This Week’s Economic Update, August 29, 2022

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Labor Day Weekend.  The end of Summer.  The start of school, gateway to the football season, and supposedly, the end of wearing white for the year.  Enjoy the final vestiges of the carefree warm days.  Time to find that light jacket and schedule a date to view the changing leaves.  Fall can be just as enjoyable as Summer, you just need to pick out the things to look forward to.

The Richmond Federal Reserve manufacturing report this week dropped from break even in July to a negative 8 for August.  The Richmond Services Index fell even more, dropping another 12 after a July number of negative 13.  It appears that the consumer, at least on the Eastern seaboard, is cutting back. 

It may not just be the East that is seeing a decline.  The Kansas Fed Manufacturing report moved from a positive 7 in July to a negative 9 in August.  Within the report, the largest decline was related to wood products likely a reflection of the soft housing market.

The Durable Goods numbers for July were telling.  Overall, the durable goods orders were flat.  However, the consumer and businesses did increase spending slightly.  The durable good orders were flat when you pull out defense, transportation and airline purchases.  These three areas all have some issues that will have to be overcome before we can expect durable goods orders to rise.  The supply chain issues in the auto industry are well known.  The old adage, I cannot sell what I do not have, applies here.  Once the inventory is replenished, sales should increase.  Defense is another issue.  Our defense department is working on de-commissioning after 20 years of war.  Without the demands of a foreign war, there is no need for new purchases.  Lastly, the airline industry is purchasing planes, but at a lower level.  Most replacements are for greater efficiency but not really for expansion. 

The Fed continues to indicate that higher interest rates are in the offing.  The issue is how many and how much?  If the goal is tamping down inflation, you need to first understand where the inflation is actually coming from.  Typically, high demand creates inflation.  The current state of our economy does not appear to reflect an excessive amount of demand.  If anything, demand is slack for many products.  The real issue is in the supply.  Without the goods to purchase, any demand is too high.  Interest rate increases will only push demand down in all but the necessities which we must have to live.  Food, energy, housing, the basics will reach a level of demand that can not be decreased without human suffering.  Discretionary spending is already drying up. 

With an increase in interest rates the Fed risks dampening demand too much.  At the same time, that could easily prompt a drop in manufacturing and distribution activity, expecting little to no demand.  The outcome could be a continued supply shortage which keeps prices high and demand low.  While the supply chain could eventually catch up, it may be too late.  This scenario begs the question of when the labor market may begin to see stress due to layoffs? 

The new jobless claims, as well as continuing jobless claims were flat from the prior week.  We have not seen a move in layoffs, either increasing or decreasing, for the last month.  This is something to watch closely.

Check your calendars, if you are an Underwriter, Credit Analyst, or a new or aspiring Commercial Lender, you will want to attend the ICBA Credit Analyst Institute that runs from October 2 to October 5 this year.  I will be teaching the course in person in Bloomington, MN at the Embassy Suites.  The course will provide you with the key tools you need to fully manage the credit risk of your clients.  We look at the marketplace that impacts your borrower, assess the skills of your client’s management, recognize the core cash drivers of the client as well what to watch for in early warning signs that exist to catch a deterioration in your borrowers.  To find out more information, as well as, register for this powerful course, go to, click on Education and then select Seminars and Institutes.  I look forward to seeing you there.

Of course, next Monday is Labor Day, I will be taking a break so my next update will be September 12.  Have a great two weeks.



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