U.S. Economy Posts Surprise Contraction, Belying Solid Consumer
Comment of the Day

April 28 2022

Commentary by Eoin Treacy

U.S. Economy Posts Surprise Contraction, Belying Solid Consumer

This article from Bloomberg may be of interest to subscribers. Here is a section:

Against a backdrop of quicker inflation and solid spending, Fed monetary policy is still geared for a half-point rate hike next week. Nonetheless, officials need to balance tighter policy with risks to demand. 

The economy faces other potential headwinds that include knock-on effects from Russia’s war in Ukraine. Growth prospects in Europe are deteriorating, some raw materials are in short supply and the Chinese government’s severe pandemic-related lockdown measures are leaving supply chains in disarray.

The S&P 500 rose and the yield on the 10-year Treasury note remained higher along with the dollar.

“With strong growth of consumer spending, business investment and employment in the first quarter, the U.S. economy was not in a recession at the beginning of the year,” said Bill Adams, chief economist at Comerica Bank. “Growth should resume in the second quarter as the trade deficit and inventories become smaller headwinds.”

Biden blamed the contraction on “technical factors,” saying in a statement that employment, consumer spending and investment all remain strong.

Eoin Treacy's view

When you feel pressured by inventory shortages and rising prices, the natural response is to accelerate purchases. Orders also tend to be front loaded to forestall the trouble of having to worry about inventory in future.

In replacing the foundation of my home, which is blessedly close to completion, we were plonked in the centre of the shortages of materials. Some tradesmen could not start because they could not find materials. For instance, there is no oil-based paint available anywhere for a reasonable price. Quarter round is on back order for months unless one is prepared to travel to every story in a 50-mile radius to buy all of the available inventory.
We initially ordered flooring from Home Depot but the delivery date was set at six weeks. In the interim we found a better priced, higher quality product and cancelled the order. They have already refunded us but have tried delivering the four pallets on three separate occasions. In chatting with the most recent delivery driver yesterday, he reported no one had accepted a delivery yesterday. He was driving back to the depot with a full load.

We ordered a new car in December before we discovered the foundation issue. The logic was simple enough. New cars were cheaper than second hand if one was prepared to wait a few months for delivery. That was scheduled for the end of May, but it arrived today. In between prices for new vehicles have risen $10000 so we have “saved” money by waiting. Either German manufacturing is speeding up, or orders are being cancelled to save a month on delivery times. Perhaps it is both or neither. 

After tennis last night, our group had a running discussion about the merits of buying short-dated TIPS as a means of starting a savings account for college for four children. 2-year TIPS currently have a yield a -1.82%. The logical of the questioner was it was better to lose 1.8% than 8% to inflation. The sense of resignation among the group that inflation was trending higher and would continue to do so was palpable.     

I don’t think about my life as being different from the masses. The one thing I do know is we are looking forward to the end of large purchases and returning to spending more on travel. I wonder if others are also thinking along similar lines. The best way to beat inflation is to stop buying altogether.

My point in reporting these facts is I have a sense the economy is not as strong as official figures are reporting. Companies have been building inventory at an historically quick pace for the last year, but available inventory is still low in many high traffic areas. Buy-now-pay-later schemes are proliferating and are available just about everywhere. That is allowing consumers a great deal of leeway to order from multiple locations but only take delivery from one. It’s boosting orders temporarily but means a lot of loose inventory will be floating around within the coming quarters. Together with slowing M2 growth, interest rate hikes and balance sheet reduction to the tune of $90 billion a month, we can expect growth to continue to slow.

Strong earnings from Meta Platforms boosted sentiment today amid short-term oversold conditions. The Nasdaq-100 firmed from the region of the March lows.

Back to top

You need to be logged in to comment.

New members registration