U.S. MANUFACTURING output in the three months Feb-Apr was almost 6% higher than in the same period a year earlier, showing momentum in the business cycle but also why supply chains are struggling to cope and prices are escalating rapidly. Rapid growth in manufacturing explains why diesel is short supply and prices are escalating:
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“The price of grain is linked essentially with the concept of ‘famine’. As in the modern world, so in the ancient, ‘famine’ is a concept with class and financial connotations. The lowly and the poor in society had no reserves either of food or money and therefore suffered immediately as a result of a rise in the cost of basic essentials. The rich and upper classes on the contrary rarely experienced actual hunger during a famine because of their financial resources and even private grain reserves. If the shortage of grain persisted, the rich might suffer economically by having to use more of their wealth, or their own grain, but they did not starve. The poor did, not necessarily because there was a total lack of grain available, but rather because the current price of grain had risen beyond what they could normally afford to pay, whether because of crop failure, hoarding or speculation by dealers.” ― The Corn Supply of Ancient Rome, Rickman, 1980
U.S. GASOLINE and diesel prices are much higher than would be expected based on the price of crude alone, reflecting the shortage of refining capacity. Once increases in wages are taken into account, however, the average gasoline pump price of $4.44 per gallon this month is well below the peak of $6.17 per gallon in June 2008. In real terms, prices are only in the 81st percentile for all months since 1994:
CHINA’s coal production climbed by almost +12% in the first four months of the year compared with the same period in 2021, as the government ordered miners to maximise output to reduce the risk of electricity shortages and cut dependence on imports from Australia:
U.S. TRANSPORTATION SERVICES (freight, post and passengers) prices increased at an annualised rate of almost +47% in the three months from January to April – as the supply chain remained under pressure and fuel costs surged after Russia’s invasion of Ukraine and sanctions imposed in response:
U.S. CONSUMER SENTIMENT has weakened sharply this month and has fallen to levels consistent with a recession in the past:
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U.S. FINANCIAL CONDITIONS for households and businesses wanting to borrow or raise capital tightened again last week and are the most restrictive since the first wave of the pandemic in 2020 and before that 2012:
U.S. INFLATION is becoming more deeply embedded in the economy with service sector prices climbing at an annualised rate of almost 8% over the last three months, the fastest increase since 1990 and before that 1982.
Some commentators have dismissed the increase inflationary pressure as a problem of supply bottlenecks rather than too much demand. Separating the supply side and demand side this way is an analytical error. Insufficient supply is the same as excess demand and vice versa.
But the data also shows inflationary pressures have spread from the energy- and raw materials-intensive merchandise sector to the labour-heavy services sector. Rapid service sector price increases usually signal the imminent arrival of a recession:
BUSINESS CYCLE turning points and phase transitions are hard to spot in advance or in real time in the official statistics because most data is published with a lag of 1-3 months. Latency in the statistical system conceals the much more rapid change in business conditions. But it may be possible to detect mid-cycle slowdowns and end-of-cycle recessions much closer to real time by focusing on the behaviour of key companies.
In presidential address to the American Economic Association in 2017, economist Robert Shiller characterised a recession as “a time when many people have decided to spend less, to make do for now with that old furniture instead of buying new, or to postpone starting a new business, to postpone hiring new help in an existing business.”
Decisions to reduce spending, postpone expensive purchases, defer or freeze hiring are all indicators of a potential slowdown. Sometimes the reasons will be company or household specific. But if there are enough companies and households behaving in the way the likelihood of an imminent slowdown is much higher.
In that context, these recent news headlines are all indications economic momentum is slowing:
“Uber to cut back on spending, treat hiring as a privilege” (Wall Street Journal, May 9)
“Twitter freezes hiring as two senior executives leave the company” (Wall Street Journal, May 12)
“Amazon’s net loss prompts query: has it built too many warehouses?” (Reuters, April 29)
This is not conclusive proof the major economies are entering a slowdown, and it cannot show whether it will be a mid-cycle soft patch or something deeper that qualifies as a recession, but the headlines are strongly suggestive pattern.
