This Week’s Economic Update, December 6, 2021

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Without looking it up, can you recite all the gifts listed in the 12 days of Christmas?  The song was originally published in 1780, a time when Christmas presents must have been very different.  Most of the gifts now would be criticized by various groups as being insensitive or even abusive to protected species.  Not sure about you, but the gifts here are only the beginning, the up keep, expense and on-going care of the gifts over time would lead me to dump this generous giver rather quickly.  Who has room for French Hens, Turtle Doves, Swans swimming in a pond, the cows that come with the maids a milking or the patience for the noise calling birds would make?  Of course, each year someone sends out a reporter to determine what this list of extravagant gifts would amount to, just the purchase price, not the up keep mind you.  This year Gabriel Cortes of CNBC built the list and measured the price increase year over year.  Somehow, the second highest levels of inflation surrounded the 12 drummers drumming, 11 pipers piping and 10 lords a leaping.  These three gifts each rose by more than 40%.  This is rather odd and appears to be rather sexist as the increase in the 8 maids a milking and 9 ladies dancing did not appear to increase at all.  The winner of the highest price increase related to the birds.  The cost of two turtle doves rose by 50% over the past two years while the six geese a laying popped up by 57%.  In the end, the cost of all 12 days totals up to a whopping $41,205.   That would be quite the credit card bill shock in January.

Inflations continues to take a bite out of the consumers wallets.  In spite of the price increases, consumers continue to spend.  The Dallas Fed Services for November increased from 19.6 to 25.4 indicating that it is not just manufacturing that is doing well.  People continue to have money to spend and evidently, at this time anyway, the prices are not a factor.  The savings rate had returned to prior pandemic levels after rising over the last two years.  It appears that the consumer will spend down the excess liquidity before pulling back to their prior cautionary balances.

The ADP November employment numbers reflected a continued strength in hiring numbers, nothing stunning but a good performance.  Whether it was the phase out of the unemployment benefits or just wage offers that were finally large enough to pull in workers, it is a solid recovery.  The service sector provided 3/4ths of the new hires.  Trade and skilled jobs continue to go wanting.  Manufacturing only accounted for 50,000 of the new jobs, less than 10%.  The numbers and the types of jobs filled reflect those with lower skills getting back to work.  Our economy still needs many more trained workers in the goods producing sector. 

Another indicator of a tightening job market is the continuing jobless claims.  For November that number fell to 1,956,000 down from 2,063,000 in October and off the peak of 2,811,000 in September of this year.  This is more a reflection of employers not wanting to lay off or cut employees that they are going to need in the future.  Permanent job losses were down again in November.

The labor participation rate in the US is a key statistic to watch.  The Friday Bureau of Labor Statistics indicates a rise from the end of October of 61.6 to 61.8.  This is a nice move and one that might start to release the pressure on wage inflation that is eating up profits on small to medium businesses.    This would also alleviate the wage push inflation that is part of the current trifecta going on in our economy. 

The current inflation trifecta that we are experiencing covers all sources of inflation.  First is a replay of the 1970’s supply shock inflation.  Our supply chain is curtailing products getting to the store shelves so prices are rising to ration out the items to those willing to pay higher prices.  This is similar to the oil embargo in the 70’s.  The second is wage push inflation, similar to the late 1990’s.  The employment sector is experiencing a historical mis-match.  We have a significant number of jobs that require specific training that are unfilled, well over 7,000,000, due to a workforce that is not ready or trained to accomplish the tasks.  Secondly, we have many who refuse or wish not to participate in certain jobs, being very selective about the positions they will take.  Until they see the wages rise, they will sit on the sideline pushing wages up.  Companies then nudge prices up to cover the cost.  Last part of the trifecta is devaluing your currency.  The Treasury Department has pushed out unprecedented levels of cash into the economy.  When everyone has cash, the value of your currency goes down, prices go up.  We have never experienced all three factors coming together as they have at this time.  I still believe all three of these conditions will abate late in 2022 as the supply chain catches up, consumer cash runs out and incentives to sit on the sidelines for labor expire driving people to go back to work.  Until then, inflation will be a problem.

The ISM Manufacturing report for November was just slightly higher at 61.1, essentially flat from the October number of 60.8. The good news in the report was that new orders jumped from 59.8 to 61.5 indicating continued strong demand for manufactured products.  Production grew 2.2% in November as it appears the supply chain is catching up.  Even the back log of orders dipped which had been at a near high level due to companies being able to produce.  The key take away is that manufacturing continues to be demand driven with client inventories being too low to sustain sales.  The indicators all point to at least two to three months of continued strength as manufacturing works to meet demand.

The update was a bit long this week, I guess I made up for taking last week off.  Have a great week.

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