This Week’s Economic Update August 22, 2022

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How are your clients managing their gross profit margin in this inflationary environment?  I know how Arby’s is doing it.  My wife and I love Arby’s, loved them more before they canceled the potato cakes, but that is another issue.  We would grab our 2 can eat for $8.99 coupon and enjoy two regular roast beefs, two fries, two drinks and the mozzarella sticks.  Sadly, when our new coupons arrived this week,  my wife as aghast. The 2 for coupon was now $9.99.  Worse yet, I was aghast when I saw that the increased price no longer includes the mozzarella sticks.  A clear case of inflation and size-flation to keep Arby’s gross profit margin in place. 

A portion of the job market may be an early warning sign of a coming softness in both employment as well as the economy.  A report from PwC this week indicated that 50% of respondents indicated they currently are or are planning reducing headcount at their companies.  46% have stopped offering sign on bonuses to new recruits and 44% are rescinding offers that were recently made.  Much of this relates to the Tech Industry, however, the US Survey included 700 executives across many varied industries.

Earlier this year I shared the thought that the Federal Reserve was trying to take a path where their policies were aimed at reducing the level of open positions and not wanting to create layoffs.  I indicated then that the ability to thread that needle was going to be difficult at best.  We are seeing the initial impact as the level of job openings are declining.  While last weeks job report was strong, specific industries are starting to share information about pending staff reductions.  The list of firms announcing layoffs recently include Wayfair, 5%, Microsoft, 100’s, Peloton, 600, Bio Gen, significant, and Robinhood 82 but also announcing the planned hiring of 400 was off the table.  Medline is also cutting 100 jobs.  This is likely the tip of the iceberg of what is to come.

The retail sales in July were flat lined from June.  The US experienced a drop in sales in autos as well as auto parts in July.  This is unsurprising as the prices for most vehicles are rising above affordability levels.  I also noted in a prior update the increasing inventory in lower priced autos.  As inflation continues to pound households under the median income level, purchasing a new or used vehicle is off the table.  The retail sales continue to reflect a shift away from bricks and mortar stores while online retail see strength. 

We saw two manufacturing reports this week that tell a different tale.  The Empire State Manufacturing report fell off the table again, producing a -31.3 result.  Since the first of the year this report has been extremely erratic.  In January it was flat after a very strong December.  February was slightly up, March fell by 11.8.  April soared to a positive 24.6 only to have May fall back by 11.6.  June was flat.  July popped back up to 11.1.  The wide and varied movements indicate an excessive amount of risk in the New York manufacturing market.  Nothing in the reports reflect any underlying reasons for such moves.  It is not a supply chain issue, the labor market appears to be sufficient to meet the hiring needs, and inflation has not seemed to have a marked impact.  The only key driver seems to be on again, off again levels of new orders. 

The Philly Fed manufacturing report recovered from two straight down months to record a growth number of 6.2. This level is admittedly weak, and in the repor, concern about new orders being soft could point to this being a dead cat bounce.

US manufacturing production in July rose by .7%.  This was better than the June level when production declined by .4%.  Nothing to write home about.  An interesting point in the report was the Capacity Utilization level of 80.3%. Since March of this year the capacity level reached and has maintained 2018 levels.  81% is the level where efficiencies begin to grab hold and industry has to decide whether to purchase new equipment to increase capacity or efficiencies.  Once we hit that level expect, firms to begin to purchase more capital equipment. 

The new housing starts in the US are down, no surprise here.  With housing prices beyond sane levels and rising interest rates, a slow down is not unexpected.  Tie this to the Chinese problems with real estate development, and you can expect any supply chain issues in construction to go away.  The failure of many developers in China, as well as the cancelation or abandonment of current construction projects, should leave supplies under less stress than they have been for some time.

Have a great week.



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