Economic growth last quarter was down significantly and came in well below expectations. This was due largely to slowdowns in the auto sector as shortages of semiconductors forced manufacturers to cut production, taking sales down from an annualized rate of almost 19 million for the year before September to below 13 million in September. Bad news, certainly. But the interesting news here is that two major manufacturers, Stellaris and Volkswagen, see the situation improving and expect chip supplies to ease up by year-end. Even Ford, on its earnings call, noted that there were “significant increases” in semiconductor availability from the second to the third quarter. A necessary prerequisite to things getting better is that they have to stop getting worse, and that seems to be the case in this very important area.
That’s not to say we are out of the woods, of course. While the auto industry may be stabilizing, the supply chain issues are just starting to hit other companies. According to the Wall Street Journal, Apple, for example, warned that supply chain issues are hurting production and may threaten holiday sales growth this year. Amazon posted lower-than-expected sales last quarter, due largely to supply chain challenges, and reported costs up by $2 billion on that and rising labor costs. Both stocks were hit. If even these masters of supply chain management are getting hit, we can expect the damage to continue throughout the rest of the economy.
If you take the above into consideration, you would expect inflation to be topping out as some sectors start to improve but to remain high as many sectors continue to suffer. And that is exactly what we are seeing. The monthly Personal Consumption Expenditures core deflator number came in consistent with expectations; while it was above last month’s number, last month was revised down. On a quarterly basis, this inflation measure was down from 6.1 percent to 4.5 percent—a meaningful decline. Other measures are also showing improvement. Just as with the supply chain issues, with which it is directly tied, inflation has to stop getting worse before it gets better. Here, too, there are signs that is starting to happen.
Perhaps partially because of this, consumer confidence as measured by both major surveys has stabilized and even ticked up a bit in the most recent surveys. Wage growth continues to spike, even as jobs remain very easy to get, which likely explains the recovery as medical and economic fears start to peak and recede. Once again, things have at least stopped getting worse.
And that is the message from the quick hits today: while risks are still very much with us, much of the medical and economic damage looks like it may have peaked—and be starting to improve. This is showing up at the medical level, the corporate level, and even, potentially, the consumer level. Overall, one more reason to feel good as I head back home for the weekend.