Brief Notes on the US Economy
• Trade Data Worsens – It has been no surprise that imports have been up over the last several months given that consumers have been coming out of the hibernation imposed by the pandemic for the better part of 2021. The good news was that exports were also rising as other nations experienced some of that recovery. The latest data shows that imports are still on the way up but exports are trending down. The latest data shows a trade deficit of $80.9 billion and that is up from the August numbers by $8.1 billion. This makes two months in a row for a record trade deficit. The fact the US is buying more than it sells is not really the issue as the consumer is getting the benefit of those cheaper prices for imported goods. The real concern is the drop in exports and that is almost entirely due to the sluggish recovery in the nations the US sells to. Our prime export destinations include Europe, Canada, Mexico and the developed nations in Asia. They are not seeing sufficient growth to boost demand for the kind of things the US sells.
• Fed Reaction – The Fed has not made it official and probably will not for another few weeks and perhaps months but the investment community has concluded that rates are on their way up and sooner than would have been expected only a few months ago. The current thinking is that rates will start to rise by the second quarter of 2022 (probably towards the end). The hikes will be measured but consistent – a quarter point at a time. The challenge for the Fed is that this tactic affects the money supply part of the inflation threat but has little influence over issues such as commodity hikes, supply chain distress or wage hikes. The actions taken by the Fed next year will slow the economy down but it will take between 12 and 24 months. One of the problems is that the federal government is now poised to dump additional billions into an already overstimulated economy.
• It’s NOT the Economy Stupid – Once upon a time it was a truism that economic issues swayed the voter but those days seem to be gone. By most accounts, the economy in the US is doing very well but the population seems more frustrated and worried than ever. Unemployment is at near record lows, the indicators are all strong, consumers are spending money. It would seem that all is well but growth brings its own issues such as inflation, shortages and bottlenecks. The lingering threat of the virus looms over everything and suddenly the fact the economy has recovered matters very little. The motivator for the voter is now social issues and cultural issues and there is absolutely no consensus regarding any of these challenges.
Brief Notes on the Global Economy
• Bolsonaro Abandons Fiscal Rectitude – When Jair Bolsonaro won the election in Brazil he campaigned on a platform of fiscal responsibility and sharply attacked the policies of Lula and Dilma Rousseff. They were castigated as spendthrift leftists willing to bankrupt the nation for votes. The new plan put forward by Bolsonaro is more expensive and aggressive than anything they ever put forward. It involves billions to be poured into social welfare aimed at the poorest population. It can be argued that after the last two years of economic collapse attributed to the pandemic this kind of reaction is justified but the impact on the budget will be extreme and Brazil will need to borrow the majority of the money it will need. The effort is designed to bolster his reelection chances as he still trails in the polls.
• Belarus Engages in Migrant Blackmail – Over the last several months there has been an increasing crush of migrants assembling on the border between Poland and Belarus (as well as other neighboring nations). The evidence is strong that Belarus has been trying to push the crisis into Europe by both assisting migrants in their attacks on border guards at the same time the Belarus forces attack and abuse the migrants. The intent is to escalate the conflict to the point that Europe gives in to the demands from Belarus that sanctions be lifted. The EU has thus far refused but the crisis has escalated to near riot conditions.
We Have Met the Enemy and the Enemy is Us
That phrase will instantly date me and many of the BIB readers. Uttered by the wisest of possums in the days of Earth Day, Pogo’s assertion seems applicable now as we look at the expected inflation numbers. The rate hit 6.2% and that will mark the fifth straight month of rates above 5.0% and the highest rate experienced in over 20 years (not since 1990). The US has been spared any sort of inflation for the last three decades and that record has been utterly shattered in the last few weeks. What is going on and more importantly what is not going on?
Analysis: It is probably a good idea to temper some of the panic that has started to set in as this has been a significant factor as far as pushing inflation. There have been some big panic moves and plenty of smaller reactions that have added up to a serious boost towards higher prices. The big panic moves have come from people who are either woefully ignorant or are seeking some kind of advantage by scaring people to death. There have been assertions that hyperinflation or stagflation are now upon us and neither of these warnings contain a shred of validity. Hyperinflation is 50% inflation per month over a significant period of time and is marked by prices that change by the hour. It is what happens when a government utterly collapses. Stagflation is marked by simultaneously seeing high prices and high levels of unemployment. With a jobless rate of 4.6% and Q3 growth of just 2.0% the US is not seeing either of these ingredients.
