Forty five years ago tomorrow, August 16, 1977, was a day the music died. For us Baby Boomers, this was one of those memorable dates that we knew right where we were when we heard the breaking news that Elvis Presley had died. He was only 42 years old at the time, I will admit he was well past his prime, but his music still lived on. Few recall that on the day Elvis passed, his last album, Moody Blue, as well as the second single off that album, Way Down, were both charting pretty well. Tomorrow, take a minute, raise a glass to Elvis, his influence on the Beatles, Rolling Stones and other musical acts has been immense.
The impact of inflation on our economy continues to be problematic. While the numbers this past week indicate we may have peaked on the month over month increases, higher prices are not uniformly going to abate anytime soon. The good news is that the rate of increase is dropping. Of course, the bad news is the rate of increase is still high and will continue to impact our budgets.
Like the old story book my mom use to read to me when I was a kid, Fortunately, we have two sides to the narrative right now. Fortunately the prices of most commodities, corn, wheat and soybeans have returned to near pre pandemic levels. Unfortunately, the higher expected market price that farmers thought they were going to get when they planted massive fields of corn, wheat and soy beans this year are not going to be realized. In fact, at the lower prices today, many may not break even or the margin will be so tight, that crop input loans may have to be carried over. Not good.
The Producer Price Index for July dropped .5%. Fortunately, that does indicate that we are past peak inflation growth. Unfortunately, this could indicate the start of a possible deflationary trend. We are seeing inventory starting to pile up in some areas. Some retailers are already discounting prices to clear lagging merchandise. The old issue of buying high and selling low for a business causes significant struggles with gross profit margin, net income and ultimately the solvency of the firm. If we see this trend become widely spread firms will begin laying off staff, struggle to make loan payments and will ultimately lead to a deeper, harder recession. Now is the time to meet with your banking clients to see what they are seeing and how they are responding to the market changes.
Two signs on the debt front that are early warning signs of the stress on consumers. Based on the numbers, consumer revolving debt in June of 2022 hit a level just under the all time high in 2017. Wells Fargo provided a report this week that found that more card holders are redeeming rewards to pay off recent balances. In the past, the rewards were heavily used for premiums, that changed to offset increasing balances. Bank of America shared in the news that in July they saw a decrease in revolving credit balances. It was a slight decrease and the reason is not yet known. There was a slight uptick in real estate refinances as well as in the home equity loan offerings. I could not find a clear correlation between the two, but that could be part of the answer. Another reason could be consumers pulling back on spending in specific areas. Clarity on this issue will be achieved as more reports come out.
Lastly, both export and import prices in July declined. Since the dollar is so strong our exports have become incredibly expensive to our trading partners. Beyond just supply shortages, labor cost increases, our exports also are impacted by the very strong dollar value. This makes it harder for the world to buy our products. However, In the past month, the majority of our exports related to the above mentioned grains of corn, soy beans and wheat. As those prices have crashed, it brought the aggregate price of our exports down. The drop of 3.3% in one month is one of the largest on record. The import price drop of 1.4% is broken into two areas. Oil prices have declined world wide which drove down the price of energy that we imported in July by 7.5%. Non-fuel prices also fell as the supply chain issues in most areas appear to be clearing up.
Before I part, I want to share some advice. In my over 30 years in commercial banking I learned that Main Street is about 30 days ahead of Wall Street. Start talking to your clients now to see what they are hearing and experiencing in their markets. Currently there is a great deal of excitement as the market rises. The numbers are going both ways in terms of what could happen later this Fall and Winter. Is the current Dow increase a dead cat bounce or is it sustainable? Find out by getting out of the office, visiting your clients, witness first hand what they are seeing. AND if you have time, please email me with what you are learning. I always appreciate good market intel from Main Street. My email is Brad.Stevens@srmallc.net
Have a great week.
