Member Briefing June, 14, 2023
CPI = 4.0% Inflation Eased in May, Still Well Above Fed Target
Inflation in May was around half of last year’s peak but remained far above what Federal Reserve officials would like to see. The consumer-price index rose 4% last month from a year earlier, the Labor Department said Tuesday, well below the recent peak of 9.1% last June and down from April’s 4.9% increase. The figures showed that the Fed has made progress in cooling price pressures, but also that officials still have work to do to get inflation to their 2% target.
So-called core consumer prices, which excludes volatile food and energy categories, climbed 5.3% in May from a year earlier, down from 5.5% in April. Economists see core prices as a better predictor of future inflation. Core prices remain elevated in part because an earlier surge in housing-rental prices continues to show up in the inflation figures. Overall consumer prices increased a seasonally adjusted 0.1% in May from the prior month, down from April’s 0.4% increase. Core consumer prices rose 0.4% in May from the prior month, the same pace as in April and March.
Prices for housing, used vehicles and food drove inflation last month, the Labor Department said. Energy prices declined 3.6% in May from April.
War in Ukraine Headlines
- Ukraine and Russia: The Latest News – The Guardian
- UN Aid Chief Says Ukraine Faces `Hugely Worse’ Humanitarian Situation After the Dam Rupture - AP
- Kyiv Hits Deep in Russian-Occupied Territory as its Forces Search for Opportunities to Break Through Enemy Lines - WSJ
- Russia Kills Civilians in Apartment Block Strike In Zelenskiy’s Hometown - Reuters
- U.S. Set to Approve Depleted-Uranium Tank Rounds for Ukraine - WSJ
- Behind Enemy Lines: Inside the Operation to Rescue Ukraine’s Abducted Children - Politico
- Russia Releases Video of Captured German Tanks, U.S. Fighting Vehicles in Ukraine - Reuters
- U.S. Lawmakers Ask White House to Punish South Africa for Supporting Russia - NYT
- Pakistan Paid in Chinese Currency for Discounted Russian Oil - Reuters
- How Wars Don’t End - Ukraine, Russia, and the Lessons of World War I – Foreign Affairs
- Interactive Map: Assessed Control of Terrain in Ukraine - Institute for the Study of War
- Map – Tracking Russia’s Invasion of Ukraine – Live Universal Awareness Map
Manufacturing is Sputtering in the World’s Largest Economies
Manufacturers around the world are contending with weakening demand as the economic outlook for the industry darkens. Factories in the United States and across the eurozone reported a decline in new orders for manufactured goods in May as they worked through their backlog of orders, according to recent business surveys released by data firm S&P Global. It’s unclear for how long those backlogs, which swelled in the early days of the pandemic, will sustain the industry globally.
S&P Global data showed that the US manufacturing sector fell into contraction territory in May. A similar survey released by the Institute for Supply Management showed the industry contracted for the seventh consecutive month in May, at a faster pace than in the prior month. Among manufacturers in the eurozone, production, new orders and backlogs all fell in May as the sector contracted at a faster pace that month, according to S&P Global figures. recent data showed that exports from China fell 7.5% in May from a year earlier, the biggest decline since January, as imports contracted further that month.
Survey: Supply Chain Professionals Wary of Rising Operating Costs
A 72% majority of supply chain professionals are experiencing significant challenges across their organizations, from fuel costs to inflation to various delays outside their control, according to a report from last mile delivery software provider DispatchTrack. And those issues are expected to continue over the next six months, DispatchTrack said in its “Supply Chain Perspective Report.” The research is based on a survey completed last month of over 100 logistics professionals in the industries of furniture and appliances, 3PLs, medical, auto parts, and others.
By the numbers, the top challenges supply chain leaders are currently experiencing include fuel costs (59%), inflation (46%), delays outside of their control (41%), unpredictability (38%), driver shortages (32%), and losing business due to the economy (30%). The data also signaled that supply chain leaders expect ongoing increases in operating costs, as 6 in 10 respondents expect operating costs to be 10% to 20% higher this year than in past years.
