Another Slowdown (Economic Outlook‪)‬

The global economy is losing momentum as we move through the second quarter--at least that is what markets are signaling. Oil prices are off their highs, suggesting weaker growth of demand for energy. Weak energy demand in turn reflects a global slowdown in industrial production in response to an earlier inventory buildup. The inventory buildup indicates that producers boosted output too much during the first four months of 2011, perhaps having overestimated the pace of demand growth. It also may reflect some of the supply disruptions tied to the Japanese earthquake. Turning to securities markets, stocks of US companies declined by about 3 percent during the first three weeks in May. That drop came as interest rates on government securities fell by more than forty basis points, from an early-April high around 3.6 percent to around 3.15 percent in late May. The drop in US interest rates, which has been accompanied by lower interest rates in most other major markets, reflects falling inflation expectations as measured by the "break-even" inflation rate, which is derived by comparing yields on Treasury notes with and without inflation protection. Investors expected inflation to be about thirty basis points lower in mid-May than they did in early May. That shift is consistent with a drop in oil prices that reflects somewhat slower growth and weaker momentum in demand for energy.