This Week’s Economic Update, January 10, 2022

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The Alabama/Georgia rematch for the NCAA Championship is tonight.  While there were some great bowl games this season, the playoffs were snores-ville.  I don’t have a dog in this fight, no pun intended. During the game we will have to see which way the momentum tide goes, ok, pun intended.  Best of luck to both teams.  For me, I am looking forward to Fall of 2022 when my teams can start over.  Go Gophers, Go Sooners.

The ISM manufacturing and Service reports arrived last week.  As expected manufacturing slowed in the amount of growth from November.  The growth in manufacturing went from 61.1 in November to 58.7 in December.  The slowing of growth appeared across the whole report.  New orders, production, deliveries and exports all reflecting slowing from the November levels.  Supply chain issues continue to be the culprit for most of the areas that are softening.  Labor and prices were the only areas that grew faster than November.  Manufacturing in general is still trying to catch up on the labor front.  If they can hire more employees, the level of overtime currently being required to meet production will abate. 

Certain industries continue to see supply shortages with no end in sight.  Automotive is the area most impacted.  Chip supply is not expected to come close to catching up until mid 2022 now.  Any industry using plastic is another that has been negatively impacted by supply shortages.  This is partially due to covid related impacts on production, staff shortages as well as impact by the oil market.  Due to the narrow margins in plastics, wage increases are tough to swallow.  Firms are seeing many employees moving to higher wage jobs or getting training so they can improve their income. 

After an all time high number of 69.1 for the Service PMI in November, December reflected quite a drop, all the way down to 62.  At this level, the growth is still strong, but it reflects the growing impact of supply shortages.  Throughout the report, complaints about the supply chain and the level of employee attrition were wide spread.  It is hard to tell right now whether the consumer continues to want to spend, but can not find the opportunity, or if they are pulling back a bit.  Until the supply chain catches up the numbers are vague in the cause.

The labor reports that came out last week were very hard to decipher.  The ADP Employment change measures only private employers.  The report found that private employers hired 807,000 workers in December, well above all expectations.  The hiring was broad based with hospitality adding 246,000 new jobs.  Professional and business services hired 130,000 and manufacturing added 74,000. Larger companies hired nearly 400,000 during December.  The numbers were smack in the middle of two important news stories.  The jobs were filled after the Delta Variant had abated, but before the Omnicron phase hit.  It was also prior to many firms indicating they will cut non-vaccinated employees in January. 

The Bureau of Labor Statistics report on Friday was, at best, a hot mess.  It contradicted itself in certain areas, low new job growth yet the unemployment number moved down noticeably, as well as differing numbers between the number of employees that companies reported versus households indicated.  Accuracy is also an issue with significant upward revisions in the October and November numbers previously released, leaves doubt about the reliability of the numbers shared.  One number that was consistent between all the reports was the high level of hiring in the leisure and hospitality area for December.  The sustainability of the hiring in light of the new variant impact indicates that January numbers are going to be ugly.  Between shut downs in resorts, reluctance to travel and companies cutting un-vaccinated staff, expect negative numbers later this month.

What is old might be new again.  Covid has many industries rethinking their long term business model.  We saw a bit of this over the past two years with working remote.  The banking industry is relying less on bankers in the office than remote, either at home or other flexible locations.  Fast food is still struggling both in terms of staffing as well as product delivery.  The auto industry is one area where the model used prior to 1975 appears to be in vogue, no pun intended.

Prior to the early 1970’s, dealers maintained one or two of each model for customers to check out.  If you wanted to buy, you sat down, selected the model, then added various options that were available.  The order was sent to the factory and you waited until your vehicle arrived, typically 2 weeks to a month later.  This changed when Ford, Chrysler, GM and AMC decided to ramp up production due to higher overhead costs, primarily due to larger labor contracts.  This allowed dealers to have stock on hand as well as streamline the actual offerings.  This also helped the consumer who could now dicker on a vehicle so the dealer could “get them off the lot”.  With the current shortage, consumers are now back to ordering a specific vehicle and waiting for it to arrive.  Many dealers have a pipeline of inventory coming and are selling them prior to receipt.  Negotiating is gone since the dealers have no carrying costs for vehicles on the lot.  From the supply chain indications, this could be a long term business model in the automotive industry.  Now, if I could just order that brand new 1966 Thunderbird with the 428 engine in it……..

I will be leading the Commercial Lending Academy for the Minnesota RMA Chapter. The program is held over a two week period, the weeks of February 7 and March 7 at the Mall of America in Bloomington MN. For more information and to register, please visit https://rma-mn.org/education/commercial-lending-academy/2022-commercial-lending-academy The Academy has been presented for many years and is the premier commercial banking program for RMA. There are a number of new additions to the curriculum this year including, environmental, regulatory, legal as well as cryptocurrency segments. It is the most complete commercial program offered by RMA. Registration is closing soon.

Have a great week.

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