How a Decline in Savings Affects the U.S. Economy

Freedom Financial Archive | Originally posted April 19, 2023
  • Is inflation finally coming down?
  • Supplier deliveries are at the lowest since the Great Financial Crisis
  • U.S. private construction spending continues to fall.

Dear Reader,

Yesterday we talked about how “excess” savings for many Americans would be severely decreased by the middle of this year. Today, we’re going to talk about how that affects the economy as a whole.

The spread between new orders and production in ISM (Institute for Supply Management) Manufacturing reversed lower in March, which bodes well for further decreases in inflationary pressures.

"Manufacturing is pulling back, but the service sector was still chugging along in February," said Chris Low, chief economist at FHN Financial in New York.

"As long as it remains well above 50, the broad economy should be just fine. Nevertheless, the health of manufacturing is related to the health of the overall economy."

The March numbers reflect the fact that companies are continuing to slow outputs to better match demand for the first half of 2023.

Supplier Deliveries Are At the Lowest Since the Great Financial Crisis

Prices reversed lower in March, while supplier deliveries also lowered to 44.8, which is the lowest since the great financial crisis. They were at 45.2 in February. A reading below 50 indicates faster deliveries to factories.

We're seeing shipping normalize in terms of pricing, but it's a mixture of two factors.

  1. There’s less product to move
  2. There’s more people to move it.

That’s good and bad. At the same time, you're going to see another shake out when you start looking at the trucking industry. According to data from the Bureau of Labor Statistics, the trucking industry saw a decline of around 8,500 jobs in February.

Services have gotten better, but they’re still expanding at almost 60 on the Purchasing Managers’ Index (PMI) scale.

PMI is an index of the prevailing direction of economic trends in the manufacturing and services sector. Essentially, it summarizes whether market conditions are expanding, staying the same, or contracting. The purpose of the PMI is to provide information about current and future conditions to company decision makers, analysts and investors.

The headline PMI is a number from 0 to 100. A PMI above 50 represents an expansion when compared with the previous month. A PMI reading under 50 represents a contraction, and a reading at 50 indicates no change. The further away from 50 the greater the level of change.

U.S. Private Construction Spending Continues to Fall

Construction spending for private residential space continues to fall with the year-over-year percentage change falling 5.7% in February, hovering in recessionary territory. However, it's been in this territory before without the formal recession.

And the reason why is because when you look at the rate year on year, it looks bad. It’s fallen 5.7%, after all. However, when you look at the actual number at the top of the chart (the black line), you can see the drop isn’t that much. We went from 0.9 to 0.85, so how slow is it really?

One reason for the dip is investment in single family homebuilding decreased amid the higher mortgage costs. And as you can see, there’s a massive gap between residential (black) and non-residential (blue). There's still a lot more room for this to continue to contract and meet somewhere in the middle. This chart goes back to 2007 and this is the widest it’s been.

If you go prior to 2007, we've had gaps like this before, and what happens is residential spending typically collapses down. And the two typically end up meeting somewhere in the middle.

Thanks for reading,

Freedom Financial News