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**Supply chain pressures and commodity prices**
Incoming data over the last few weeks mostly suggest that inflationary pressures are receding. A key reason for this concerns the trends in chart 1 below. According to an index calculated by the New York Fed, global supply chain pressures were more than 4 standard deviations above normal at the end of 2021. Fast forward to May 2023, and they are now estimated to be nearly 2 standard deviations below normal. Consequently, the intense upward pressure on commodity prices caused by these supply chain issues has also reversed, as evidenced by the deflation that can be observed in the CRB index of late.

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**Europe’s upstream price pressures**
Those trends, in turn, are also generating downward pressure on producer prices, which tend to be a key leading indicator for consumer price inflation. This is evidenced in chart 2 below showing a 95% correlation between PPI inflation (advanced by 3 months) and CPI inflation in the euro area over the past 20 years. This week’s data showed that PPI inflation rose by just 1% in the year to April down from around 43% y/y last August. That bodes extremely well for the likely evolution of CPI inflation in the euro area in the period ahead.

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**China’s trade**
China's trade continues to play a crucial role in the global economy. That’s why this week’s trade data for May were concerning. More specifically China’s exports fell by 7.5% from a year earlier in May while imports were down 4.5%. Abstracting from month-to-month volatility and the overall trends, moreover, can best be described as pedestrian, as evidenced in chart 3 below.

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**Investors’ growth expectations**
The Sentix survey measures the overall sentiment and expectations of financial market participants, particularly investors, regarding the future prospects for the world economy and financial markets. And this month’s survey revealed that those expectations remain fragile. Growth expectations in the US and euro area admittedly perked up a little, but from a very weak base. Meanwhile, and in sympathy with the message about China’s trade above, expectations regarding growth in Asia took a turn for the worse, albeit from a slightly higher base.

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**US inventories**
The fragilities in the world economy are probably one reason too why the odds of a recession outcome for the US economy in the period ahead remain high. Indeed the latest surveys from the Institute of Supply Management (ISM) suggest the manufacturing sector may already be in recession and that activity in non-manufacturing slowed sharply in May. Both sectors, moreover, revealed acute inventory imbalances, as evidenced in chart 5 below. Rising inventory levels potentially indicate excess supply, heightened financial strain and ebbing profitability with ripple effects for the broader economy.

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**The Green Energy Transition**
On a completely different note, our final chart this week homes in on Asia's transition to a green economy. That transition requires a shift away from fossil fuels and high-carbon industries, but the rapid growth of sectors like manufacturing and construction in the region presents challenges in terms of transitioning to cleaner alternatives. As shown in Chart 6 below, coal remains a relatively affordable energy source in the region. This affordability, coupled with its widespread availability, has resulted in heavy reliance on that commodity in the area. Limited financial resources further complicate the shift from coal to renewable energy sources, requiring significant investments and substantial support from policymakers.

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Financial market sentiment has continued to improve in recent days despite conflicting signals from the economic data flow. This improvement can be traced, in part, to the removal of uncertainty surrounding the US debt ceiling. However, as indicated by our first two charts this week, there is now growing evidence to suggest that headline inflationary pressures are receding in most major economies, which could have been a further contributing factor. Nevertheless, as our next three charts this week also suggest, the world economy is not yet out of danger. Among other potential negatives, this week's data flow signalled a big slowdown in export growth in China (chart 3), still-fragile growth expectations from the global investor community (chart 4), and increasing inventory imbalances in the US economy (chart 5). Lastly, and on a completely different and more structurally-rooted note, our final chart this week looks at some of the challenges Asian economies face in their transition to a Green economy (chart 6).

Charts of the Week (June 9, 2023)

Carol Stone, CBE

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Borrowing in the U.S. economy increased moderately in Q1 2023, to $4.831 trillion from $3.979 trillion in Q4 2022, quoted at seasonally adjusted annual rates.  The data come from the Federal Reserve’s Financial Accounts, and the totals here include all sectors of the economy, domestic private, government and foreign.  All the amounts described here, unless otherwise noted, are quoted at seasonally adjusted annual rates (“SAAR”), although the raw amounts are available in the Fed’s accounts.  We cite the SAAR data to show how they compare with the economy as a whole.  Thus, the Q1 SAAR total represented 18.2% of GDP, up from 15.2% in Q4; for all of 2022, borrowing amounted to 22.7% of GDP.

