On the West Bank of the University of Minnesota in Minneapolis there was an intersection that we called Seven Corners. This intersection brought three and a half streets together. There was a North/South, an East/West, a Northwest/Southeast and a street that came from the Northeast that all met in one location. Poor urban planning at its best. This so called controlled intersection was a nightmare to navigate, particularly when right turns on red were allowed. Over time the traffic volumes led to perpetual grid lock. The powers that be redesigned the intersection in time making it into a conventional four corner intersection and rerouted the non-essential streets. I bring this up as it is an example of when you have enough traffic or information that all congregates in one area or point, it will start to capture the attention of more and more onlookers.
Let’s start with the ISM reports for July. There were two reports released this past week, the ISM Manufacturing and the ISM Services Report. These reports, coming from various directions, pointed to the same conclusion. The economy continues to grow and grow at a steady pace.
The Manufacturing report for July came in at 59.5% which was 1.1% off the June report which was 60.6. While the growth slowed slightly, it is still considered a very healthy level. From all the interior points of the report, we seem to be settling into a growth plateau. New orders, production, deliveries and the backlog of orders are all growing at a stable, steady rate. The primary constraint to further growth right now is the supply chain and finding trained, qualified workers. From all indications, Manufacturing does not need further stimulus.
The Service Report for July came in at 64.1%, a 4% jump over the June numbers. Activity, new orders, hiring and the backlog of orders all are showing very strong growth. Constraints are related to supplies as well as staffing. “Dramatic” price increases are seen across all inputs in the service sector. From the information in the service report, no more stimulus is needed here.
July total vehicle sales moved further off the peak from April to a level of 14.8 million. There have been three straight months of vehicle sales declines. However, this is not due to slacking demand, rather it is lack of inventory. The auto makers continue to struggle with completing the vehicles without chips and other parts that are either tied up overseas or at the docks. The comments in the report indicate there is no shortage of demand, even if prices were to increase. The auto industry does not need more stimulus, they need more parts.
The labor reports released on Thursday and Friday for July were much better than expectations. New jobless claims fell below prior levels while continuing claims dropped below three million for the first time in a while. Clearly, people are finding jobs and coming off of the unemployment rolls. Non-farm payrolls grew nicely in July, soaring way above expectations and beating the June number, which was also revised upward. The U3 Unemployment rate dropped from 5.9% to 5.4%. The issue here is that it remains above 5% due to the mis-match of job requirements and the talent pool available. To force the number down further we need to train those looking for work to match the jobs that are open. Average hours worked during the week continues to be steady indicating employers have a strong demand for their products.
Government payrolls increased in July by 42% in one month. The June number was 169,000 while in July it grew by 240,000. By any stretch, this is a really strong growth number. It does not appear that the labor market needs more stimulus, it likely needs training programs.
It is rare in history when anyone can accurately predict future interest rate movements. However, not really going out on much of a limb here, I will say interest rates are destined to climb and do so soon. All the information shared above brings you to an intersection where the Fed needs no more quantitative easing, they can immediately start to taper their purchases of mortgage backed securities, private bonds as well as T bonds. As they taper, the rates will rise. This will cool down an overheated housing market. It will raise rates for firms to borrow, assisting them in re-assessing certain expansion projects that might be overly risky. Lastly, it will likely raise the 10-year T bill rate back to where it really should be for a healthy economy, over 2%.
Later this month, August 26-28 the Fed is hosting an economic symposium at Jackson Hole Wyoming. Everyone will be watching and listening to the speakers, particularly Chairman Powell. At this meeting there will undoubtedly be statements that will shed light on the future of the stimulus, quantitative easing and other direction indicators that will give us information on which way the policy makers will take our economy. Based on the reports so far, we are in need of some tweaking to get the supply chain and labor markets settled, but need little to no further fiscal or monetary stimulus.
Have a great week.