Orders, imports, retail sales, and prices are all sending the same message – demand slowdown. The synchronicity of these growth and inflation measures sliding lower provides further confirmation of a weakening economic backdrop. We believe this is what long-end rates and the yield curve have been signaling for the last few months. If the economy is going to re-accelerate in the second half of the year, we would expect to see a reversal of these trends.
Starting on the macro side, we would expect to see less order growth if businesses are experiencing a slowdown in demand and/or are expecting less demand from here. Factory orders have decelerated to a y/y pace of -0.98% in May, its first negative print since October 2020. From their cycle high made in June 2022, orders have declined by 2.55%. Factory orders excluding transportation, a measure that removes some of the volatility from large airline orders, have decelerated to -4.24% y/y and are down by 5.20% from their cycle high.
Similar to orders, if demand was accelerating or expected to accelerate, import data should be improving. For the month of May, imports decelerated to -6.82% y/y and -9.23% from the cycle high made in March 2022. This is not a good sign for the domestic demand setup.
Indeed, the current consumer demand setup has moved in a negative direction over the last several months. The y/y growth rate of Redbook Research’s weekly retail sales data has decelerated to -0.4%. Importantly, this data is reported in nominal terms, meaning the unit growth is even weaker. A deceleration in unit growth likely leads to less logistics activity, which is what we have seen in the Logistics Managers’ Index (LMI) and shipment data. For the month of June, the LMI declined to a record low and manufacturers’ value of shipments moved deeper into negative territory in May.
Source: Macrobond, Logistics Manager Survey.
Another way we can track demand is through prices. If prices are decelerating y/y, it is likely a reflection of businesses adjusting to declining demand by not raising prices as much as they had been or even offering discounts. For June, the Consumer Price Index decelerated to 3.1% y/y, down from 4.1% in the prior month. On a rate of change basis, the 100-basis point deceleration was the CPI’s fastest slowdown since April 2020. From its cycle high in June 2022, CPI has decelerated by 580 basis points. For some historical context, the last time we saw a twelve month stretch of this nature the economy was in the second half of the Great Financial Crisis when CPI fell from 5.5% y/y to -2.0%, a 750-basis point deceleration.
Turning to the market side, we can monitor the U.S. Treasury yield curve for a view into growth and inflation expectations. While the front end is more responsive to Fed policy, the long end of the curve reflects longer-term expectations for growth and inflation. This disconnect has led to curve inversions consistent with prior economic slowdowns. At the front end, the 3-month Treasury yield has increased 509 basis points since the day of the first rate hike. At the long end, the 10-year yield has increased 179 basis points, and the 30-year yield has increased 153 basis points. Since October, however, the front end has continued to increase, the long end has drifted lower, and curves inverted further. This dynamic suggests that longer-term expectations for the economy shifted somewhere around the fall of last year, even as the Fed hiked an additional 125 basis points. Notably, the stall in long-end rates and further flattening of curves occurred just as the orders, imports, and other economic indicators started to accelerate to the downside.
The major takeaway from this data is that several economic indicators and market signals remain at levels consistent with prior economic slowdowns. We will continue to monitor these trends as we move into the second half of the year.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Economic Analyst
Boyd Watterson Asset Management, LLC