Sectors of the Economy Are Improving
Inflation, housing, supply chains, used autos & labor showing positive signs
For the better part of two years we’ve watched sectors of the economy spiral out of control. There has been no stopping or even controlling the upward push in prices.
Stabilizing and stopping the continuous run higher in prices is vital to the economy. It allows companies to set prices. It helps temper inflation, thus helping consumers. It’s all part of the economic cooldown that we need to endure to reign in the continuous run of higher and higher prices.
It looks like we’re finally starting to see some cooling and positive data in some of the overheated economic sectors.
Inflation
Last week the fed’s favorite inflation figure was released. The core personal consumption expenditures index (PCE) came in at 4.9% for May. That is down from 5.2% in April and 5.3% in March. This is the first move lower since November 2020.
A closer look at the trend over the last two years.
This number did cause the stock market to pop higher. The feeling is that this is showing the data that inflation has in fact peaked. The CPI number for May is released June 10th.
Inflation has been a big drag on consumers, the stock market and overall economy. If more data follows this showing declining inflation, expect sentiment and the market to really rally higher.
Housing
The hottest sector over the past two years is finally starting to see some cooling.
Housing inventory for sale is up 9% YoY. It’s quite a move from down 30% to start the year. Inventory growth is quickly accelerating while we’re starting to witness a decline in demand. Inventory is key to the housing sector as it usually dictates where prices are headed.
The March supply of homes was at 6.9 months and April is now up to 9 months supply. The all-time record low was in October 2020 at 3.5 months supply. Another rapid move in a short amount of time.
Demand has started to cool as inventory rises. Prices have not budged yet. We will see if demand pulls back enough and new homes continue to come on to pullback prices. Or we may just see prices level off and the average time a house sits lengthen. If homes start to sit longer we’ll see a natural decrease in prices to move home sales.
Supply Chains
The pictures and stories of ships waiting to be unloaded have faded. This is starting to ease the bottlenecks in company supply chains. The ports of Los Angeles and Long Beach which account for roughly 40% of total imports to the US have seen a steep decline in container ships outside the ports.
We’ve also seen the available space among trucking freight at it highest since June of 2020. That’s the highest available capacity on ships in two years.
It doesn’t seem that long ago companies were buying their own ships and trucks to move their cargo. The bottlenecks were something else that we knew would be short term and just had to be worked through. With bottlenecks under control that should help dampen the higher production costs.
Used Autos
The Manheim used vehicle index finally saw a tick downward. Constant rising costs of used autos were becoming out of control. The lack of semiconductors to get new vehicles out of production pushed used prices upward.
As supply increases this number should continue to drive lower. The days of used vehicle prices rising month after month should be a thing of the past.
Labor
There are still two jobs available for every unemployed person. This has helped wages for workers but also played a large role in the rise in prices for good and services through wage inflation.
Companies have started to signal that the hiring concerns that plagued so many for so long have started to subside. This has been a welcomed improvement for companies of all industries in their recent conference calls.
The two largest employers in the US, Walmart and Amazon both acknowledged that they’re overstaffed. Other companies earnings calls are reflecting similar comments about how finding people to fill jobs is getting easier. Some have expressed a need for less people and we’re even starting to see companies starting layoffs. Caravan, Netflix, PayPal, and Wells Fargo have all announced layoffs last month.
Throughout history we see cycles within the economy. Ferocious moves higher or lower will stabilize or move in the opposite direction over time. Eventually seeing a reversion to the mean. That’s healthy and important for the economy. After over two years of these ferocious moves in all directions, we’re finally starting to see mean reversion back to pre-pandemic levels.
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