As a little boy my mom would read to my brother and I nightly. By the time we could read on our own we had devoured hundreds of books. One of our favorites was called Fortunately by Remy Charlip. The tale follows Ned as he needs to cross the country to get to a birthday party being thrown for him. Unfortunately, Ned has no way to travel until a friend, fortunately, loans him an airplane. Unfortunately the plane explodes and our poor Ned has to bail out. The story flips from fortunately to unfortunately until he finally reaches the party. It is a wonderful kids book with great illustrations.
I bring up the book Fortunately because the economic numbers over the last week followed much of the same path. There was good news that was seemingly embedded with bad news. Let’s start with the oil markets. US oil rigs increased again nearly topping 400. The increase should produce more supply of crude for the refiners. Unfortunately, demand is increasing driving supplies down. The industry has been unable to keep up with the reopening of the economy as well as the summer travel season. Gas prices are now expected to remain above $3.00 for a while, likely into the Fall.
The June durable goods report showed a significant increase in non-defense aircraft production as well as communication equipment. This indicates a strong demand by businesses for reinvestment, reflective of a positive outlook. On the flip side, orders fell for other capital goods as well as motor vehicles. This seems to indicate that we are experiencing a divergence between industries, some taking off, leisure and travel, and others grounded, consumer related industries that struggle with supply chain and labor issues.
The July Fed Reports are slowing coming in. The Richmond Fed report edged higher, reaching a level not seen since 2004. Unfortunately, the report shared that new orders are declining and inventories are depleting. The concern is that the supply chain problems are causing business owners to reconsider expansion plans. Further, pessimism regarding the spread of the Delta variant is causing a reluctance to restock in the event of another shut down.
The July ISM Manufacturing report comes out on Monday August 2nd after I have posted this update. Based on the Fed Reports I would expect a flat number from the June level of 60.6. However, the Chicago PMI number out on Friday was very strong, indicating that there might be strength building in the economy that is being missed by other indicators. The Chicago report was scant on details so no conclusions as to why it increased can be made.
Federal Reserve Chairman Jerome Powell expressed that the Fed is not going to raise rates nor is it considering cutting purchases of either mortgage back securities or Treasury Bonds. This is great news for borrowers who can still lock in low rates on loans used for expansion and growth. On the flip side, it also reflects the Federal Reserve opinion that the economy is not faring very well, requiring much more stimulus. This is in spite of inflation exceeding the target of 2% causing some worries in specific sectors about consumer affordability.
The second quarter first look at GDP was 6.5% growth. While beneath expectations, the number was still strong by any measure. Consider the period prior to the pandemic when GDP was languishing in the 2 to 3% range. Just like poor Ned, when you look a bit deeper, the number loses some of its luster. The GDP numbers are nominal so they do not reflect the impact of inflation. Thus, the 6.5% is an overstatement in real terms. This could be the main reason why the Fed has been reluctant to cut back on stimulus programs in spite of the GDP numbers.
Fortunately, there is still time to register for the ICBA Commercial Lending Institute which I will be teaching virtually with Bob Page. The Institute covers August 16-19 and August 23-25 and is required to earn your Commercial Lending Certificate through ICBA. You can register at
Unfortunately, if you miss this class you will have to wait a year until it is offered again. You will find the course informative, fun as well as a great step for your career in banking.
Have a great week.
