Brief Notes on the US Economy
• Really Transitory? – There are two assertions that do not exactly square with one another. The first is that all this inflation we have been seeing of late is transitory and will simply go away on its own. The second assertion is that inflation has been far more robust and pervasive than expected. The fact is that both of these statements are coming from the Fed. If the issue really is as transitory as the Fed has been asserting there is no pressing reason for the Fed to take drastic action or even react much at all. If the inflation threat is more urgent than has been assumed the Fed will be compelled to act more forcefully and sooner than many expected. The burning question is which of these interpretations is the correct one. At the moment the official Fed position still leans towards the transitory position but there are members of the Fed that have been questioning that policy.
• Stimulus and the Inflation Threat – It has been argued that much of the inflation threat stems from the pandemic reaction and that is obvious in many respects. The collapse of the supply chain drove prices up and the sudden rebound at the start of the year was triggered by the lifting of the protocols. A bigger factor may have been the effort to mitigate the damage from the pandemic lockdown. The US pumped over $6 trillion into the economy in 2020 – a 47% increase over the previous year. To put that in some perspective the national GDP of Japan in 2020 was $4.8 trillion. Only two nations have a GDP higher than the amount the US spent in one year (the US and China).
• Inflation and Too Much Cash – The enormous spending undertaken during the pandemic put billions in the pockets of consumers and much of that largesse is still in savings accounts. This has blunted the usual reaction to inflation as people have enough money to ignore the higher prices. Not that people are not complaining bitterly about these hikes but when push comes to shove, they are still spending and forces more dramatic action if the Fed wants to reduce the fuel for further inflation. The betting is that consumers will plow through some of that accumulated cash in the next quarter or two but this is where the supply chain chaos plays a role. People would be buying more if they could get access to it but they can’t.
Brief Notes on the Global Economy
• EU Actions Worry China – China is starting to notice the shifts in emphasis as far as the EU and the US are concerned. The last few years have been instructive as regards trade dependency and that has prompted the EU (as well as the US and others) to question their trade policies. The EU has now instituted a wide variety of regulations and trade barriers that are overtly designed to push more business back to Europe and China has been reacting with accusations that these steps will compromise global trade. In fact, they probably do but the motivation has started to shift in the EU and elsewhere. The old pattern was to favor the consumer and ensure wide access to goods from all over the world but now the emphasis has been on promoting domestic production and creating a more secure and reliable supply chain.
• Shift in Covid Strategy – It is the winter season and we all know what this means in terms of viral attacks. In the last couple of years the winter months brought new waves of Covid 19 but this year is expected to be far less threatening to many. The US and Europe (as well as several Asian states) have vaccination rates of over 70%. This basically means the emphasis will be on the unvaccinated. Already this is the population that has been at risk – over 85% of hospitalizations and deaths. The restrictions proposed by many governments will be aimed at the unvaccinated – limits on where they can travel or work, controls on what they can attend and participate in. For the vaccinated the expectation is life back to what was once considered normal and routine.
Report from the Front
Each month we have the opportunity to review some of the more important economic indicators for two manufacturing organizations – Chemical Coaters Association International and the Industrial Heating Equipment Association. Both are oriented towards the metal industries – either coating or heat treating. They are closely tied to sectors such as automotive, appliances, aerospace and many others. What follows is the executive summary for the report and some of the specific area analysis.
There is not a lot of good news to focus on these days. Or is there? The headlines have been blaring with all manner of dire warnings and as is usually the case, there is far more hype than reality. The three headline issues are obvious enough – inflation at levels not seen since the 1990s, a supply chain that has been near collapse and a severe labor shortage. The fact is that all of these are related and highly predictable once one wades through the hysteria. Let’s start with inflation.
There have been those that are trumpeting idiocies such as claiming imminent hyperinflation or stagflation. These assertions are foolish in the extreme and only serve to obscure the real situation. Hyperinflation is inflation of over 50% per month – not the current rate of 5.0% per year. The hyperinflated economy is in utter collapse and one where money has no value whatsoever. Stagflation is a combination of very high unemployment and high inflation. We have inflation at 5.0% to perhaps 6.0% and a jobless rate of 4.6%. We have neither of these to deal with – we have good old-fashioned inflation driven by the three factors that always drive inflation and this situation presents challenges enough without introducing extremes.
The prime driver for higher prices is a surge in demand for these goods. Coming out of the pandemic there was a surge in demand that nobody was prepared for. The supply chain crisis was a matter of overwhelming a system that had been nearly shut down the previous year. The commodities prices soared and so did everything else connected to them. The good news is that supply driven inflation is short lived as demand fades and supply catches up – in part because of the higher prices. The second driver of inflation is a bit more worrisome as it is based on labor costs. Once these wages go up, they do not come back down easily. The pressure to hike wages to get the labor needed is driving the cost of even unskilled labor up. The final driver is the only one the Fed can react to – money supply. There is simply too much money in the system and that has prevented inflation from doing its job. Usually, the rise in price will serve as a discouragement – people will stop buying as they either can’t or refuse to. They are complaining about the higher prices but they have money and decide to buy anyway. The Fed will try to dry up the surplus that accumulated during the pandemic (over $7 trillion in excess savings worldwide) with higher interest rates, adjusted reserve ratios and other tools.
