This Week’s Economic Update, Halloween 2022

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Here we are at October 31 and the World Series is just getting started.  Growing up October was the home of the Fall Classic.  Pushing the World Series into November allows Reggie Jackson to permanently maintain the title of Mr. October.  We will have to see who will claim the title of Mr. November in time.  Here in Minnesota, if the Twins ever return to the Series, it will be interesting to see if the weather will provide a re-naming of Baseball’s premier event into the Winter Classic.

There is something that has gone a bit under the radar recently.  During 2020 and 2021 there was a high interest in investing in Special Project Asset Corporations, SPAC’s.  These SPAC’s raised significant capital with the funds to be invested in particular opportunities.  The majority of the SPAC’s were targeting real estate.  This helped produce the overheated residential and commercial markets that highlighted the last two years.  Much of the money was used to pay cash for properties which boxed out many would be residential home buyers. 

One of the terms of the recent “Inflation Reduction Act” included a 1% fee on any return of cash to the investors in the SPAC’s.  If the SPAC management has been unable to spend all of the original investment funds or if the investment is not producing the desired return, they could return the cash to the investors.  Of course, they could also hold the cash to look for an eventual investment but that would require them to pay the expected return to investors without having a way to make money. Again, the SPAC is limited to specific investments.  During the last month, to avoid the 1% fee that will be put in place on January 1, 2023, billions of dollars have been distributed to owners who had originally been expecting high returns.  It appears the SPAC market is not doing well.  The returns are not anywhere near expectations and with the current market, new investments are not lucrative enough to use the sidelined money.  Many are rushing to liquidate to avoid a penalty to the investors.  What this means for the real estate market is unclear right now.  However, this could push the market lower overall in the near term. 

The Richmond and Kansas Fed released their manufacturing numbers for October.  Neither paint a very strong picture.  Kansas fell from 2 to a negative 22 in the past month. The Kansas number was not an outcrop of the supply chain, which actually appears to be improving.  Key areas that are slowing down include computer, electronics, wood, primary metals and plastics.  New orders, back logs, exports and finished goods all showed negative trends which likely point to demand issues finally arising from the consumers point of view. The Richmond report indicated much the same with a drop from 0 in September to negative 10 in October.  New orders, shipments and employment all showed notable declines in the report. The fourth quarter may be off to a very slow start.

One reason for the first look at third quarter GDP being as strong as it was, related to the durable goods performance.  For September durable goods overall were up .4% compared with the August number of .25.  Digging deeper into the number does show the start of the consumer weakness in spending.  When you pull out defense spending, the durable goods number drops to a negative .7%.  If you pull out autos and transportation it was a negative .5%.  A major concern is that the consumer is finally holding back, inflation and falling liquidity may be finally affecting the outlook and spending habits of the buyers.  This may not bode well for the upcoming Christmas Season.

There is a growing concern in the Eastern United States over fuel oil and other distillates supplies being sufficient to actually meet demand this Winter.  While crude oil inventories rose this past week due to the draining of the Strategic Oil Reserve, all post refined product supplies contracted.  Demand is currently outstripping the production in the refinery sector.  While gasoline supplies declined the most in the recent report, the extended decline over the past two months in fuel oil, diesel, kerosene and other distillates have brought a real fear that consumers may not be able to even get the fuel they need to heat their homes at any price this coming winter.  With production falling, including another week of fewer oil rigs working, we are getting to a critical point where the supplies can not be replenished in time for cold weather.  This is a very serious issue which seems not to be getting much attention outside of the Eastern Seaboard.  Tapping the Strategic Oil Reserve is like spitting in the ocean, way too little and now, way too late.

Have a good first week of November



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