December 5, 2022
What Slowdown? - Flexport Weekly Economic Report
For October, both disposable income and real personal consumption expenditures were up. This is not consistent with a rapidly slowing economy, nor do the latest numbers support a restoration of the balance of goods and services consumption to pre-pandemic norms.
In Focus - Personal Consumption Expenditure
There was little sign of an economic slowdown in this week’s data on US October personal income and outlays. Real disposable personal income was up by 0.4% for the month; real personal consumption expenditures were up by 0.5%. Each of those statistics has dropped in only one month out of the last five, and those drops were in the summer.
The components of real personal consumption expenditures were all up, too. Services consumption was up 0.2% for the month. Goods consumption was up a striking 1.1%. That goods number consisted of a 0.3% monthly jump in nondurables consumption and a remarkable 2.7% increase in durable goods consumption.
The chart offers some degree of historical perspective to what has happened to the three components of real personal consumption expenditures. To do so, it normalizes their levels to February 2020, on the eve of the pandemic economic shock. It is worth keeping levels in mind: in October, services accounted for 65.7% of personal consumption expenditures; nondurable goods were 21.6%; durable goods were 12.7%.
The chart goes back to January 2019 to illustrate how wild and different consumption behavior has been during the pandemic era. Prior to the pandemic, the three categories largely moved in parallel, and a 5-10% swing over a year was a very large one.
The consumption story of the pandemic was that services behaved very much as one would expect all consumption to behave after a sharp recession. It fell by almost 20% by April 2020 and then worked its way back to its February 2020 level by October of 2021. In October 2022, it was 3.1% above its February 2020 level.
In contrast, nondurable and durable goods consumption saw extreme swings. Durable goods recovered its pre-shock consumption level by May 2020 and nondurables by June of that year. Durable goods consumption hit a peak of 36.5% above its pre-shock level in March of 2021; nondurables peaked up 12.4% in October and November of 2021.
With goods consumption significantly up and services consumption down, there was significant pressure on supply chains to deliver. Flexport Research has tracked and forecasted this ratio of goods to services with its Post-Covid Indicator. Over the last year, goods and services have shown some signs of rebalancing; services consumption grew by 2.8% while durables grew 2.0% and nondurables fell 1.4%.
This rebalancing could also be seen in price pressures. In March of this year, goods prices had risen 10.6% from the year before and services prices had risen only 4.8%. In the latest report, goods prices had risen 7.2% and services prices were up 5.4%.
While goods consumption levels have dipped from their peaks, they are nowhere near pre-shock levels. In October 2022, nondurable goods consumption was up 10.9% from February 2020 level; durable goods consumption was up 27.6%. In fact, over the last three months, durables consumption grew by 2.6%; nondurables by 1.4%; and services by 0.8%.
If the US economy is pulling back, it’s not yet showing up in consumption numbers.
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Latest Flexport Metrics & Research
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The US job market remained strong in November. In BLS data, the unemployment rate remained at 3.7%; it has been in a 3.5%-3.7% range since March. There were 263K net new jobs, roughly in line with the average of the past three months. Labor force participation was largely unchanged.
- Average hourly earnings rose by 5.1% over the past 12 months.
The Federal Reserve’s preferred inflation gauge showed continued strong price increases. The Personal Consumption Expenditure deflator, excluding food and energy, increased by 5.0% in the 12 months to October. While that was a dip from 5.2% in September, the figure has bounced between 4.7% and 5.2% since April. The smoother Trimmed Mean PCE figure held steady at 4.7%. All these figures are well above the Fed’s 2% target.
Euro Area Inflation was 10.0% in November, down from 10.6% in October. The rate excluding volatile food and energy prices rose from 6.4% to 6.6%, a new recent high.
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US Q3 GDP figures were revised upward to 2.9%. With the revision, real final sales to domestic purchasers, a smoother measure, grew 1.1% over the year to 2022:Q3.
US wholesale inventories rose 0.8% from September to October in nominal terms (while goods prices rose 0.3%). Retail inventories fell by 0.2% in nominal terms and fell 0.4% excluding motor vehicles and parts.
South Korean exports dropped 14% in the year to November. It was the largest drop since mid-2020. The figure is sometimes taken as a bellwether for trade. In this case, the drop appeared to reflect a slowing in China and lower demand for semiconductors.
Congress passed and President Biden signed a bill legislating an agreement on labor terms in the rail industry, thus precluding a strike. In his statement, President Biden said, “Our nation’s rail system is literally the backbone of our supply chain…A rail shutdown would have devastated our economy.”
Chair Jay Powell suggested that upcoming Fed rate hikes might be smaller than recent 75 basis point hikes. While this was taken by markets as encouraging news, Powell issued important cautions. First, he noted that “Despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation.” He then concluded that a policy of smaller rate hikes would be “far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time.”
Senators Rob Portman (R-OH) and Chris Coons (D-DE) announced plans to introduce a “Trading System Preservation Act” in the remainder of the current Congress, saying congressional inaction on trade had been highly costly. The plan would include limited Trade Promotion Authority, covering sector-specific agreements at the World Trade Organization.
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