U.S. inflation was/is driven by supply side impacts as a result of policy (Build Back Better). The U.S. recession was/is now driven by demand side impacts that are the result of increased supply side costs. This is the natural economic truth being denied by all levels of political leadership.
Joe Biden policy makers, specifically the U.S. treasury secretary and the federal reserve chairman, have claimed -falsely- that current inflation was/is being driven by demand. In essence, and ironically, their position means consumers are to blame for high prices. This has been their story and they have stuck to it. However, remember monetary policy can only impact the demand side of the economy. Monetary policy cannot impact the supply side, that aspect is led by Joe Biden policy.
The Federal reserve, having denied (pretended) the supply side causation, has effectively raised interest rates (0.75%) into an economic environment where consumer demand was already contracting. CTH has been asserting this fundamental position all year. Here is the evidence:
US Manufacturing PMI fell dramatically to 52.4 in June 2022 from 57 in May. This drop is well below the market and economic expectations of 56, and now points to the slowest growth and steepest drop in factory activity in almost two years. Contractions in output and new orders are pushing the index down.
Production and new sales declined for the first time since the depths of the pandemic in mid-2020 driven by weak consumer demand. Inflation and a drop in wholesale and retail purchases have lowered purchase orders. The gears inside the economy are slowing to a halt.
Look at the PMI trendline and you can clearly see what we have been discussing on these pages since March of 2021. Consumer demand has been dropping in direct proportion to the dramatic rise in inflation (consumer prices).
At the exact moment that U.S. inflation began spiking in housing, energy, fuel and food, consumer demand for non-essential purchases, durable goods, started dropping. This is a natural outcome that mirrors your own experience in checkbook economics.
When food, fuel and energy cost you more, you stop buying stuff and start prioritizing.
Following the path of the “build back better” agenda, the U.S. version called “Green New Deal,” meant the Biden administration had to continue denying that any demand side contraction was taking place. However, it is clear from the indexes under the control of purchasing managers that orders for factory goods have been dropping.
The same is true on the services side of the PMI. Demand for services are being prioritized, and demand for non-essential services are dropping.
The U.S. economy is contracting. Denial abounds.
FXStreet – The S&P Global Manufacturing PMI plunged to 52.4 (flash) in June from 57 in May, missing the market expectation of 56 by a wide margin. This report revealed that the business activity in the manufacturing sector expanded at a much weaker pace in early June than it did in May.
Further details of the publication revealed that the Composite PMI declined to 51.2 from 53.6, compared to analysts’ estimate of 53.7.
Commenting on the data, “the pace of US economic growth has slowed sharply in June, with deteriorating forward-looking indicators setting the scene for an economic contraction in the third quarter,” said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. (more)
The White House will blame Russia.
