Charts of the Week (Jan 27, 2023)

US Treasuries and global growth The yield on 10-year US Treasuries often does a good job at anticipating the upswings and downswings of the US - and broader global - economic cycle. It’s certainly no coincidence that US yields have, on the whole, been declining in recent weeks as incoming economic data have- until recently - tended to surprise forecasters on the downside (see chart 1 below).

US growth versus the rest of the world A closer examination of Citigroup’s economic surprise indicators, however, suggest that disappointing data has been largely confined to the United States. The dataflow from Asia, and China in particular, and from Europe, have tended to surprise forecasters on the upside far more frequently in recent weeks (see chart 2).

Global shipping costs and supply chain pressures Much of the incoming economic data in recent weeks – and this week’s flash Purchasing Managers Surveys offered a good example – suggest many of the supply chain pressures that have been afflicting the world economy have lately normalised. Further examples of this can be seen in chart 3 below showing an ongoing retreat in the Baltic Dry Index (an indicator of global shipping costs). The New York Fed’s broader index in the meantime suggests that global supply chain pressures were just over one standard deviation away from normal in December. That contrasts with the situation at the end of 2021 when those pressures were more than four standard deviations from normal.

Goods inflation versus services inflation One of the obvious implications of these supply-side improvements is reduced inflationary pressures in global goods markets. Haver’s aggregation of goods price inflation in advanced economies has certainly declined quite sharply in recent months, specifically from a high of 10.2% last March, to 7.2% in December. Still, as chart 4 below also suggests, services prices inflation has continued to climb in recent months, specifically to 5.3% in December.

UK labour supply The big worry for central banks is that these service price pressures reflect still-tight labour markets and monetary policy settings that are still too loose. This week’s CBI industrial trends survey for January certainly suggests that skill shortages are still very acute in the UK’s manufacturing sector, as evidenced in chart 5 below.

Labour market participation Some of these supply-side bottlenecks in labour markets can be traced to broader structural factors that have dis-incentivised people from re-entering the labour market. There are additional Brexit-related challenges too that may have choked off the potential supply of labour in the UK. In some economies, and Japan is a good example, there have also been cultural barriers and broader demographic challenges that have hampered the flexibility of labour markets. Still, from a longer-term perspective, it is encouraging that female participation rates in Japan have been climbing over the past decade as – until recently – have participation rates among older age cohorts (see chart 6 below).