higher interest rates and prevailing high private debt levels. It could get very ugly.
Rent is not falling, the chart shows that it is still rising at 16% y/y
Love this write up! Would love to hear some thoughts on next steps for the Fed and their current monetary policy framework. Should the Fed ease up on the magnitude of rate hikes henceforth given that inflation expectations are tempering and the yield curve is essentially flat?
Also, one sentence stood out to me - “It’s not clear how severe a recession we’re going to get.” Hope this isn’t pedantic but does this mean you actually think a recession is unavoidable at this point? If so, would be curious what percentage you would assign to the probability of a recession.