US inflation cools, but risks remain
Good news on the US inflation front: The consumer price index, on an annual basis, has cooled for six straight months. The CPI reading came in at 6.4% year-on-year in December, and fell by 0.1% compared to November. Core inflation readings, which exclude food and energy, also offer reassurances: Core inflation in the fourth quarter of 2022 was 3.1% on an annualized basis, a steep drop from 7.9% in the second quarter.
Slowing inflation plus the healthy labor outlook as reflected in last week’s job report is as good a combination as any for hopes of achieving a “soft landing” of tamed prices while avoiding an economic recession. The market seems to believe the same: Yields on 10-year Treasury bills have fallen sharply over the past two weeks, and investors increasingly believe the Fed could dial down the the pace of its rate tightening.
Still, risk factors remain – including, say, another energy price shock from the expanded Russian oil products sanctions. And input shortages continue to plague manufacturers. The latest ISM Manufacturing report, for instance, indicates that electrical components, electronic components, and semiconductors have been in short supply for 27, 25, and 25 consecutive months respectively.
US CPI, seasonally adjusted
Source: Bureau of Labor Statistics
Economic optimism, pessimism, or realism?
Meanwhile, the IMF has some cautious optimism for the global economy, predicting growth to rebound later this year and a “higher growth trajectory in 2024.” That’s a cheerier note than the World Bank’s steep downgrade of global growth forecasts to 1.7% from its previous projection of 3%. Major US banks are buckling down for a bumpy economic ride ahead: The four largest commercial banks stowed away 2.8 billion USD in the last quarter of 2022, in anticipation of potential loan losses.
A small step towards reindustrialization
The South Korean solar energy firm Q Cells, part of the broader Hanwha conglomerate, this week announced a 2.5 billion USD investment to expand its existing solar panel factory in Georgia, and open a second plant there with production slated for 2024. It’s the largest foreign direct investment in US solar manufacturing, according to fDi Markets. The new factory will make solar panel components not currently produced in the US, including silicon ingots, wafers, and cells.
For Washington, Hanwha’s announcement is a sign that the massive green subsidies, tax credits, and other incentives offered by the Inflation Reduction Act are prompting new investment in the American industrial base. US president Joe Biden touted Hanwha’s investment as a “direct result of my economic plan and the [IRA].” (Note: We ran commentary from Harry Moser this week about the limitations of a subsidy-based approach to reindustrialization.)
Across the Atlantic, the response is less positive. German chancellor Olaf Scholz wants the EU to create new financing tools to compete against Washington’s green subsidies. And Politico scooped on Friday that the French government has pitched a sweeping “Made in Europe” strategy to counter a flood of US subsidies.
And even as Georgia claims victory in attracting Hanwha’s landmark investment, projects elsewhere have been put on pause due to uncertain conditions. According to the Korea Economic Daily, Ford Motor and SK Innovation’s battery unit, confronted by rising global interest rates and weaker EV demand in Europe, this week canceled plans for an EV battery plant in Turkey.