August 10, 2019

Brad StevensEconomic News

Well, someone had to be the first.  The new Corvette C8 was announced late in July with customer deliveries to be made in early 2020.  This past week a driver taking part in the Corvette Caravan through Yosemite Park drifted over the center line on a blind curve and smacked into a Ford Explorer.  Not a full head on collision but one that tore apart the new Corvette drivers front suspension and side.  While the Corvette held up and the safety of the occupants was assured, the vehicle itself is a total and will likely have to become a parts car going forward.  You can see a photo of the accident scene at https://www.thedrive.com/news/29359/2020-chevrolet-corvette-c8-crashed-months-before-customer-deliveries-kick-off. While it would have been great to have been driving the new C8 through Yosemite, it is better to “Not be that Guy” that was driving at the time of the accident.  As a friend once told me, “You always want to avoid a CDE”.  In this case the driver being an employee of GM likely experienced a CDE- Career Debilitating Event.

The ISM non manufacturing report was released last Monday.  The index slipped from 55.1 in June to 53.7 in July. As with the Manufacturing report, the majority of the embedded numbers in the report showed that growth continues but at a subdued level.  There were 13 industries that reported business activity growth during July.  Leading the pack was hotel and food services, impacted mostly by vacation activity during the summer month.  Moving down the list, Utilities experienced nice growth, this due to hot weather and need for electricity for A/C etc.  Scientific and Technical Services were third.  Slipping in the pack from prior months was transportation and warehousing.  As manufacturing softens the need for trucking services and storage is lessening a bit.  Wholesale trade continues to lag.  The issue here might not be overall demand but related to the amount of alternatives that are being offered.  Sourcing wholesale goods appears to have never been easier.  The catch here is that Wholesale may be impacted by the same dynamics as Retail where the buyers can now go direct and not have to be limited to geographic proximity. 

This past week was tough on the interest rate market.  The 10 year dipped to 1.71%.  If you are ready to pull the plug on an expansion, acquisition or equipment purchase, the drop from earlier this Spring from 2.1%.  Based on this drop the savings on each monthly payment for each $100,000 is $390.  Not sure how much more rates might drop.  So if there is a need, the financing rates are pretty enticing.  The lower rates of course weaken the dollar as fewer investors will place dollars in accounts that are earning less.  A weaker $ makes it harder to purchase foreign goods which become more expensive, need to trade more dollars than last week for the same priced good.  However, a weaker dollar supports more exports as our products become cheaper.  However as in life, nothing in the markets ever stays static.  Earlier this week China decided in response to the tariff issue to devalue their currency.  As the dollar weakens this offsets some of what they hoped to accomplish.  In the longer run the economic impact for China is a bout of inflation for anything imported.  This may or may not be a real problem for them as they import less from the US that we do from them.  Their top import is machinery which accounts for 24% of all items imported.  As the cost of machinery increases since their currency is weaker, it will be harder for their industry to afford to expand or replace the equipment they have.  Second on Chinas list of imports is oil, 16% of total imports.  Oil is traded in Dollars which their devaluation of the currency will hit the hardest.  And as we know, oil is infused in about every product one way or another, direct or indirect so this will cause rampant domestic inflation.  The key is what is the population and business pain threshold that is acceptable while the government plays politics with their currency.  Don’t be misled, the US is facing the same type of pain threshold on our exposed industries that are impacted by the trade policy.  In the US though the number of industries impacted is less than in China.

The ups and downs of the oil and gas supplies moved higher on Tuesday.  Both oil and gasoline supplies in the US shot up significantly.  Gasoline supplies actually hit the highest level since late in 2018 and at the high side of the ten year long term average.  The impact of the Iranian embargo has not been fully realized at this time.  However, Europe has stuck by the embargo as have others.  This leads to the question of, if Iranian oil is not being bought and the embargo holds with the current supply being what it is, how low will oil prices go if the embargo is settled?  See the paragraph above regarding China and how a settlement would help them.

Inflation continues to be in check.  The producer price index was muted in July.  The index showed deflation in prices exists outside the areas of food, energy and trade services.  This was the first decline in this area since October 2015 in the overall index.  Food and energy were the only areas of inflation in July and that was at 2.3%.  The majority of that increase came in energy due to drop in supplies in June and early July.  Food prices increased just .2%.  Importantly, prices for transportation and warehousing declined in July by .2% which indicates a strong indication that manufacturing and trade is slowing at a pace that should warrant attention going forward.

My impression continues to be we will likely see a recession or near recession in the economy later in 2020. 

With that, have a good week.