This Week’s Economic Update, February 19, 2024

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Being Presidents Day, I wanted to do a shout out Happy Birthday, belated, to Abraham Lincoln who was born on February 12, 1809.  Honest Abe would be 215 years old now.  On February 22, George Washington, the Father of our Country, would be celebrating his 292nd birthday.  There was a time when our nation celebrated both of these birthdays as individual holidays.  I still remember during my elementary school days having both birthdays off.  I was greatly offended when Congress combined the holidays into Presidents Day.  To be honest, my affront was more about losing a day off from school than it was celebrating these great leaders.  Over time, I have come to recognize and appreciate the level of excellence that President Washington and President Lincoln exhibited in directing our country.  Oh, the good old days.

This past week the National Federation of Independent Business released their survey on small business owners expectations for 2024.  The respondents in the report indicated they are less optimistic about the future than in prior months.  One of the key concerns is inflation.  Business owners are seeing a resurgence in prices on most, if not all of their production inputs. The concern is the ability to be able to pass on the increase in costs to their clients without seeing a sales decline.  This would indicate that shrinking gross profit margins are ahead.  Worse, many of the business owners listed high labor costs as the second reason for the pessimism in 2024.  While they still may have job openings, they are reluctant right now to fill them unless the absolute perfect candidate shows up.  As labor quality is in question, business owners can not justify the cost of adding someone who will not increase overall efficiency.  Included in the labor concern are new local regulation costs or mandates that are being required by newly passed laws.  Overall, this means that two of the most crucial core cash drivers of a firm, the gross profit margin and operating expense margin are under stress.  The outlook for small businesses is not bright.

Inflation does appear to be bubbling up again.  The Consumer Price Index for January was hotter than expected at .3%.  After bottoming out in October at .1%, the CPI has been on a steady rise each month.  In the last six months it is on a 3.4% annualized rate.  That is hotter than the FED is comfortable with.  This would indicate that interest rates will remain higher for a lot longer than previously expected.  The Producer Price Index for January also popped up the past few months.  This is typically a leading indicator for the CPI.  As I have shared before, the low hanging inflation fruit of the supply chain may have been picked, now we have the much harder, labor embedded inflation which will likely take years to get under control.

The manufacturing sector continues to be in a twilight zone area.  The NY Empire Manufacturing index continued to be negative, it rebounded in February to a -2.4 from a dreadful -43.7 in January.  Part of this is a math issue.  Since January was so bad, February had to show less of a loss.  On an absolute level, it is still well below what is called healthy.  The Philadelphia Fed Manufacturing index improved nicely actually moving into positive territory.  Based on the overall look at manufacturing right now, the ISM report to be released on March first may be the first expansion since October of 2022.  That would be huge, but again, the various reports are all over the place.  I have not seen such an uneven regional performance in my memory.

As could be expected from the inflation numbers, long term rates are back on the rise.  This will negatively impact the housing and mortgage industry.  We already see mortgage applications falling off the table.  Between the refinance market drying up and marginal buyers having to once again wait since they can not qualify, we can expect further job layoffs associated with mortgage banking.  There continues to be little to no existing home inventory again.  Buyers that still qualify and want to purchase are virtually required to buy new.  What we are seeing between the high mortgage rates and high construction costs, is that even qualified buyers are balking and for now, remain on the fence. 

Have a great week.

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