- Q1 GDP Growth Jumps 1.1% on Strong Personal Consumption
- A Strong March Leads to a Surge in Chinese GDP in Q1 2023
- Durable Goods Retail Sales Suffer from High Interest Rates and Wary Consumers
- Choppy GDP Means UK Should Avoid Q1 Recession
- Japanese Consumer Confidence Jumps to Highest Level in Over a Year
- The End of Summer Sees the End of Disinflation in Europe
- Labor Market Indicators are Starting to Unify on Easing in Hiring
- Inflation and Tight Financial Conditions Weigh on the German Consumer
- Euro Area Money Supply Contracts for the First Time Since 2010
- Dismal Economic Data Out of Germany
- Core Durable Goods New Orders See Gentle Uptrend in July
- More UK Data Pointing to Q3 Decline
- Whispers of a UK Contraction in Q3
- Japan's Core Inflation Resumes Uptrend in July
- Early July Economic Data Leads to a Sharp Increase in Q3 Growth Expectations
- UK CPI: Energy Inflation Crashes but Services Inflation is Still Sticky
- China's Weak Start to Q3 Means More PBoC Easing
- Bank of Japan is Too Optimistic on Inflation
- The Bank of England Pauses in a Near Split Decision
- UK Inflation August Update: A Precursor to the Bank of England's Announcement
- Housing Starts Tumble in August Amid Rising Mortgage Rates
- US Retail Sales Grow at Fastest Monthly Rate Since the Start of the Year
- US Consumer Prices Surge in August Driven by Energy Costs
- August NFIB Survey Showed a Tough Environment for Small Businesses
- All Signs Point to a Weaker Labor Market in August
- Thoughts on GME and This Week in the Stock Market
- Record Home Price Levels Point to Strength in Post-Pandemic Economy
- The Stock Market Looks Overvalued, but It's Probably Not
- China GDP Growth Surpasses Expectations
- President-elect Joe Biden Introduces His "American Rescue Plan"
- Political Polarization Intensifies with Another Impeachment Along Party Lines
- Metal Demand Has a Bright Future in 2021 and Beyond
- What Happened to That US-China Trade Dispute?
- Civil Unrest, A Rising Threat to the 2021 Economy
- What's in the $900 Billion Relief Plan?
The Chicago Fed Index Reverses in July
August 22, 2022
The Chicago Fed National Activity Index (CFNAI) pointed to some stabilization in economic indicators in July. The index had been in negative territory in May and June before reversing all the losses last month. In fact, the increase of 0.52 pts means that the index in July matched its value just 3 months ago at 0.27.
Two categories of indicators, the “sales, orders & inventories” and the “personal consumption & housing” indicators, were mostly neutral at just 0.01. The weakness in both of these categories reflects the weakening of demand, especially in the housing market, which has taken place as financial conditions and economic sentiment have weakened. However, there is still some support for personal consumption (in particular services consumption) as a result of excess savings and a strong jobs market.
The two stronger categories “employment, unemployment, and hours” and “production and income” point to the two strongest areas of the economy. The labor market is keeping the economy afloat with growth in wages and plenty of job openings. The decline in the unemployment rate in July was the reason why this component of the CFNAI shifted from negative to positive. Indicators tracking production reversed sharply in July on the strong 0.6% MoM industrial production print in July. The initial decline in demand is not having a strong effect on industry because firms are bouncing back from easing supply chain pressures.
Do Markets Have Ground to Stand on?
What does this mean for markets? The rebound in stocks over the past month or so seems to have some ground to stand on. SPY and QQQ are up 9.5% and 11.4% since June 15th, and many question the bullish sentiment pushing stocks higher after the declines in Q1 and Q2. These doubts are certainly valid as the May and June readings of the CFNAI made it clear that economic data is clearly moving to the downside, but investors have taken more positive data in stride. This includes a CPI report that was interpreted as a potential peak in US inflation.
Don’t get too excited because the worst is not behind us. Economic indicators can and very likely will reverse any strength seen in July. Some early reports like the Empire State Manufacturing Survey have shown a much weaker August. The Empire Survey’s General Business Conditions index plunged -42.4 pts to -31.3 this month with the New Orders index down -35.8 pts to -29.6. These are lows not seen since the pandemic. Financial conditions are just now starting to tighten to the degree that businesses will have to start adjusting to higher borrowing costs and, in general, tighter credit conditions.
Bears can also find the strength in July to be a point in their column instead of the bulls’. The Fed is closely monitoring economic data and shaping its tightening path meeting-by-meeting. Economic strength means that the FOMC can feel more comfortable about being aggressive in rate hikes and delaying rate cuts. In the same period that SPY and QQQ were up, the yield on the 2-year Treasury grew 3.75% to 332 basis points. Indeed, the 2-year yield bounced from being down -10% twice in the last 47 trading days suggesting investors sense hawkishness. That in itself is enough to justify the current rally breaking down.