What the US is dealing with is a classic case of good old-fashioned supply and demand driven inflation. The motivators for these higher prices are not the least bit mysterious and we have been watching them emerge for the past two years. The recession of 2020 took the world by surprise and left business and the consumer in a state of shock. Production slammed to a halt along with the bulk of spending. Inventories accumulated almost overnight and tens of thousands of businesses were crushed and driven out. The recovery that started in early 2021 was far more aggressive that anyone expected with a 9.5% growth rate noted early in the second quarter (that pace “slowed” to 6.5% by the end). The consumer was determined to make up for lost time and overwhelmed the producers who were still licking their wounds from 2020. Too much demand for too little supply equals one of two things. There will either be shortages or higher prices and, in most cases, there will be a bit of both.
The primary drivers for the higher prices include the supply chain breakdown that has created massive shortage situations in almost every aspect of the production cycle. It is an economic version of the old adage “for want of a nail the war was lost.” Cars can’t be sold if there are no computer chips, houses can’t be built without lumber, machines can’t be completed without steel and aluminum and consumers can’t get their holiday shopping done when the shelves are bare. This supply chain issue leads people and businesses to engage in behavior that may make sense for them but is bad for the economy as a whole. The business engages in buying as much inventory as they can get in anticipation of being unable to get it later. Consumers fear higher prices later and decide to do as much buying now as they are able to. That accelerates the pace of inflation as it makes the supply situation even more tenuous than it was.
There is an additional factor driving all this. The efforts to stimulate the economy worked far too well. The trillions dumped into the economies of the world resulted in a bloated money supply. The US savings rate in the second quarter of 2020 ballooned to over 30% (usually the savings rate is closer to 6.0%). That cash is still sloshing around the economies of the world and that makes business and consumer alike a bit immune to the usual braking of inflation. People and businesses are complaining about the higher prices but for the time being they can still pay them and they still want the stuff they want.
What Will Have to Happen for Inflation to Ebb?
The “good” news is that what goes up generally goes back down. The “bad” news is that this is not a swift process. The current estimate is that prices will stay high for the next six months or so. It may be third quarter of 2022 before the factors driving these higher prices start to fade. Three developments will have to take place.
Analysis: The first and most obvious is that the supply chain collapse must come to an end. The producers will need to catch up with demand and the transportation bottlenecks will have to be removed or at least reduced. The good news is that this will most certainly happen as producers are working hard to meet that demand and as the consumer starts to apply less pressure the transportation sector recovers. The second motivation for the end of this inflation run will be drying up the money supply that has been fueling all this growth. That means the Fed hiking interest rates and taking other steps to reduce outlay. It also means the consumer finally running out of saved money that allowed them to keep spending. The final step is related to the second – removing what is left of the stimulus effort. The reality is that stimulus lasted too long. The extended unemployment, extended business loans, extended government largesse in general all lasted longer than what would have been ideal. It is very difficult to know when this kind of help is too little and when it is too late. Cutting this support too early would have extended the recession but cutting it too late triggers inflation.
For the next six months to a year there will be issues at both ends of the economic spectrum. There are still millions of people who have not recovered from the recession and will suffer as the assistance is pared back. There will be tens of millions of people who will suffer the ravages of inflation as the economy works through the supply and demand issues. To further complicate matters the triggers that marked 2020 and 2021 remain active – the pandemic response at the top of that list.
Misery Loves Company
Perhaps loving the current inflation situation is not the most accurate way of presenting the situation but it is readily apparent that the US shares the inflation crisis with the rest of the world. This comes as no shock to anyone who has been watching developments over the last several months. The supply chain breakdown has been a universal experience and in many respects the issue has been more vexing for the Asian economies than those in the western nations. The lack of supply has been creating upward price pressures but the crush of demand in the producer states has amplified the issues of inflation in China, Vietnam, Korea and the others.
Analysis: Inflation in China has hit levels not seen since the 1990s. The official Producer Price Index has jumped by 13.5% over what it was in 2020 and hit levels last seen in 1995. The expectation had been that the PPI would be higher but not this high. The assertion was that it would gain by 12.4% after the September reading of 10.7%. That September number was also higher than anything seen since 1995 and the spikes just keep coming.
The situation in China has been complicated by an energy crisis that has developed due to a combination of factors. There has been more demand than ever for power as the manufacturers try to meet demand that has accelerated. Not only are Chinese consumers trying to spend more but exports have been surging as the consumers in the US, Europe and Asia start to come out of hibernation. At the same time there have been significant production cuts in the energy sector due to both government policy and the impact of weather related events. Floods in the coal regions have slashed output and at the same time the government has been trying to implement policies that reduce dependence on these fossil fuels. That strategy has been all but abandoned as the price of energy has soared. The Chinese stated they would no longer help other nations build coal fired plants but they have accelerated the development of these operations in the country. This shortage of power generation has caused a series of rolling blackouts that affected overall manufacturing output.
