For the first time in two years a uniform set of data reports is suggesting that restrictive monetary policy may be starting to bite, says Dr. Vince Malanga, president of LaSalle Economics. He notes April saw a decline in consumer sentiment, rising credit delinquency rates and a falling household savings rate. Both manufacturing and services ISM measures fell into contraction, with service industry employment weakening alongside prolonged goods industry employment weakness.
While the economy is not officially in decline, Malanga says April’s weakness could signal the onset of stagflation. Price indexes in both manufacturing and services ISMs accelerated, reflecting lagged effects of commodity price pressures. Energy prices have recently eased, potentially leading to a near-term easing in the yearly inflation rate, though the CPI remains above the 2% target.
Further progress toward the Fed’s targeted 2% inflation rate will be challenging due to calendar effects, starting with May data released in June. Widespread price weakness is needed, which may require an economic downturn, Malanga believes. The Federal Open Market Committee faces challenges with potential additional money injection by the administration before the election, complicating its task, he adds.
Malanga’s bottom line: If economic softness persists, the Fed might cut rates, possibly starting in July. This could lay the groundwork for future inflation, adding complexity to the stagflation scenario.
