🇺🇸 America's slowing down

What’s going on here?

The US president designed two acts to bolster America’s manufacturing industry, but nearly 40% of the major projects are stuck on the back burner.

What does this mean?

Two acts were designed to breathe new life into America’s Rust Belt – once an area of manufacturing might, now plagued by unemployment and a shrinking population. The Chips and Science Act and Inflation Reduction Act dangled a carrot of over $400 billion of tax credits, loans, and grants to incentivize clean technologies and semiconductor supply chains – but they’re stuck on ice. Out of the projects worth more than $100 million, $84 billion worth of them have been delayed or paused indefinitely. Besides delays in funding and unclear rules, companies are blaming lackluster demand and uncertainty in the market, especially with a high-stakes election looming.

Why should I care?

For markets: The chipmakers are down.

The rollout of AI services is also spluttering, slowed down by a shortage of skilled workers. Case in point: the US chip manufacturing workforce has shrunk by 43% since its peak in 2000, according to McKinsey, and the country could be short of 146,000 engineers and technicians by 2029. So while the US is expected to pour $250 billion into the sector over a five-year period, it’ll be stuck with a bottleneck unless companies can reel in top talent from around the world.

The bigger picture: We’re living in a catch-22.

Areas or countries with shrinking and aging populations are at serious risk of lower economic growth and higher public debt. That’s why one of AI’s biggest selling points is its ability to replace humans in certain roles – ironic, given that companies first need more humans to train systems. And while the prospect might conjure up fears of redundancy and flashbacks of Charlie And The Chocolate Factory, history shows that technology tends to fill existing gaps left by worker shortages.

What’s going on here?

Tuesday’s fresh press showed that US producer prices rose less than expected in July, a refreshing blast for worn-out investors.

What does this mean?

The Producer Price Index (PPI) is usually overshadowed by the widely read Consumer Price Index (CPI). While the former just indicates what businesses are paying for supplies, which may or may not be passed onto customers, the latter shows how much folk are actually paying at the till. But unusually, the PPI landed first this week, and curious investors couldn’t help but sneak a peek. And they won’t regret it: producer prices were a mere 0.1% higher in July than June, and only up 2.2% compared to the same time last year – just shy of market estimates. Plus, the report highlighted the first drop in services costs this year, suggesting that inflation is starting to calm down across the board.

Why should I care?

For markets: Goldilocks could come out to play.

Investors are on edge after last week’s sell-off, so any unwelcome statistics could have had them scoping out the exits again. But they won’t fully relax until tomorrow’s CPI data drops. Even slightly higher-than-expected inflation could stop the Federal Reserve (Fed) from cutting interest rates as aggressively as hoped. But if prices stoop too low, traders and analysts might see a recession as more likely. Just right, though, and the current rally may have legs.

The bigger picture: Fail to prepare, prepare to fail.

It’s been incredibly difficult to read – let alone predict – the economy since the pandemic. So markets have been driven largely by narratives – essentially, stories that try to explain why certain movements are happening and what may happen next. Right now, the consensus narrative seems to be that the Fed will tame inflation without crashing the economy. But if the data diverges from that scenario, investors will scramble to adjust their position – so make sure your portfolio can handle some surprises.