Among nonfinancial sectors, the federal government was largest borrower, taking on $1.195 trillion in Q1, up from $1.057 trillion in Q4 and representing 4.5% of GDP in Q1.  Businesses borrowed at a $755 billion annual rate in Q1, with $604 billion for nonfinancial corporations and $151 billion for noncorporate businesses.  The business total represents 2.8% of GDP, up from 2.5% in Q4 2022 and with business borrowing stronger in the first half of last year, it is 4.2% of GDP for all of 2022.

Households borrowed just $420 billion in Q1, down from $629 billion in Q4 and $1.153 trillion for all of 2022.  The Q1 amount was 2.1% of disposable income, down from 3.3% in Q4 and the smallest ratio since the pandemic recession in 2020.  In Q1, both mortgages and consumer credit use slowed with one-to-four family home mortgages up just $306 billion, compared to $455 billion in Q4 and, with amounts in excess of $1 trillion in the first half of last year, $838 billion for all of 2022.  Consumer credit use was just $204 billion in Q1, down from $349 billion in Q4 and compared with $355 billion for 2022 as a whole.

Borrowing by financial institutions themselves was stronger in Q1, at $2.44 trillion, up from $2.029 trillion in Q4 and $1.771 trillion for all of 2022.  This borrowing included $1.635 trillion in debt securities in Q1, up slightly from $1.63 trillion in Q4, plus loans of $805 billion in Q1, up from $399 billion in Q4.

Foreign borrowers paid down debt again in Q1, though just $19 billion, after paying down $234 billion in Q4 and adding $282 billion on net during all of 2022.

Net wealth in the U.S. economy increased $1.467 trillion in Q1, following an advance of $1.349 trillion in Q4.  The increase for all of 2022 was $699 billion, due to sizable reductions in Q2 and Q3.  These amounts are the actual totals, not seasonally adjusted or annualized.  So the total net wealth at the end of Q1 was $13.7 trillion, which is slightly lower than the record of $13.9 trillion at the end of Q1 2022.  Household net worth rose $3.025 trillion in Q1, following a $1.619 trillion increase in Q4  But for all of 2022, household net worth fell $4.6 trillion.

The Financial Accounts data are in Haver's **FFUNDS** database. The Federal Reserve is the main source, while associated information is compiled in the Integrated Macroeconomic Accounts produced jointly with the Bureau of Economic Analysis (BEA); these are carried in Haver's **USNA** database as well as in **FFUNDS**. Note that revisions are common throughout the accounts with every quarterly release.

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- Federal government borrowing largest among nonfinancial sectors, but up just modestly in Q1.
- Business borrowing ratio to GDP increases.
- Households borrow smallest ratio to disposable income since 2020 pandemic.

Borrowing Up Modestly as % of GDP in Q1

Tom Moeller

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Wholesale inventories fell 0.1% (+6.3% y/y) in April following a 0.2% March decline. This was revised from the advance report of a 0.5% decline. Inventory growth has slowed considerably since a 25.6% y/y peak increase in June 2022. A 0.2% April decline had been expected in the Informa Global Markets Survey.

Durable goods inventories rose 0.6% (11.1% y/y) in April after holding steady in March. Machinery inventories jumped 2.1% (26.7% y/y) while metals inventories strengthened 1.6% (1.4% y/y). Electrical equipment inventories rose 0.7% (13.9% y/y) as motor vehicle & parts inventories edged 0.3% higher (22.4% y/y). These gains were offset by furniture & home furnishings inventories which fell 0.5% (-1.1%), following four consecutive months of decline. Professional equipment inventories fell 0.7% (-1.1% y/y), down for the fifth month in the last six.

In the nondurable goods sector, inventories declined 1.2% (-0.5% y/y) in April, the fifth consecutive monthly drop. Farm product inventories fell 7.1% (-34.6% y/y) while paper inventories fell 2.5% (-3.9% y/y), about the same as in March. Apparel inventories were off 2.3% (+8.4% y/y). Chemical inventories fell 1.8% both m/m and y/y), the eighth consecutive monthly decline. To the upside, petroleum & petroleum product inventories rose 1.5% (-2.5% y/y) following four straight monthly declines. Grocery product inventories rose 0.5% (2.4% y/y).

Wholesale sales rose 0.2% (-3.4% y/y) in April after falling 2.7% in March. The Action Economics Forecast Survey expected a 1.0% monthly gain.

