In order to more accurately predict the future of the economy and financial markets, it is important not only to use graphs and technical analysis, but also to understand the current economic situation and the factors influencing it. In this text, we will focus on analysing detailed data and interpreting it to answer the question of how these factors may affect financial markets.
Inflation in the price of services, not products
Source: FRED, Durables and service price inflation
Above, the green colour shows US CPI inflation. The blue colour indicates the price change in the durable goods sector and the red colour the inflation of the services sector. As could be seen from the above data, during the pandemic, demand for durable goods increased dramatically, resulting in higher inflation in this sector. However, the situation has started to reverse in recent months, with prices in the durable goods sector starting to fall by more than 1% year-on-year. In October 2022, inflation in the services sector surpassed inflation in the durable goods sector for the first time since the start of the pandemic. It appears that the further direction of inflation may depend on the sectors adapting to changing consumption habits.
Source: FRED, Change in consumer consumption
Post-pandemic consumption habits shifted from services to durable goods in a way not seen before. Consumption of durable goods and services fell significantly in the first months of the pandemic. This difference appears to have resulted from fiscal support and a change in consumer habits caused by the pandemic, shifting demand from services, such as eating out in restaurants and travel, to purchases of furniture and fitness equipment. The graph above shows changes in personal consumption expenditure, where demand for durable goods is shown in blue and services in red. However, we could see a renewed shift in trends in consumer habits from durables, whose demand has hardly increased, to services, whose demand has been growing steadily since the beginning of 2021. This would confirm rising inflation in the services sector and falling inflation in durable goods.
Source: FRED, Price inflation for the shelter, and non-shelter market
Changes in the CPI consumer price index presents an interesting price trend in the rental market. According to the data, from January 2022 to January 2023, the rental cost index increased by 7.9%, which is more than 2 percentage points above the overall inflation rate of 6.3%. For all types of costs other than rent, the price index started to decrease from June 2022. This may mean that the peak inflation episode is coming to an end, at least as far as prices outside the rental market are concerned. It could also mean that investing in rental property is one of the most effective ways to combat inflation.
Probability of recession still low
Source: FRED, Smoothed probability of recession
One model for estimating the probability of a recession in the US is the Markov model, which uses four monthly variables: non-farm payrolls, the index of industrial production, real personal income excluding transfers and real trade and industry turnover. It appears that the increasing likelihood of a recession may be affecting the S&P 500 Index (US500) in a negative way. Nevertheless, current values of almost 5% may imply a low probability of a recession. We could conclude from this that the lows on the previously mentioned index may be behind us.
Source: Conotoxia MT5, US500, Daily
A labour market that means companies don't want to hire?
Source: Fred, change in the number of current and new job vacancies compared to 2020
In the chart above, the number of current job vacancies in the market against 2020 levels is shown in red and the change in new job vacancies in the market is shown in blue. We could see that after the pandemic slump in the labour market we are now above pre-pandemic levels. Nevertheless, we could see a stagnation in the job offers market from the beginning of 2022.
Source: FRED, Number of economically inactive persons
The labour force includes people who are currently employed or actively seeking employment. The pandemic has caused a significant proportion of the workforce to lose their jobs. The graph above shows a spike in the number of people out of the workforce in spring 2020, which has since declined but is still higher than pre-pandemic levels. The extended red trend line shows that there are now around 2.2 million more people outside the workforce than expected based on trends leading up to the pandemic, contributing to the current shortfall in the workforce.
Grzegorz Dróżdż, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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