Signs of a Slowing Economy

SLOWING ECONOMY OR MORE INFLATION?

Notwithstanding the expectations for a Fed pivot, along with expectations for inflation to get a lot worse, there are numerous indicators that the economy is slowing considerably.

Evidence of that slowing has shown itself in several areas: 1) economic activity, 2) commodities prices 3) stocks and bonds, and 4) interest rates. Let's take a look...

ECONOMIC ACTIVITY

Economic activity provides a measure of judgement for our efforts to provide for ourselves, enhance lifestyle, and grow in productive fashion as a society. There are three charts - retail sales, auto and light truck sales, and housing starts - below and comments after each chart...

Real Retail Sales Historical Chart


'Real' retail sales means the numbers have been adjusted for inflation. Looking at the chart, retail sales have been reasonably stable; not just from the onset of the Fed's public efforts to raise interest rates, but dating back one year before that to early 2021.

There is a slight downward slant over the period but nothing terribly unusual or negative; unless one was expecting continued growth in sales as had been seen post-Covid. The next chart follows...

Auto and Light Truck Sales Historical Chart



The above chart for Auto And Light Truck Sales is an activity chart, NOT a price chart for vehicles. The current level of sales activity is down sharply since its post-Covid peak and there is increasing volatility. The extreme volatility shown on the chart is not indicative of a stable growth pattern. Our third chart, Housing Starts, is next...

Housing Starts Historical Chart


As seen before with auto sales vs. vehicle prices, we see in the chart immediately above that high prices for residential properties don't translate to new construction demand.

COMMODITY PRICES

Another area that seems to be consistent with a slowing economy is commodity prices. We'll look at three commodities below: lumber, wheat, and cotton...

Lumber Prices Historical Chart


Wheat Prices Historical Chart


Cotton Prices Historical Chart


Price history shown above for all three commodities - lumber, wheat, and cotton - reflects sharply lower prices since the onset of the Fed's policy to raise interest rates. Other commodities show a similar pattern.

STOCKS AND BONDS

Our next area of concern is the financial markets. Below are charts of the S&P 500, the NASDAQ, and the 10 Year U.S. Treasury Bond...

S&P 500 Index Historical Chart


NASDAQ Composite Historical Chart


Long-term U.S. Treasury Bond ETF


Both stocks and bonds have fallen in tandem and concurrent with the increase in interest rates. Bonds, of course, are the inverse reflection of interest rates, so there is no need to analyze the price action, or wonder about any correlation. Lower bond prices and higher interest rates are the same thing.

Declining stock prices over the past fourteen months indicate concerns about company earnings associated with a slowing economy. This is a concern brought into focus by rising interest rates and their effects on financial liquidity, as well as the potential for recession.

INTEREST RATES

Below are charts for U.S. Treasury rates and mortgage rates...

1 Year Treasury Rate Historical Chart


30 Year Fixed Mortgage Rate - Historical Chart


The sustained increase in interest rates over the past year and one-half has led to serious repercussions in the financial markets and the economy.

SUMMARY AND CONCLUSION

A slow and progressive unwinding of unsupportable and unsustainable levels of debt and activity financed by cheap and easy credit is taking its toll. In addition to the signs discussed in this article, we are now seeing bank failures and hearing about the huge amount of commercial real estate debt.

All of these things are cracks in the foundation of financial and economic stability. In other words, it is not just a problem of a slowing economy. It is much worse than that and will take a long time to work itself out.

Written by Kelsey Williams, Neptune Global