Inflation has forced the Federal Reserve to raise interest rates. Now there are signs that you may not need to do much more.
But that does not mean that Fed policy shows results.
Growing evidence shows the economy slows down. The decline in demand associated with the impending recession will bring down prices.
This is not good news. But that’s where the evidence points.
One part of the recession argument is shown in the chart below. Shipping costs go down.
Sink shipping costs
Baltic Dry Index tracks supply and demand
Above is the Baltic Dry Index (BDI), which tracks the average prices paid for transporting dry bulk materials (shipping containers, cars, etc.) across 20-plus routes. It does not track the oil and natural gas tankers around the world.
BDI is often perceived as a leading indicator of economic activity because changes in the index reflect supply and demand for important materials used in manufacturing.
For example, China imports many of the raw materials needed by its manufacturers.
Imports are usually in ships transporting the manufactured goods abroad.
In a growing economy, the demand for shipping is stable or rising. This pushes the BDI up.
Lower prices indicate a decline in demand for shippers. The recent decline in new orders according to the Institute of Supply Management confirms this forecast.
Like BDI, new orders are a leading indicator.
The MACD indicator has become bearish
Although many analysts believe the recession has already begun, unemployment remains low. It tells me that the recession will not start yet.
But the chart above shows that the pain of economic contraction is just beginning.
The MACD (Convergence / Divergence Movement) indicator at the bottom of the chart tracks the momentum of the BDI. It just became a bear, indicating another plausible disadvantage.
When the recession does begin, expect unemployment to rise, as this is one of the factors that defines the recession.
The Bottom Line: The good news is that inflation should go down.
As demand for the economy declines, the Fed may stop raising interest rates in response.
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