Read more at Supply Chain Quarterly
COVID Update - Australia is in Another COVID Wave. But it's Not Like the Others
Each Omicron wave so far in Australia has had distinguishing features — the sharp rise and fall of BA.1, the widespread transmission among children and families in BA.2, a shift to more infections in older people with BA.5, then the confusing variant mix in the summer wave of 2022-23. Now Australia is in its fifth Omicron wave, which has been brewing since February. But it has grown so slowly that many people may have not realised it until recently.
The slow and drawn-out nature of the current wave is most likely due to the sequential emergence and spread of new Omicron subvariants. The current wave started with XBB.1.5, then shifted to XBB.1.9.1 and XBB.1.9.2, then most recently XBB.1.16. Each subvariant has been able to spread where the previous one could not. But the competitive advantage of each has been minor. So we have only seen a progressive increase in infections as new subvariants emerge, rather than the dramatic surges in infections and health impacts associated with previous variants.
Report: Industrial Leaders See Tailwinds, Manufacturers Show Optimism
According to a recent report from Forbes and accounting and advisory firm Crowe LLP, manufacturers think they can get their arms around what’s needed to thrive in the coming years. The study, which focuses on sources of current and expected volatility, showed that manufacturing leaders are more optimistic than their peers across the economy:
- While financial risks such as top-line growth and access to capital are expected to become more precarious among all of the 1,001 large-company executives surveyed between now and 2025, only 31% of industrial leaders see them being problems in two years versus 44% of all respondents.
- Similarly, today’s crucial pain points of talent and supply chains—57% of manufacturing leaders cite each as sources of volatility—are expected to quickly recede: Only 23% of manufacturing respondents expect labor to be an issue in 2025 (versus 43% among all respondents) and 29% (versus 41%) think the supply chain will still be a headache then.
“Manufacturers tend to be more optimistic because they’ve seen this type of thing before,” said Andrea Meinardi, managing partner of the manufacturing group at Crowe. “They’ve had to reinvent themselves—often with small tweaks—but there’s never a steady state.”
Consumer Inflation Expectations Continue to Drop in May
Consumers — at least in the near term — continue to believe inflation will recede alongside a resilient labor market, according to the New York Fed's latest survey of consumer expectations, released Monday. Over the next year, Americans' median inflation expectations fell to 4.1% — a 0.3 percentage point decline from April and the lowest level since May 2021 (though still quite elevated compared to pre-pandemic times). In the three-year horizon, expectations edged up slightly (by 0.1 percentage point) to 3%.
For the first time in five months, consumers anticipate their pay will rise at a slower pace over the next year. That decline was most pronounced among the least educated workers. But consumers are still confident about the broader state of the labor market; they see very low odds of being laid off over the next 12 months. The mean perceived probability of losing one's job registered the lowest reading since April 2022 — and is only 0.1 percentage point above the all-time low.
Banks Raise Roadblocks to Small-Business Loans
Banks are tightening lending standards. Small businesses are paying the price. Some entrepreneurs are finding it more difficult to get a new loan or have had existing credit lines cut. Others report stricter terms, higher borrowing costs, longer waits and tougher questions from their bankers. “They are definitely being more conservative,” said Brock Hutchinson, chief executive officer of Big Frig, a maker of coolers and drinkware in North Sioux City, S.D. “Things have tightened up.”
Big Frig’s sales slowed in the fourth quarter as corporate customers cut spending on promotional products. In response, the company’s bank reduced its credit line to $450,000 from $1 million early this year, Hutchinson said. Nearly half of banks reported stricter loan standards for small businesses in the past three months, according to a survey of senior loan officers released by the Federal Reserve Board in May. More than half said they expect to tighten small-business lending standards further in 2023.
Global Sentiment Edges Higher, but the U.S. and China Show Signs of Weakness
Global consumer sentiment continued to rise in May, adding to steady gains made since December 2022. The 0.6% increase in Morning Consult’s GDP-weighted measure of consumer sentiment was driven by rising confidence in France, the United Kingdom and Japan. In the United States, consumer sentiment rose for the better part of May. However, confidence materially weakened at the end of the month, bringing into doubt the longevity of an uptrend that has been broadly in place since July 2022.
