Crypto News: Economics Daily: Factory turning point

I'm Chris Anstey, a senior editor for economic policy in Boston and today we're looking at signs US manufacturing may be turning a corner. Send us feedback and tips to ecodaily@bloomberg.net or tweet to @economics. And if you aren't yet signed up to receive this newsletter, you can do so here.

The US was stripped of its top-tier sovereign credit grade by Fitch Ratings. The Biden administration objected strenuously, and some prominent economists joined the chorus of criticism.
China is stepping up its policy support for the economy, pressuring local governments to speed up the sale of bonds to fund infrastructure spending.
Economists at Bank of America revoked their forecast for a recession in the US, becoming the first large Wall Street bank to officially reverse its call.

To gauge when economic activity are about to turn around, it can be useful to look at the "delta of the delta" — or, the pace of change.

US manufacturing deteriorated in July. But, the contraction was less than was the case in June. The Institute of Supply Management said its index rose to 46.4 from 46.0. Anything under 50 is regarded as a decline in activity. It was the third straight reading between 46 and 47.

A number of the sub-indexes, including that for new orders, rose. This is a "positive signal" that things could improve by this autumn, Timothy Fiore, chair of the ISM manufacturing business survey committee, said on Bloomberg TV. "Maybe we're going to see some growth here, some 50-plus numbers start to show up in the October timeframe."

Caterpillar's results Tuesday morning certainly fit with that outlook. Its revenue exceeded the highest analyst estimates, and it projected an increase in the second half of 2023.

Caterpillar backhoe excavators. Photographer: Luke Sharrett/Bloomberg

A pickup in manufacturing could prove helpful if production levels help to depress inflation. Federal Reserve Bank of Chicago President Austan Goolsbee said in an interview Tuesday that he views further price declines in goods as a key factor for inflation in coming months. He put less emphasis on services prices for the moment.

"Core goods going back to deflation is critical in the near term," along with evidence of a slowdown in housing costs, he said. "When you're around the transition point, every meeting is a live meeting and you're trying to figure out trends."

But if US manufacturing is at a trough, and poised to improve later this year, that could stoke the so-called "no landing" scenario, where the economy simply keeps expanding despite the Fed's rate hikes.

The Atlanta Fed's volatile GDP tracker was clocking 3.87% for the third quarter as of Tuesday.

"That estimate is bound to be revised, but it certainly supports our view that our old soft-landing-rolling-recession scenario of the past year and a half may be morphing into our new no-landing-rolling-recovery scenario," Ed Yardeni, president at Yardeni Research, wrote in a note.

The bond market is also picking up the whiff of change, with 10-year yields back above 4%. After the Fitch downgrade late Tuesday, the yield on 10-year Treasuries was little changed at 4.02%.

Additional Reading:

The Fed's next meeting is some way off, but economists and markets are already settling on a pause as the most likely decision
The US and European Union are unlikely to finalize a legally binding agreement to govern trade in steel and aluminum this year. Separately, the EU and Turkey are discussing an update of their customs union.
Thailand's central bank raised its benchmark interest rate to the highest level in nine years.
Australia's narrowing industrial base shows the economy can't be left solely to market forces, Industry and Science Minister Ed Husic said.
Wall Street is war-gaming spillovers from higher Japanese bond yields.

US consumers can't continue their current high levels of spending without falling significantly into debt, according to a Brookings Institution paper.

Much of the wealth built up during the pandemic, partly driven by big federal cash distributions, dissipated by the first quarter. That makes continued strength in spending surprising amid "weakness in real income, weak consumer sentiment, moderate gains in wealth since 2019, and increasing debt," Wendy Edelberg and Sofoklis Goulas wrote in the report.

"If households were to sustain their current spending trends and increasingly finance spending with borrowing, financial health could deteriorate in a worrying way," the duo wrote.