Monday Economic Report - Federal Reserve Chair Powell "Reducing Inflation Will Not Be Painless"

AICC, through its membership in the Council of Manufacturing Associations, is pleased to present the "Monday Economic Report" from the NATIONAL ASSOCIATION OF MANUFACTURERS (NAM).

By Chad Moutray, Ph.D., CBE – August 29, 2022

NAM Weekly Economic Toplines:

• In his speech at the Kansas City Federal Reserve Bank’s economic policy symposium at Jackson Hole, Wyoming, Federal Reserve Board Chair Jerome Powell reiterated the Federal Open Market Committee’s desire to bring core inflation back to its target of 2% over the long term. He added:  
  
  “ … without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all. The burdens of high inflation fall heaviest on those who are least able to bear them.”

• Yet, a more restrictive monetary policy will not be painless. Along these lines, he stated:
  
  “Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

• The PCE deflator edged down 0.1% in July, pulling back after rising 1.0% in June, which was the fastest pace of monthly growth since September 2005. Energy prices fell 4.8% in July, helping to pull the headline index lower. Food costs increased 1.3%, continuing to rise solidly year to date.

• Excluding food and energy prices, the PCE deflator inched up 0.1% in July. Overall, the PCE deflator has risen 6.3% over the past 12 months, decelerating from the 6.8% year-over-year pace in June, which was the strongest since January 1982. The current outlook is for the core PCE deflator to be 3.8% year-over-year in December.  

• On the manufacturing front,new orders for durable goodswere essentially unchanged in the latest data, remaining near a record level. On a year-over-year basis, new durable goods orders have jumped 10.9% since July 2021, or 7.2% with transportation equipment excluded. Core capital goods orders rose 0.4% to a record level, up 8.5% year-over-year.

• The durable goods data provide mixed comfort. On the one hand, the manufacturing sector has proved to be surprisingly resilient over the past year in the face of numerous challenges, and that can be seen in the year-over-year figures. Yet, growth has slowed in some areas, even with some new records being set. It is also notable that these figures are in nominal terms, with higher prices likely inflating some of this growth.

• The manufacturing sentiment surveys released last week speak to the challenges faced in the sector, with activity often at the weakest pace in roughly two years. New orders declined in each, for instance. At the same time, manufacturers felt cautiously optimistic for the next six months, with expectations of reduced or moderated pricing pressures.

• After dropping to a record low in June (50.0), the Index of Consumer Sentimenthas risen for two consecutive months, increasing from 51.5 in July to 58.2 in August, according to final data from the University of Michigan and Thomson Reuters. Even with gains in the past two releases, consumer confidence remains lower than desired, and Americans continued to worry about inflation, even as expectations for price growth moderated in August. 

• Personal consumption expenditures edged up 0.1% in July, the weakest monthly reading since December. Despite some softening in the latest data, personal spending increased 8.7% year-over-year. Meanwhile, personal income rose 0.2% in July. With that said, manufacturing wages and salaries increased 0.9%, with 8.7% growth year-over-year. The personal saving rate was unchanged at 5.0% in July, remaining the lowest since August 2009.

• After soaring to a record $126.81 billion in March, the U.S. goods trade deficitedged lower for the fourth straight month, down from $98.59 billion in June to $89.06 billion in July, according to preliminary figures. In July, goods exports edged down from a record $181.35 billion to $180.97 billion, and goods imports dropped from $279.94 billion to $270.03 billion. 

READ FULL REPORT