Everyone loves to make predictions for the coming year. Some are good, some are way off, but they are always fun to read and keep track of. So here goes mine. As a disclaimer, if you have twenty five cents and these predictions, you can get a cup of coffee at a really cheap diner. First, interest rates will be going up in 2022. With the Federal Reserve announcement this week this is likely a no brainer. Second, the supply chain will eventually stabilize. However, business and government will have to team up to provide a new infrastructure to assure products get to where they need to be when they need to be there. We are essentially working with early 1900 modes of transportation in 2022. Time for a massive investment. Third, Russia will make a move on the Ukraine which will muck up both the economies of Russia as well as Europe. The impact on the US will be limited. The Middle East is a crap shoot. I am expecting some sort of conflict between Israel and Iran that could become a major flash point. Let us hope that predication is way off.
The manufacturing sector seems to be taking a breather with the last set of reports. The Philadelphia Fed Manufacturing report went from 39 in November to 15 in December. New orders in the report fell dramatically, from 47 to 13. Business owners were less optimistic about the future with the business conditions number dropping from 28.5 to 19. The Capital Expenditure number in the Philly report was equally as dire. Companies in the East Region have curtailed new equipment acquisition from 31 down to 20 in just this past month. The Kansas manufacturing index dropped from 17 in November to 10 in December.
On a more national basis, US Capacity utilization rose slightly to 76.8. There is little pressure on companies to invest in new equipment unless the utilization level clears the 79% level. Any investment right now is related to lack of labor which may be leaving some machines unattended. Currently the new investment is in robotics, not to replace labor, but to avoid having to hire more staff to meet the orders. November manufacturing production fell from 1.4% in October to .7% in November. Part of this is the impact of the supply chain, but more of it relating to declining new orders. After Christmas we will have to see what inventory levels do. The expectations are that the consumer stimulus money is running out, inflation is finally starting to impact the thoughts of the consumers and spending is abating. This could result in a very lean 2022 first quarter.
The Baker Hughes oil rig count is telling. Prior to the pandemic our oil rigs operating in the US were in excess of 1,000. The numbers dropped to under 300 after the crash of the oil market in May 2020. The number of oil rigs should have rebounded by now, particularly when you consider that last month the price of oil peaked at over $82 per barrel. Last week the number of operating rigs rested at 579. New regulations regarding methane releases, federal leasing controls and ongoing court battles over pipelines are all contributing to a reluctance for the industry to open more rigs. In the end, this is negatively impacting the US ability to produce more oil and gas supply for the market. On the flip side, while gas prices are over $3.00 and likely to stay there for some time, demand continues to abate. More workers are able to complete their tasks from home without commuting. We are also taking less trips, staying closer to home and not traveling due to the continued pandemic fears. If the economy fully reopens we can expect gas supplies to drop and prices to rise rapidly as supply will not be sufficient enough to respond.
The core Producer Price Index for November bumped back up after three months of being at .6% growth. The increase of .8% tells us that consumer inflation will continue rise faster in 2022.
As you have likely noticed, it is not just the actual price increase of the product, but the portions of what we are buying are changing. Many products, staple products, have declined in size while the price has gone up. This is not always calculated in the inflation numbers. I noted this size issue this past week when my wife was making one of my favorite Christmas Cookies, Peanut Blossoms. While my grandmother made them with Hershey Kisses, my wife prefers Chocolate Stars. In either case, the size of the chocolate has at least been cut in half and the price, $16.00 per pound, is taking away much of the “cookie enjoyment” that I once had. They are still great cookies, but I just have to eat double the amount to reach the same level of enjoyment. Unfortunately at a much higher cost.
Oh well. Have a wonderful week and a Merry Christmas. I will be back January 3, 2022.