Across Europe, slowing inflation continues to drive improvements in consumer confidence. In May, sentiment rose in 15 of the 16 economies tracked by Morning Consult, with only the Czech Republic experiencing a month-over-month decline. Since the start of 2023, the 30-day moving average of the Morning Consult China Index of Consumer Sentiment has increased by 17.8 points, or 12.9%. With a large amount of accumulated savings after years of lockdowns, the Chinese consumer has the means to spend, and rising confidence could well provide the spark needed to reignite growth
Why America Isn’t Ready for the EV Takeover
The adoption of electric vehicles represents the biggest shift in our energy and transportation systems in more than a century—but it’s also the biggest shift in consumer electronics since the debut of the iPhone. On both counts, progress is accelerating in the U.S. And on both counts, we are far from where we need to be. A recent 1,000 mile road-trip in the longest-range electric vehicle you can buy brought this home for me. That journey was as worrisome as it was thrilling, and it clarified how much more needs to be done for drivers to have a consistent and satisfying experience on par with buying a gasoline vehicle.
Thursday’s announcement that General Motors will join Ford in making Tesla’s nationwide Supercharger network available to its customers is potentially a big step in the right direction. However, with EVs currently representing only about 1% of all vehicles in the U.S., according to the Energy Department, the scale of the challenges ahead is mind boggling.
Toyota Unveils Sweeping Plans for New Battery Tech, EV Innovation
Toyota will introduce high-performance, solid-state batteries and other technologies to improve the driving range and cut costs of future electric vehicles (EVs), the automaker said on Tuesday, a strategic pivot that sent its shares higher. The Japanese giant's technology roadmap, covering aspects as varied as next-generation battery development and a radical redesign of factories, amounted to the automaker's fullest disclosure of its plan to compete in the fast-growing market for EVs where it has lagged rivals led by Tesla.
It also trumpeted a "technological breakthrough" that addresses durability problems in solid-state batteries and said it is developing means to mass produce those batteries, targeting commercialization over 2027-2028. Solid-state batteries can hold more energy than current liquid electrolyte batteries. Automakers and analysts expect them to speed transition to EVs by addressing a major consumer concern: range. Still, such batteries are expensive and likely to remain so for years.
U.S. to Allow South Korean, Taiwan Chip Makers to Keep Operations in China
The Biden administration plans to allow top semiconductor manufacturers from South Korea and Taiwan to maintain and expand their existing chip-making operations in China without U.S. reprisals, according to recent remarks by a senior Commerce Department official. Some analysts say the move will weaken U.S. export controls designed to slow China’s technological advance.
Last October, the U.S. implemented curbs on China’s semiconductor sector but it also provided one-year exemptions to several companies—including South Korea’s Samsung Electronics and Taiwan Semiconductor Manufacturing—that have invested billions of dollars to build plants in China.
What’s Killing Productivity? In the UK Some Think It’s the Banks
The U.K.—inventor of the factory system, steam engine and passenger rail—is at the forefront of a 21st-century global productivity slowdown. Growth in U.K. productivity, or output per hour worked, has halved since the financial crisis, leading some policy makers to call this era Britain’s lost decade. Among the world’s seven largest developed economies, only Italy has fared worse.
The causes are hotly debated, and include an aging population, tighter regulation and the U.K.’s departure from the European Union. But a factor that has gained special attention: the way U.K. banks have tilted lending to the booming housing market. Bank lending for projects that boost economic output, such as machinery and software, has stagnated. Research and regulators say the two trends are linked: As real-estate prices soared, banks shifted more capital toward housing, viewed as less risky because the loans were backed by tangible assets with rising values.
The South is Fast Becoming America’s Industrial Heartland
In popular perception America’s industrial heartland is its Midwest. But take a look at where the money is flowing, and a different picture of manufacturing emerges. It is the South—a region running from Texas to Virginia—that is fast becoming America’s new industrial heartland. The shift for American factories has been years in the making. When Japanese and German carmakers started production in America in the 1980s and 1990s, most chose the South.
What stands out now is the pace of change. The industrial policies crafted by Mr Biden’s administration—notably, incentives and rules to boost the production of semiconductors, renewable energy and electric-vehicles (evs)—have catalysed a surge in investment, much of it in the South. s&p Global Market Intelligence, an analytics company, calculates that about two-thirds of planned ev jobs will reside there.