All this inflation and the supply chain chaos is a bad thing – right? Of course, to an extent that is certainly true as everybody is confronting the higher prices and the shortage of just about everything but if one considers the reasons we are dealing with this there is most definitely a silver lining to this dark cloud. These are problems of growth. The US economy was barreling along at a 9.5% pace for the early part of Q2 in 2021. That pace slowed to 6.5% by the end of that quarter but that is still over twice as fast as the US economy traditionally grows (around 2.5% per year). These shortages and the congestion are because there has been extraordinary demand – not an actual shortage that can’t be addressed. The producers will catch up and likely within the next six months.
The one issue to be confronted by the producers is the stability of that demand. They are well aware that consumers are rushing to get back to their old habits but they are also aware that these consumers are operating with a lot of that stimulus cash and will not have the same kind of access next year. The oil producers are aware that demand is driving prices up but that demand is very fragile. The gas shortage in Europe is artificial and could vanish overnight. The real demand for oil comes from the US commuter and they have not resumed that pattern as yet. The consumer product demand is based on consumers who still lack access to their former service sector options. The metal producers are not sure when auto production ramps up. You get the drift – lots of unanswered questions that will determine just how aggressive these suppliers will want to be in the coming year.
New Automobile/Light Truck Sales – This story is getting very old and frustrating for just about every sector of the automotive industry. The carmakers are still stalled by the shortage of computer chips and that stalls the tier one, two and three suppliers as well as the car dealers and of course the car buyers. Sales have fallen every month and will continue to tumble until the shortages are alleviated and right now it is anybody’s guess as to when that will be. The major producers of these chips are in full production mode but the capacity is just not there. It is not just the carmakers that need these chips, the entire electronics industry has been seeing stepped up demand and that has simply overwhelmed the ability of the producers. There are other threats emerging through all this. The global vulnerability when it comes to chips has not escaped the notice of the Chinese government. They are well aware that Taiwan remains the largest producer of these chips and the threats that have been directed at the ROC are pointed. China is fully capable of destroying Taiwanese capability in a matter of minutes. The US is now actively trying to lure production back to the US.
New Home Starts – The housing market seems to have hit is peak a couple of months ago and has been sliding since. This has been more pronounced in the new home sector than with existing homes but there are still some powerful drivers in the economy that have been keeping the sector viable. The most important is that mortgage rates have remained low but there is an expectation this will not last much longer and that has driven a little bit of surge as people who have been on the fence decide they have better act now. There has also been a slowdown in the movement out of the cities that had been provoked by the pandemic. Some are even trying to return to the city as they discover they will not be doing as much remote work as they assumed. There have been wide differences between parts of the country as well – more activity in the southwest and southeast than in the northeast and mid-Atlantic.
More From the CCAI/IHEA
Steel Consumption – The level of steel consumption has been volatile but that is not particularly new. The three major consumer sectors for steel have all been unsteady and it has been hard to determine what the real demand will look like. Construction remains the number one sector and there has been good news and bad. The demand for office construction is way off and is likely to stay down for a few more quarters. Meanwhile the demand for warehousing is way up and there has been a surge in development of manufacturing facilities. The infrastructure package has finally passed – over two years late. It will not have a major impact on the construction community until later in 2022 and 2023. The automotive sector (vehicles in general) is still moribund as the chip shortage and remains an inhibitor. The third sector is oil and gas and that has been unsteady for years as everyone tries to puzzle out what is ahead as far as alternatives. The recent surge in energy pricing has not triggered a lot of new development of capacity or pipelines because it is hard to determine how reliable this demand is. Oil producers are waiting to see if the daily commute makes a comeback as this is the number one consumer of fuel in the US.
Industrial Capacity Utilization – The level of capacity utilization has been consistent over the last several months and even the last year. There had been a slight trend upwards but this was followed by another slight slide. It has been asserted that the “ideal” level of capacity utilization is between 80% and 85% as that would suggest there is little slack in the system and at the same time no real evidence of bottlenecks. What makes the data interesting right now is that it would seem that shortages would be having a bigger impact on utilization than it appears. There is some expectation that these numbers might deteriorate in the coming months but for now it seems that production has been less affected by the supply chain crisis than most expected.