China calls for elderly to get vaccinated (trans.)
U.K. REAL GDP declined in both February and March, a sign growth was stalling even before the rise in utility prices and payroll taxes took effect in April:
TEXAS power consumption has surged to a near-record as the state is hit by a sustained period of much higher than normal temperatures for the time of year:
U.S. PETROLEUM inventories increased by +3 million bbl to 1,699 million bbl last week (SPR crude -7 million; commercial crude +8 million; gasoline -4 million; distillate -1 million; and jet +2 million):
U.S. DISTILLATE inventories fell -1 million bbl to 104 million bbl. Distillate availability shows no improvement but it is not deteriorating either at present:
U.S. GASOLINE inventories depleted by -4 million bbl to 225 million bbl last week, the lowest for the time of year since 2014, as distillate shortages bleed across into gasoline:
CHINA generated a record 221 TWh of hydro electricity in the first three months of the year, up from 196 TWh in the same period in 2021, relieving pressure on coal and gas inventories and prices:
U.S. EQUITY PRICES signal investors expect an imminent business cyclical slowdown – either a mid-cycle soft patch or an end-of-cycle recession. The S&P 500 index is down by almost 5% compared with the end of May 2021 and down by more than 11% in real terms:
China’s gas consumption and imports decline ($WSJ)
Germany fears economic hit from gas disruption ($FT)
EU drops planned ban on shipping Russian crude ($FT)
China avoids surge in consumer price inflation ($WSJ)
U.S. INTEREST RATE traders have started to anticipate a slowdown in the business cycle that will bring inflation under control and then encourage the central bank to start trimming interest rates slightly to support growth later in 2023. Policy-controlled short-term rates are expected to peak at 3.00-3.25% by August 2023, up from 0.75-1.00% currently, before dipping slightly at the end of 2023 and into 2024.
The implied trajectory is consistent with inflation under better control by mid-2023 and a slowdown in the business cycle that will cause the central bank to shift its focus to supporting growth. A similar pattern occurred during previous interest rate tightening and “soft-landing” cycles in 1966/67 and 1994/95.
As a result, the U.S. Treasury yield curve between two-year and ten-year notes has started to steepen slightly, usually a sign of an impending business cycle slowdown that will eventually cause the central bank to reverse some of its expected interest rate rises:
INDIA’s temperatures have fallen over the last week and are closer to the seasonal average, reducing electricity consumption slightly and easing stress on the power grid. The grid’s frequency has moved closer to the 50 Hz target and periods of under-frequency have become shorter and less severe, showing a closer balance between generation and demand:
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DISTILLATESHORTAGES are pulling up crude spot prices and calendar spreads as refiners maximise crude processing to meet demand for freight and manufacturing fuel:
U.S. FINANCIAL CONDITIONS are tightening rapidly as investors and intermediaries anticipate higher interest rates and a slowing economy. The Federal Reserve Bank of Chicago’s national financial conditions index – derived from 105 indicators covering risk, credit and leverage – shows conditions are the tightest since the first wave of the pandemic in 2020, and before that 2016 and 2012. The adjusted index, which attempts to isolate purely financial rather than real-economy factors, is the tightest since 2020 and before that 2011:
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BRENT spot prices and calendar spreads are climbing as traders anticipate an EU embargo will disrupt Russia’s oil production and reduce supplies available globally. Brent’s six-month calendar spread is trading in a backwardation of more than $10 per barrel again, notwithstanding the ongoing release of emergency stocks by the United States and other members of the IEA. Brent futures for deliveries in Dec 2022, when the release will have been completed, are trading at $102, not far below the peak of $104 in early March during the initial shock after Russia’s invasion of Ukraine:
U.S. PETROLEUM inventories including the strategic petroleum reserve fell by -0.5 million bbl to 1,696 million bbl last week. Distillate stocks fell -2 million bbl to 105 million bbl. Global consumption is running consistently faster than production causing inventory depletion and upward pressure on prices:
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