Dampening inflation spurs enthusiasm, but where is the attention to contraction in the US manufacturing index? Plus we have a roller coaster week for the growing US-EU trade spat, signs of relaxations in China’s COVID Zero restrictions, and escalating protests in Brazil – paired with dropping oil prices, an LNG deal for Germany, a possible agreement to restore Russian ammonia exports, and a nascent EV industry shift to sodium-ion batteries.
Several economic readings this week show welcome – albeit tentative – signs of slowing in the US economy. But the labor market is still hot, and far more so than the Fed and markets would like. And, of course, there’s the question of what slowing is good slowing.
Inflation: Inflationary trends appear to be dampening. The core Personal Consumption and Expenditures Index, which excludes food and energy, rose 0.2% in October after two consecutive months of 0.5% increases.
Hikes: Apparently in response, central bank chair Jerome Powell said in a Wednesday speech that he is prepared to slow the pace of rate hikes next month. Markets cheered, sending the Dow up 700 points, S&P500 up 3.1%, and Nasdaq Composite up 4.4%.
Jobs: That said, the Labor Department’s employment report showed 263,000 jobs added last month, few signs of severe hiring slowdowns, and a 0.6% rise in average hourly earnings for private sector workers. In other words: A hot labor market. That’s despite the labor market churn data from earlier this week showing a slight slowdown in the number of job openings: 10.3 million in October, versus 10.7 million in September, but still above the level in August.
Manufacturing: Not all economic slowing is something to cheer. And some of the indicators are worrying, suggesting that the Fed’s efforts to cool the economy risk hurting precisely the parts most necessary for continued resilience. The Institute of Supply Management’s factory activity gauge showed its first contraction last month since 2020. That’s hardly a surprise considering the macro-economic environment, including a strengthening USD that undermines export competitiveness and high inflation that raises cost of production. But as we’ve noted before, to fix inflation, the US must fix supply. And to fix supply, the US must grow its physical production capacity. A contracting PMI suggests the opposite is happening.
ISM Manufacturing Index
Source: Institute for Supply Management