If there is one economic issue that panics the leadership in China it would be inflation. These bursts of higher prices have toppled regimes many times through history. Nobody is suggesting the leadership of Xi Jinping is in any danger but these issues are not coming at an opportune moment. The Winter Olympics are imminent and China is worried about how these will come off. The big CCP meetings are also imminent and this is the point that Xi wanted to further consolidate his power. The criticism of the government has been muted but frustration is evident over everything from the handling of the pandemic to these current economic issues.
Russia Still Playing Hardball with Europe
There are many motivations for the current energy crisis but at the top of the list has been the dramatic surge in the price of natural gas in Europe. The 600% hike in the cost of Europe’s primary fuel has crashed through the entire global energy system. The origins of that crisis are many and varied but at the top of the list has been the refusal of the Russians to ramp up supply. In fact, the Russians have not even supplied what they had been contracted to provide. The issue is the European reluctance to move forward on the construction of Nordstream 2. The EU position has been to ultimately reduce dependence on Russia for gas as well as to move away from fossil fuels altogether. Russia is not in favor of this strategy. Vladimir Putin made some empty promises as far as providing additional gas supplies but very little has been done and Europe is facing a cold winter at this stage.
Analysis: In addition to the decline in gas supplies the Europeans are facing reduced output from the wind farms that have been constructed in the last few years as this has been the year the wind has not blown reliably and the operations are only generating about 20% of what was expected. The shortage of gas in Europe and the coal issues in China blew up the price for natural gas and LNG and that has forced power plants to switch to burning oil instead (as it has been somewhat cheaper than the gas). The result has been a cascade of higher prices throughout the energy sector.
It is a little difficult to explain to the person suddenly confronting gasoline prices that are almost a dollar per gallon higher than they were a few months ago that they can blame Russian manipulation, calm winds and flooded coal mines but that is the reality in a global market such as oil. To further complicate matters the oil producers are not convinced that demand will hold up and they are therefore reluctant to return to full production.
Armada Strategic Intelligence System Starts to Show Some Weaker Numbers
The most recent data from the Strategic Intelligence System is showing some signs of weakness as the pandemic threat reignites around the world. This is consistent with many of the global economic assessments released lately. The projections are still showing progress but it is not as robust. Check this out for yourself, the latest issue has been released. Your two-month trial is absolutely free – no obligations at all. Simply go to www.asisintelligence.com and engage with us. We continue to tweak the report with every issue – adding the content that readers have requested.
The very definition of volatility. A cursory look at the inflation picture over the last year shows that there has been an incredible amount of movement and that will extend into the coming year. The good news is that both real and core rates will come down in the new year but the bad news is that they will stay higher than they have been.
What We Are Watching – From the Black Owl Report
OSHA Seeking Comments on Applying Vaccine Mandate to Small Business. There is an ongoing comment period in which OSHA is gathering information from small businesses about their approach to vaccine mandates and how difficult it has been for them to implement such standards. Some believe that this could be a pre-cursor to the Government expanding the vaccine mandate from private companies with 100 employees to perhaps the entire business community. The current private company mandate has been pushed back to January 4th, but the act will be enforced after that. According to the best we can gather, it looks like those that expect to get vaccinated by the deadline have to have their second shot before January 4th
For more go to www.armada-intel.com/trial
Credit Where it is Due
Yet another travel related set of commentaries. I have observed there seem to be two sets of responses to the travails of the current environment. We are all very well aware that things are not as smooth as they once were. Hotels are short of people and have eliminated even basic services, flight attendants have been made into enforcement agents, airports are devoid of restaurants, even Uber and Lyft drivers can be scarce. One reaction to all this has been surly grunts and undisguised anger and frustration on the part of those employees that are the recipient of the consumer’s frustration and anger. I understand and don’t really blame them although I crave a resumption of some level of service and friendliness. That is why I am so thrilled when the other response manifests.
I encountered two people who seemed determined to alter the pattern. The flight attendant on the Chicago to Austin run was as chipper and attentive as I have seen in months. She joked with everybody, did her best to react to requests and even adopted a far more gentle approach to enforcing the rules. You could see passengers visibly relaxing. At the airport there was the usual dearth of food options other than the fast-food court. The service was typically cursory but the surprise came with the woman who was cleaning the tables. She was diligent about the job but she also noticed everything else. She brought extra napkins to people as she noticed they were in need. She offered to go get a bottle of water to replace one that a woman’s baby had tipped over. She treated the court like it was her own restaurant with smiles and greetings. I complemented her and she simply responded with the comment “I am lucky to be here, away from the dangers back home in Guatemala. I have much to be happy about.”