Metal Pricing – The recent erosion of the key metal prices may be a sign of a cooling off period for the economy or it may be a short-lived trend. Prices have been spiking for the most basic of reasons – consistent and unexpected demand combined with a shortage brought on by the supply chain breakdown and the lack of activity by producers that are not sure they can trust that demand. The reality is that industries that provide the most demand for these metals are not sure what to expect in the coming year. The high current rate of inflation could trigger efforts to bring these prices back down and that often leads to a downturn and possibly a real recession. The uncertainty has caused hesitation when it comes to expanding production. Aluminum is still waiting to see what happens as far as aerospace is concerned while copper producers are watching the electronics sector. Steel (and nickel) may see a jump now that the infrastructure plan seems to be underway.
Purchasing Managers’ Index – The data from the Purchasing Managers’ Index has remained consistent and strong. This has been the case for the US as well as most other nations in the world. China has been a notable exception as their PMI numbers have been falling. This index is considered in positive territory when the numbers are over 50 and for the last year, they have been consistently in the 60s. The reality is that business is stressed by issues ranging from the supply chain to inflation but they are still seeing consistent demand and that is reflected in the PMI data. Remember that the power of the PMI is its objectivity and frequency. It is a monthly survey that is answered honestly by purchasing managers who simply report what they are and are not buying as compared to the previous month. The index is also useful as the same techniques are employed by the index no matter what nation is assessed and that allows direct comparison.
Capital Expenditure – In the middle of all the chaos and concern over the supply chain and threats of inflation, there is still a good deal of capital investment taking place. It has been erratic for months but this seems to reflect the differing experiences for many industries. The expansion has been driven by three factors and all three will likely be major in the coming year as well. The first is that many companies have been accelerating the automation and robotics trends that started some years ago. Not only has the labor shortage only worsened but the demands of the pandemic have also driven this kind of investment. The second motivator has been the desire to engage in reshoring and onshoring. The estimate is that $1 trillion will be spent in reshoring some operations next year. This hardly means the China market will be abandoned but the shift has been palpable. The final motivation is related to inflation as the expectation is that borrowing costs will be higher next year as the Fed reacts to inflation. That drives a desire to do investing now rather than later.
Appliance Activity – The major gap between the unfilled orders and total inventories is obviously still there but it has closed just a bit. The level of inventories has started to show some gains as the producers catch up to the demand side of the equation. It is pretty obvious that demand is still on the rise and this is despite the fact that deliveries have been significantly slowed by the supply chain issues. There has been some real inflation to note in this sector but thus far it has not stopped consumer demand in any major way.
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.
It has been noted many times in the past and for good reason. The transportation sector is very often the harbinger of things to come – good and bad. When there is a surge coming there will be a great deal of commodity movement as well as delivery of intermediate parts and assemblies. When there is a slump there will be less shipment of finished goods to the consumer. The growth of the transport sector has been impressive and for the most obvious of reasons. Consumer demand is up and the ways that consumers spend has emphasized transport more than ever. The slight dip in this month’s index shows the strain of the supply chain bottlenecks – especially when it comes to the maritime sector but the decline has not been limited to just ocean shipping – there have been issues with trucking, rail and air cargo as well.
What We Are Watching – From the Black Owl Report
Law Enforcement Watching Inflation. We don’t always think about the direct link between law enforcement and the economy, and why they care about it. There is a direct link between inflation and crime – especially theft. No question. But we often forget that at the core is an economic pressure on households and people trying to make ends meet – and it spills over into other forms of protests or riots. The Arab Spring started in a food market when prices had surged, and ultimately led to what was called a protest movement against authoritarian governments that ended up toppling 4 Governments. It was an inflationary induced wave of crime that ended up taking on a different moniker, and it ended badly. Just notice that as inflationary prices start to surge, some of these protests are going to be based in a foundation of price increases on everyday items that we can’t ignore.
Knowing When Age Has Crept Up
To be honest I have known that I am not the youngster I once was for some time but every so often I get another brutal reminder. Usually this occurs when I attempt some feat of weekend strength and then feel compelled to go take a nap but occasionally it is a more metaphysical realization. As I was making my way to the hotel in Ft. Lauderdale, I discovered there was some enormous event underway – a country show called Tortuga Music Festival. For block after block there were hordes of fans making their way to the beach and my unfortunate taxi driver was stuck in all that traffic. Several things struck me as I observed this sea of humanity.
The first was that crowds are back. I have no idea what the actual attendance was but I suspect it was in the tens of millions. The second observation was that when attending a country music show in Florida the appropriate garb is a very small bikini and cowboy boots (at least for the women). Guys needed shirts with no sleeves, cowboy boots and hats and baggy swim suits. The third observation was the more personal one. There was a time when I would have been tempted to leap out the cab and follow the throng but I just remained in place and longed for the opportunity to find my hotel where I could crash on the couch. My desires have altered over time – waning interest in the events like this one and enthusiasm for sitting on my deck with a nice glass of wine. Later that evening I was at the group’s reception and was appreciating the open bar and the friendly people wandering around with snacks. Besides, I didn’t pack cowboy boots.