Discover more from Economics Uncovered
Mid-Year Economic Review & Outlook
Disinflation has already been achieved & the economic warning signs are mounting
Fed tightening is having an enormous impact on the money supply & bank credit
An analysis of the changes that have occurred in monetary and credit aggregates show that the Fed’s tightening is having an enormous impact.
On an annual average basis, the M2 money supply is falling at the fastest pace since the Great Depression and bank credit is on the verge of turning YoY negative. This comes as commercial bank security holdings see their largest decline on record and as weekly loan & lease growth has fallen from a YoY high of 12.5% in December 2022 to 5.2% as of 19 July — recent trends point to further material falls in YoY growth.
CPI expected to be range bound, core CPI forecast to keep dropping in 2H23
In my latest update to my medium-term US CPI forecasts, I currently estimate that the CPI will remain range bound between 3.1%-3.6% in 2H23. For the core CPI, I currently expect an ongoing deceleration throughout 2H23, reaching 3.6% YoY in December.
Disinflation has already been achieved, but is being ignored
Failing to adjust for lagging rent based components is leading the Fed to ignore the fact that disinflation has already been achieved. To illustrate, in June, CPI rent of shelter was up 7.9% YoY, versus 0.0% for the Apartment List Rent Index. After adjusting for spot market rents, the CPI and core CPI were just 0.5% and 1.6% YoY respectively in June, and I currently forecast both to range between 0.5%-1.2% YoY during 2H23.
Cyclical employment, GDI and real imports provide major warning signs
While most are focused on a relatively low unemployment rate, the latest jobs report delivered a major warning sign, with the Economics Uncovered Cyclical Employment Ex-Manufacturing Index turning YoY negative in June. This index turned YoY negative 5 and 6 months ahead of the 2001 recession and GFC, respectively.
While the advance estimate recorded GDP growth of 2.4% in 2Q23, a deeper look at the GDP data reveals two key concerns: 1) GDI, which theoretically should be equal to GDP, is YoY negative — since 1947, this has NEVER happened without a recession; and 2) real imports are down 4.8% YoY — since 1970, real imports have never been this negative without a recession occurring.
With M2 seeing relatively large declines, underlying inflation having already dissipated, and cyclical employment, GDI and real imports all sending warnings about the state of the US economy, the bigger medium-term risk for the US economy isn’t high inflation, it’s the risk of a deflationary bust.
See the full 37-page report below:
Thank you for reading my latest research piece — I hope it provided you with significant value.
Should you have any questions, please feel free to leave them in the comments below!
In order to help support my independent economics research (remember, everything you see — the forecasts, the charts, the analysis, the in-depth explanations of economic history — is all completed independently by me, for you), please consider liking and sharing this post and spreading the word about Economics Uncovered.
Your support is greatly appreciated and goes a long way to helping make Economics Uncovered a sustainable long-term venture that will be able to continue to provide you with valuable economic insights for years to come.
If you haven’t already subscribed to Economics Uncovered, subscribe below so that you don’t miss an update.
Important disclaimer—this may affect your legal rights:
This report is an economics research publication and is not investment advice. This economics research represents my own analysis, opinions and views, is general in nature, and does not constitute personal advice to any person.
While this research utilises data which is considered to be reliable, I have not independently verified the accuracy of the data utilised in this research.
While I have taken care to try and ensure that the figures, data and information presented in this research are accurate and free of errors, I am not perfect, and this research report may contain errors or omissions that may become apparent after this research has been published. I do not represent, warrant or guarantee expressly or impliedly, that the data and information contained in this research is complete or accurate. I do not accept any responsibility to inform you of any matter that subsequently comes to my attention, which may affect any of the information contained in this research. I do not accept any obligation to correct or update the information or opinions contained in this research. I do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omissions in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person.
Thanks for reading Economics Uncovered! Subscribe for free to receive new posts and support my work.