The US is in a 'cardboard box recession' that's pointing to a sharp fall in inflation by the end of the year

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The US is in a 'cardboard box recession' that's pointing to a sharp fall in inflation by the end of the year
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  • The US is in a cardboard box recession, Charles Schwab's Jeffrey Kleintop said.
  • Kleintop pointed to falling demand for cardboard boxes, which has preceded recessions in the past.
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The US is in a "cardboard box recession," and it could mean the economy will see a sharp drop in inflation by the end of the year, according to Charles Schwab chief global investment strategist Jeffrey Kleintop.

Though recessions typically see all sectors of the economy shrink, a contraction is currently only apparent in the manufacturing and trade industry, Kleintop said in a note on Monday.

According to the Fibre Box Association, that's led to a drop in cardboard box demand – an overlooked recession indicator that has preceded previous downturns for the US economy.

While recessions are officially declared by the National Bureau of Economic Research, Kleintop said the economy was currently in a "Cardboard Box Recession," which could bring on a weaker job market and more earnings pressure for corporations. Investors could also see muted stock returns, especially if weakness spreads to other sectors, like services.

But the downturn could also have the silver lining of softening inflation, as manufacturing prices in the Purchasing Manager's Index — which includes the prices of cardboard box — typically leads inflation in the US by about six months.

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"The Cardboard Box Recession may be good news for inflation," Kleintop said, pointing to positive inflation trends in Europe. "Europe's latest PMI price index shows inflation may track from the current 6% to near 2% during the next 6 months. Inflation might just continue to recede as fast as it rose."

Falling inflation would likely provide a boost for US markets, as corporations have been battered by high costs and rising interest rates for the past year. Central bankers have raised rates 500 basis points to tame inflation, a move that weighed the S&P 500 down by 20% in 2022.

The Fed could pause rate hikes as the inflation situation improves, which commentators have said could be bullish for stocks.

Investors, meanwhile, have dialed back their inflation expectations, as well as their expectations for future rate hikes. The five-year, five-year forward rate, an estimate of the five-year inflation rate five years from now, dropped to 2.23% this week, per Federal Reserve data. Markets are pricing in a 79% chance that the Fed pauses further rate hikes at policy meeting next week, according to the CME FedWatch tool.

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