What's Happening in the World Economy: US Economy's Surge Is Showing Strains - Bloomberg

Hello. Today we look at signs of choppiness in the U.S. economy, what’s happening in China and how central banks are turning more optimistic.

Hitting Limits

Restarting the world’s largest economy after last year’s widespread shutdowns was always set to be a choppy affair, and that’s borne out in many of the monthly U.S. indicators.

Spending at clothing stores and restaurants jumped in May, data showed on Tuesday — standing to reason now that millions of Americans are able to get out and about. But total retail sales dropped 1.3% from the previous month — more than expected.

Tightening the Purse Strings

U.S. retail sales fell more than expected in May

Source: U.S. Commerce Department

Among the final readings on the economy before Federal Reserve officials release their updated economic projections:

• Producer prices, excluding food and energy, climbed 4.8% in May from a year before, the most in more than a decade
• Higher profit margins at wholesalers and retailers suggested was behind some of that jump, showcasing pockets of pricing power
• Industrial production advanced for a third straight month, helped by a rebound in auto output
• Inventories at businesses dipped, and remain below their 2019 peak — speaking to supply constraints and longer production lead times

Fed officials concluding their two-day meeting Wednesday will have to debate whether the budding inflationary pressures are serious enough to consider paring their bond-buying program and how soon.

Accordingly, observers will be watching the Fed’s forecasts and statements, along with Chair Jerome Powell’s press conference, for any shift in policy makers’ conviction that the current surge in consumer prices — which jumped 5% in May from a year before — will prove temporary.

Interestingly, 72% of fund managers surveyed recently by Bank of America said inflation is transitory.

“The Fed will need to balance tentative signs of moderation in still-strong consumer spending with the raging price figures of late,” said Sal Guatieri, senior economist at BMO Capital Markets. “Overall, the time for taper talk is nigh.”

—Olivia Rockeman

The Economic Scene

China’s Retail Slowdown Continues

Industrial output also growing at slightly weaker pace

Source: National Bureau of Statistics, Bloomberg surveys

Note: Jan.-Feb. data is combined each year

The world’s second-largest economy is also experiencing some growing pains, though it has already ascended to the other side of the V-shaped recovery so that’s more of a normalization than a recovery wobble.

Chinese retail sales, industrial production and investment data all disappointed economists’ admittedly bullish forecasts. Lingering consumer caution is the main culprit, best illustrated by recent national holidays where spending is only running at around three quarters of pre-pandemic levels.

“Looking ahead, a stronger demand side of the economy will be the key for a continued recovery,” said Bloomberg Economics’ David Qu. “We expect domestic investment and household consumption to continue to recover but it may take more time to reach their pre-pandemic levels.”

Bloomberg Terminal readers can access the full analysis here.

Today’s Must Reads

• Power play | European Central Bank President Christine Lagarde is getting tougher with an unwieldy group of 25 policy makers. Last week’s decision to keep emergency bond-buying at elevated levels was heavily influenced by her comments three weeks earlier. Meanwhile, a think tank that reports to France’s prime minister said the ECB should consider using so-called helicopter money to boost inflation if price growth remains persistently too low.
• Uneven income | Brazilians haven’t felt so bad in 15 years as social inequality hits record levels, with the pandemic hurting the job market and causing a large income drop for the poorest. Elsewhere in Latin America, Mexico’s new finance minister wants to speed up growth via additional debt-fueled public spending.
• Home and away | One in five U.K. jobs could be outsourced abroad after the pandemic, threatening the loss of well-paid white collar employment, according to the Tony Blair Institute for Global Change. In the Asia-Pacific region, a majority of domestic workers lack legal protections, and as a result have suffered an outsized blow from the pandemic, the International Labour Organization said. 
• Overseas workers | Since the start of the year, about 60,000 Filipinos per month have been leaving to take jobs in other nations, boding well for an economy that’s reliant on remittances. 
• British prices | U.K. inflation surged unexpectedly past the Bank of England’s target for the first time in almost two years, an increase that will add to speculation about when monetary policy could be tightened.
• U.S.-China | President Joe Biden’s plans for an international coalition that can stand up to Beijing are starting to come into focus with a deal on aircraft subsidies sealed with the European Union. 

Need-to-Know Research

The Fed and ECB are turning their monetary policy commentary more upbeat tones, according to a machine learning-based analysis by Oxford Economics. The two central banks are now back to around half the pre-pandemic level of optimism, but while traders of the 10-year U.S. Treasury note seems to have priced that in, euro-area debt markets haven’t, Tamara Basic Vasiljev wrote in a report.

The study is based on an analysis of statements from central banks using a custom-made dictionary to compare them. Of the four monitored. the Fed focuses on financial market fortunes the most.

On #EconTwitter

Examining U.S. inflation expectations by age group.

Read more reactions on Twitter

Save the Date

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— With assistance by Brendan Murray

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What's Happening in the World Economy: US Economy's Surge Is Showing Strains - Bloomberg
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