Normally, this is the week I would be touting the start of Spring with the arrival of the Pitchers and Catchers at Spring Training. However, the lock out is delaying the arrival of our next season. If Punxsutawney Phil was a correct predictor of the arrival of Spring, the lock out will end on March 16, Spring will arrive and all will be right with the world. Otherwise, it might be time to make some groundhog jerky.
This past week produced a huge amount of good information on the economy. I will lead off with the NY Empire Manufacturing Index. The dip in January to -.7 was more than offset by the February increase to 3.1%. A very nice bump in spite of supply chain issues. The Philly Fed Manufacturing report for February was as strong as it was in January. Another good sign that manufacturing is doing well, at least on the East Coast.
Industrial production for January started off the year in pretty good fashion. In December the production number went barely negative at .1%. The January number improved to 1.4%, a nice, stable start to the year. An item of note here. These are month over month numbers. That means the lower number in December is the denominator, so any increase over the December level is a bit magnified. This will hold true for the Retail sales number that I will discuss later. Industrial Capacity Utilization in January moved up over 1.1%. At 77.6%, we are still beneath a level that would require companies to invest in new fixed assets to meet demand. At the current level, we have sufficient runway for business owners to expand without too much new investment. Overall, both January and February are looking very good for the manufacturing sector.
Retail sales took off strongly in January. A good start to the year. The Retail sales number for January came in at 2%. If you pull out gas sales and auto sales, the number jumps to 3.8%. The supply chain issues that are hounding the auto industry brought the overall retail sales level down. If the auto industry were to cure its issues, the retail sales would be increasing at what many would consider, overheated. The level of liquidity in the consumer side of the economy continues to be very high. Banks continue to be awash in deposits. Watching the deposit levels in the banks should give us a good indicator of when spending might begin to curtail.
Inflation woes are not going to abate anytime soon. The producer price index is a precurser to future consumer price increases. For January the core PPI rose at .8%. Extending that to an annual rate leaves us at 9.6%. This is not sustainable for a healthy economy. On a year over year basis, going back to January 2021, the PPI has increased at 9.7%. Sadly most of this increase has come the last couple of months. There are a number of factors that are pushing this index higher, including the supply chain issues.
The million-dollar question is will the Fed’s anticipated interest increase impact the level of inflation? For the most part, the inflation is in areas that are interest rate protected. Until the supply chain issues are addressed and solved, inflation will continue, regardless of the interest levels. The items basket of goods that are being most impacted are staples, outside of used cars. These items are going to be purchased in spite of what the interest rates are.
That being said, there is no evidence that oil and gas prices will abate anytime soon. The price of oil hovers around the $90 level. This past week the market saw a pretty strong drop in supplies of heating oil, gasoline, and the refinery output. With demand continuing to be high, prices should continue to rise for the foreseeable future.
Housing starts fell in January by 4.1%, the largest drop in 6 months. This comes on the heels of a drop in December of .3%. There are two issues that might have impacted these numbers. The first was the extremely cold weather in January that curtailed construction. The second was the availability of construction material. Deep in the report is a number that is of concern. Single family housing starts dropped by 5.6% during January. That would mean that the multifamily housing starts were likely strong, pulling the total drop up by 1.5%. The increase in multi-family construction likely tells us that the supply chain may be less of an issue than maybe the interest rate increases. Between rising rates and increasing housing prices, qualifying for a new single family residence is now beyond more buyers ability.
A storm cloud on the horizon is the level of non-qualified mortgages that the banks are currently approving. These are mortgages that do not meet the terms of either FHA or Fannie Mae and have to be either held by the bank or sold as non-conforming. These are typically higher risk loans with buyers who have less margin for error. With the current level of inflation, these homeowners could be in trouble in the next year. Watch for the rise in foreclosures. This was the early warning sign in 2005 that things were failing in the market.
Have a great week, let’s hope the Baseball lock out ends soon so Spring can finally arrive.