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October 31, 2022

Growth is Cool - Flexport Weekly Economic Report

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Phil Levy

Chief Economist, Flexport

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While the latest US GDP numbers seemed to show an economy perking up after two negative quarters, the key underlying trends are those of an economy slowing down.

In Focus - US GDP Growth

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The US economy appears to have grown in Q3. According to an advanced estimate from the Bureau of Economic Analysis, GDP rose at a 2.6% annual rate. This follows two straight quarters of shrinkage (-1.6% in Q1 and -0.6% in Q2). Particularly amidst concerns about rising interest rates and looming recession, this seemed to provide an unexpected bit of good news.

Yet this is a difficult time for reading economic tea leaves. Conflicting economic signals abound, from full warehouses to tight labor markets, from slowing home sales to rising prices. The GDP numbers are no different.

The chart depicts quarterly real GDP growth as a dashed line, while it shows an alternative measure – real final sales to private domestic purchasers–as a solid line. In the same way that “core CPI” drops volatile food and energy prices, this alternative measure of GDP drops government, exports and imports (trade), and inventories. That leaves it with personal consumption expenditures (PCE) plus gross private fixed investment.

Why drop stats for government, trade and inventories? We would be the last ones to say they were unimportant. Yet the series have been noisier, particularly since the pandemic. Before Q3 of 2020, the two measures in the chart grew or shrank in tandem; then they started to diverge. But GDP growth seems to flutter around the more stable trend in the real final sales numbers.

Those real final sales numbers tell a consistent story of slowing growth. From Q4 of last year, the series grew at 2.6%, then 2.1%, then 0.5%, and finally 0.1% in the Q3 numbers just announced. This is not a picture of an economy plunging into recession, but it is a picture of dissipating growth.

Before we set aside trade as a contributor to GDP, we can focus on what happened in the most recent quarter. Imports shrank by 6.9% and exports grew by 14.4%, with goods imports shrinking even faster (8.7%) and goods exports growing even more quickly (17.2%). This shrank the trade deficit and, for a given level of consumption, increased GDP. But both import and export changes are the opposite of what one would expect following a strong appreciation of the US dollar. That will make imports look cheaper to US purchasers and it will make US exports look more expensive abroad.

Thus, a first step toward discerning where the US economy is going would be to separate the signal from the noise, focusing on the trend in real final sales to private domestic purchasers. A second step is to look at the driving forces behind these trends, especially the push by the US Federal Reserve to raise rates and beat back inflation.

A final step is to see if we can forecast where this broad trend goes next. The real final sales number is roughly 85% PCE and 15% gross private fixed investment. For the former, we have just released a new, regular PCE forecast, incorporating Flexport data. The outlook for Q4: steady as she goes.

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Latest Flexport Metrics & Research

The Flexport Ocean Timeliness Indicator for Transpacific Eastbound (TPEB) routes dropped to 80, the fastest time since February 2021. Flexport’s Air Timeliness Indicator meanwhile: Far East Westbound (FEWB) increased slightly, while Transpacific Eastboard (TPEB) dropped.

The new Flexport Consumption Forecast predicts the path of US Personal Consumption Expenditures through the end of the year.

Economic Developments

Real US Personal Consumption Expenditures increased by 0.3% in September. That included a 0.4% increase in spending on goods and a 0.3% increase in services. Among goods, nondurables (up 0.6%) outpaced durables (up 0.1%), reversing a recent trend. PCE was also revised upward for August.

  • Real disposable personal income was flat, but the savings rate fell from 3.4% in August to 3.1% in September.

The report showed a key US inflation gauge is unrelenting. The PCE numbers include a closely watched price deflator. The headline number showed core PCE inflation at 5.1% for the year to September, up from 4.9% in August. An important variant of these numbers, the Dallas Fed’s Trimmed-Mean PCE Index held steady at 4.7%, well above the Fed’s 2% target.

Germany’s GDP growth was stronger than expected, registering 0.3% growth in Q3. That’s down from 0.8% growth in Q2, but not the contraction that some had forecast.

  • Inflation in Germany, hit its highest rate since 1951. By EU standards, inflation was 11.6% in the year to October, preliminary data show.
  • Euro Area economic sentiment continued to decline, hitting its lowest level since November 2020.

The University of Michigan’s US Consumer Sentiment survey showed a divergence between perceptions of current conditions (23% improvement in buying conditions for durables) and future conditions (19% fall in year-ahead expected business conditions).

US compensation costs for private workers increased by 5.2% in the year to September. An important concern of monetary policy makers is whether we will see an upward spiral in wages and prices.

Political Developments

The European Central Bank (ECB) raised its policy rate by 75 basis points (0.75 percentage points) this week. That was the second large hike and took the policy rate to 1.5%. That leaves it well above the level of recent years, but well below current inflation rates.

Japan announced new fiscal stimulus of $197bn this week. Japan has been fighting deflation for decades, now has mild inflation, and has not joined in the global policy push to put the brakes on economic growth.

Russia withdrew from a grain deal that had allowed agricultural exports from Ukrainian ports. The move threatened to exacerbate global food crises.

President Biden issued a new order last week imposing sanctions on Nicaragua, in response to human rights concerns. The order could limit both imports and exports.

Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.

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