Meanwhile, inflation figures for January were unexpectedly hot with personal consumption expenditures (PCE) inflation – the measure that the Federal Reserve (Fed) favors – still far above the Fed’s 2% target, stoking concerns that the central bank may need to raise rates more aggressively. They are now expected to push the fed funds rate to nearly 5.5% later this year.

Second, and perhaps more importantly, is the divergence between goods and services. Goods are tangible items that consumers and businesses need such as cars, food, gasoline, clothing, home appliances, and more. Services are everything else, such as eating at restaurants, rent, education, medical care, etc. One defining characteristic of the past few years is that the demand for goods skyrocketed during and after pandemic lockdowns, while services languished as consumers stayed home. This has reversed as life has returned to normal across the country, shifting spending back to services.

This, in turn, has resulted in a slowdown in manufacturing which can be seen across a variety of data. The manufacturing purchasing managers’ index (PMI) – a measure of economic activity – has contracted while services PMI, on the other hand, are still expanding after a brief dip. This can also be seen in other data such as industrial production which has decelerated to a year-over-year growth rate of less than 1%.

This is occurring at a time when “reshoring” manufacturing back to the U.S. is part of the economic and political debate. One lesson of the past few years is that while global supply chains can be a boon when things are running smoothly, they can also be fragile when there are unforeseen economic shocks, whether related to the pandemic or Russia’s invasion of Ukraine. Securing these supply chains through policies such as the CHIPS Act and individual business decisions will likely be a priority in both the public and private sectors over the next several years.