Did anyone else find it ironic that while Russia invaded the Ukraine last week the news broke that three bears were invading a small portion of California causing havoc and destruction? Authorities initially thought it was one big bear that they named Hank the Tank. However, after further investigation it turned out to be three big bears that have developed a taste for people food. So, Hank the Tank and his two buddies are essentially annexing the South Tahoe area and terrorizing the resident’s. Let’s hope this invasion is settled peacefully for all involved.
Last week I discussed a couple of Fed Manufacturing reports that were rather positive. This past week the Richmond Federal Reserve released its manufacturing index and it was not great. After the January number came in at 8, February moved to 1, barely positive. The culprit appears to be the supply chain in the Eastern US that is causing production and shipping issues.
In the Midwest, The Kansas Fed Manufacturing report came in at 31, a huge increase from the January number of 20. While the supply chain issues still exist in the Midwest, production, new orders, and employment all showed improvement. The impetus appears to be in the growth of machinery, manufacturing, plastics, fabricated metal products and transportation equipment. These are great signs for continued economic improvement. First, business is investing in new equipment which reflects an optimism for the future. As long as the supply chain improves, we could see a greater growth on the horizon.
The Kansas Fed numbers support the continuation in what we saw in durable goods orders from January. The Durable Goods Orders increased by 1.6%, not great, but better than December. If you pull out transportation, the number was .7%. That means autos and trucks are still being produced in spite of the supply shortages. Defense orders were flat from last month. Depending on the outcome in the Ukraine, we may be seeing a jump in this number in the near future.
One area of the economy that is taking a pummeling is real estate. Pending home sales in January, month over month, fell by 5.7%. A number of factors are influencing this number and will likely continue to do so in the future. First is affordability, buyers are unable to qualify for the financing of the high housing prices in most markets. Higher interest rates in the market also price out the buyers. Lastly, the lack of existing inventory is starving the market. If a house is not on the market it can not be bought. Many potential sellers are holding back, not to get a higher price later, but because they can not find a replacement. Look for this to be a continuing issue nationwide.
The war in the Ukraine is not helping the supply chain or the prices of many items. Aluminum surged late last week. Already in severe shortage, the lightweight metal is a main export of Russia. While the sanctions have not hit base metals yet, anything that could possibly prohibit the sale or movement of goods from Russia is going up in price. Both Russia and the Ukraine are key wheat suppliers to the world. Wheat rose 15% on Thursday. While not part of the sanctions, there is a concern over transportation through a war zone, or at least how the product will get through to the markets. With much of the wheat growing area in the US under drought conditions, replacing the Russian and Ukrainian wheat will be difficult.
Oil is of course a concern for all of us. The supply numbers last week do not indicate any kind of shortage currently exists. Prices are moving on rumor and on fear, but not on actual supply and demand numbers. The oil rig count in the US again went up, 650 total rigs working. We are not at the pre-pandemic levels. Investor confidence in the oil markets has not returned and will not likely return for some time. The wipe out of 2020 is still on many investors’ minds. Until the current government provides incentives and assurances, investment in oil in the US will likely be tepid. Considering the vitriol that the current administration has targeted against the fossil fuel industry, no one anticipates any supportive programs to be rolled out to help increase production.
Have a great week.