Durable goods sales fell 0.5% (-3.5% y/y) after declining 2.7% in March. Motor vehicle & parts sales weakened 0.8% (+8.5% y/y). Sales of machinery were off 2.1% (+8.0% y/y) while electrical machinery sales edged 0.1% higher (-3.1% y/y). Professional equipment sales rose 0.6% (-3.9% y/y) but furniture & home furnishings sales fell 1.9% (-8.4% y/y).

Sales of nondurable goods rose 0.8% (-3.4% y/y) in April following two straight months of decline. Farm product sales jumped 7.4% (-3.8% y/y). A 1.2% rise (-17.5% y/y) in petroleum sales was accompanied by a 2.5% gain (-1.5% y/y) in chemical product sales. To the downside, apparel sales fell 4.6% (-12.7% y/y) and paper product sales declined 1.5% (-8.7% y/y). Grocery product sales fell 2.0% (+1.5% y/y).

The wholesale inventory-to-sales (I/S) ratio eased to 1.40 in April from 1.41 in March. It remained near the highest ratio since June 2020. The I/S ratio in the durable goods sector rose to 1.85 and compared to a low of 1.47 in June 2021. The I/S ratio for nondurable goods eased to 1.01 from 1.03 which was the highest since November 2020.

The wholesale trade figures are available in Haver's **USECON** database. The expectations figure for inventories is contained in the **MMSAMER** database. Expectations for sales are in the **AS1REPNA** database.

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- Durable goods inventories rise, while nondurables decline.
- Sales edge higher after sharp retreat.
- Inventory-to-sales ratio eases from three-year high.

U.S. Wholesale Inventories Remain Little Changed in April

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Initial claims for unemployment insurance increased to 261,000 (17.6% y/y) during the week ended June 3 from 233,000 during the prior week, revised from 232,000. It was the highest level of claims since the last week of October 2021, up from a 182,000 low in the fourth week of last September.  The Action Economics Forecast Survey expected an initial claim level of 237,000 in the latest week.

The four-week moving average of initial claims rose to 237,250 last week, up from 229,750 in the prior week. It was the highest level since the last week of April.

The number of continued weeks claimed, or “insured unemployment,” fell to 1.757 million in last week of May from 1.794 million in the prior week, revised from 1.795 million. The four-week moving average of continued weeks claimed fell to 1.785 million from 1.797 million in the prior week. The latest level was the lowest since the second week of March.

The insured unemployment rate, continued claims as a percent of covered employment, held at 1.2% for a sixth consecutive week. This rate has been between 1.2% and 1.3% since late January and compares with 0.9% in September and early October of last year, which is the all-time low for this measure of unemployment.

In the week ended May 20, the total number of continued weeks claimed for all unemployment insurance programs was 1.635 million (+27.4% y/y), little changed from the prior week. The recent high was 2.000 million in late February. The total includes federal employees, newly discharged veterans, extended benefits and other specialized programs and is not seasonally adjusted. Claims in the Pandemic Unemployment Assistance program and Pandemic Emergency Unemployment Compensation are no longer included in the main Labor Department press release.

The insured rates of unemployment in regular programs vary widely across states. In the May 20 week, the highest insured rates of unemployment were in California (2.22%), New Jersey (2.12%), Massachusetts (1.85%), New York (1.58%) and Oregon (1.57%). The lowest rates were in South Dakota (0.19%), North Dakota (0.33%), Virginia (0.34%), Kansas (0.35%), and Nebraska (0.35%). Rates in other large states include Illinois (1.43%), Pennsylvania (1.28%), Texas (1.00%) and Florida (0.42%). These state data are not seasonally adjusted.

Data on weekly unemployment claims go back to 1967 and are contained in Haver's **WEEKLY** database, and they are summarized monthly in **USECON**. Data for individual states are in **REGIONW**. The expectations figure is from the Action Economics Forecast Survey, carried in the **AS1REPNA** database.

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- Claims jump to highest level since October 2021.
- Continuing claims ease.
- Insured unemployment rate continues sideways movement.

U.S. Initial Unemployment Insurance Claims Surge in Latest Week

Robert Brusca

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I'm reading stories today about how Europe is now in recession. There was a revision to GDP growth for the European Monetary Union that puts first quarter growth in negative territory at -0.4% (annualized Q/Q) matching it with a -0.4% (annualized Q/Q) change in the fourth quarter. This magically gives us two quarters in a row of negative GDP growth – and… here we go again.

**Is 1+1=2 the ‘technical definition’ of arithmetic?**
I have long railed against using this ‘rule of thumb’ as an unimpeachable definition of recession. I am completely opposed to anyone using the expression ‘two consecutive quarters of negative GDP growth is a technical definition of recession.’ When was the last time you ever thought of 1 + 1 equaling 2 being something that was technical? There was nothing technical about this. It is, in fact, what we economists call a ‘rule of thumb,’ and that denigrates the concept to something that more accurately describes what it is. It's an exaggeration or a simplification of an underlying process that is much more complicated than the rule that we are applying to it. In this case, two consecutive quarters of negative GDP growth is a gross simplification of what are rather complex underlying economic processes. In the U.S., the NBER uses 3-concepts to vet a period as recession: (1) Is the period of economic disruptions long enough? (2) Is the disruption deep enough to be termed ‘recession?’ (3) Is the disruption broad enough across the bulk of the economy? One plus one equals two glosses over most of that.

**Not long, not severe, a breadth of discomfort…not pain**
More to the point, this is a two-quarter decline in GDP that's less than 1% at an annual rate - and that's true even when the two declines are combined! I thought that we put this nonsense behind us in 2022 when everyone failed to call two key back-to-back declines in quarterly U.S. GDP a recession. U.S. GDP in the first quarter of 2022 declined by 1.6% at an annual rate; it declined in the second quarter at 0.6% at an annual rate. These are combined annual rate declines much larger than what we're seeing in the European Monetary Union. And yet we denied calling that a U.S. recession. One of the reasons for this was because the rest of the economy was performing quite well. The labor market continued to perform extremely well and so it was quite clear to everybody that this ‘rule of thumb’ had failed.  In the European Monetary Union, the unemployment rate continues to drop. The economy has been under some stress. But I'm still quite against using this two-consecutive-quarter of GDP decline rule to call a recession now.

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**The folly of the terms 'growth recession'**
When we plot the U.S. and the European Monetary Union data on the same chart, these changes in GDP do not look like very much at all. The point here is that a recession is a special kind of economic event. And, in recessions, economies tend to create large amounts of unemployment and other distress. There tend to be credit problems. Recessions are not just periods when GDP slows down relative to trend. Several years ago, in the U.S., economists tried to coin the expression “growth recession” to characterize a period when the economy had slowed down and was still growing but was performing poorly and abnormally. However, at that time, conservative economist Herb Stein wrote a wonderful Op-Ed piece in the Wall Street Journal in which he said that calling a period of GDP slowing a recession would be like him calling his Great Dane (a Dog) a growth horse. His point is that a dog - no matter how large - is still a dog; it is not a horse. And a recession is a completely different animal from a period of growth, however weak growth may be.

**Skinning your knee is not breaking your leg**
These periods have very shallow GDP declines, and, in this respect, I would call them technical declines because they're not very substantive declines. They hardly transmit a great deal of stress to the economy in any way.  In fact, the GDP declines chronicled in the charts above are annualized quarter-to-quarter rates. If we were forced to round them to say single digit growth rates (to the left of the decimal point), the two European Monetary Union growth rates would be set to zero not to a negative number. The two U.S. growth rates, that did not mark the onset of recession, would have seen one of them presented as a -2% growth rate and the other as a -1% growth rate - if they were forced to be referred to in single digits to the left of the decimal point.

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A closer inspection of the European accounts finds a 1% decline in private consumption at an annual rate in the first quarter matched against the 6% annual rate decline caused by the public sector. Gross capital formation falls off by 3% at an annual rate. Public construction falls at a 2.3% annualized rate. Exports fell at a minor -0.3% annual rate. Meanwhile, imports that are a subtraction from GDP and buffer the decline in the other categories, decline by 5.1% at an annual rate. Domestic demand falls at a 3% annual rate in the first quarter, compared to a 4.8% annual rate in the fourth quarter. These follow strong increases in the previous two quarters. Year-over-year data show us that the only two declining major GDP components are public consumption and public construction. It’s a public sector led recession!

**The job market is oblivious**
In the meantime, the unemployment rate in the European Monetary Union has continued to perform well. The rate fell to 6.7% in April 2022 and stayed there until it fell to 6.6% in January 2023. It stayed there until April 2023, when it declined to 6.5%. So, through the ‘hurricane’ of this two-quarter recession, the unemployment rate has clung to its unemployment cycle low and upon emerging from two quarters of ‘recession’ in April 2023 the unemployment rate promptly fell to its lowest rate since the Monetary Union was formed.  If this is recession- let’s have more!

Europe

EMU Is in a Recession! Really? Will Someone Please Tell the Labor Market?

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Labor Force, IP, Manufacturing Sales & Wages (Apr)

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