The NCAA Men’s Football National Championship is tonight. While it will cap off admittedly an unusual season, it is a nice kick off to 2021. While the Big 10 nearly punted on the whole season, it is nice to see Ohio State in the trenches with Alabama. Alabama is of course the perennial front runner, but they have had their issues this year. No one would have criticized Nick Sabin, the Alabama head coach for taking a pass this year, particularly after he tested positive to Covid twice. Alabama is a clear favorite with their on the field goal of securing a fifth national championship in 10 years. Sorry about the puns, if they offended you in any way you can always ask for your quarter back. UGGH
Last week I suggested a strong but flat growth in US Manufacturing during December. The number this week blew my prediction out of the water. December posted a 60.7% which is 3.2% better than November at 57.5%. This level of growth in the manufacturing sector indicates an overall economic growth over 5% for GDP. Embedded in the report shows positive signs in new orders, up 2.8% to 67.9%, Production, up a big 4% to 64.8%, employment up 3.1% to 51.5% and the last indicator, back log of orders up 2.2% to 59.1%. These are even better numbers when you consider that both exports and imports are growing at a slower pace than the prior months. This indicates that the domestic market is pulling the manufacturing sector up which is a great thing.
There are signs that the expansion can continue as long as supply chain issues do not upset things. There are growing shortages in the supply chain including corrugated boxes which are a key early indicator. Aluminum, electrical components, as well as steel are in short supply right now. This matches an even larger list of commodities that are rising in price. This is the first month I have seen every commodity that the ISM covers being up in price. No commodities are down in price. We can expect a growing level of inflation coming through the market in 2021.
The respondents within the report provided some insight into what is going on. Computer and related products are getting slammed due to more people working at home needing upgraded equipment. A number of comments related to orders now being above pre-covid levels. One of the areas that is growing beyond early 2020 levels is machinery. The impetus for the growth appears to be related to the inability to hire staff. Whether this is due to training, continued unemployment benefits creating a disincentive and/or health concerns by workers is unknown right now.
The US Non Manufacturing report for December also showed a nice uptick moving from 55.9 to 57.2%. While demand has slackened in states that had gone back into a lockdown mode, business overall is quite good. Labor continues to be a drag on business, finding workers who are willing to work and have the skills is a concern. Embedded in the report are some indications for the future. New orders are growing faster than prior months, but the back log is shrinking. This indicates that business is able to keep up with the existing level of demand. Supplier deliveries are slowing slightly. This might be capacity issues, labor issues or related to holiday and covid shutdowns. Unlike the manufacturing report, export orders are growing faster, likely the impact of the weak dollar. Imports are slowing in their growth, again likely the impact of the dollar.
The non-farms jobs report showed a decline overall of 140,000 jobs in December. When going beyond the initial number, deeper into the report, the major culprit is Covid. The primary losses, and they were huge, were in leisure, hospitality and private education. Gains were found in professional and business services along with construction and manufacturing. The magnitude of the losses in the hotel and food services areas swamped the gains in other areas. With Covid shut downs and limited travel during Christmas, many hotels pretty much closed up. Same with food service, with the inability to eat inside or in groups. In normal times many office parties at restaurants would have been planned this year none of that occurred taking a big bite out of revenues for food service and caterers.
Wages increased in December by .8%. This was due in part to a couple of numbers buried in the report. The job losses came in the lower wage scale levels, part time workers and non-professional. The job gains came in the professional, higher paid positions as well as increased manufacturing overtime hours. We continue to see a divergence of economic benefit flowing to those with skills in the workforce and away from those who are unskilled or are not investing in themselves. January numbers will be interesting with many local governments mandating a higher minimum wage that began on January 1. If history is any indicator we are likely to see future cuts to low income positions and limited impact on overall wage growth.
This all leads into the anticipation of higher inflation coming in 2021. With the pent up demand from Covid restrictions, shortages in commodities beginning to grow, the anticipation of strong economic growth starting in the second quarter, as well as quite a bit of liquidity sloshing around, inflation could easily hit above 3% this year. The Fed’s target is 2% but they have indicated they would not be concerned about higher inflation rates. The 10 year US Note bumped to over 1% for the first time in 18 months. It will be interesting to see if the Fed continues to stimulate the economy by keeping interest rates low thereby keeping the dollar weak to further boost the economy. We will see.
From January 26 through 29 I will be presenting the ICBA Credit Analyst Institute. For anyone interested in the training please visit the ICBA Credit Analyst Institute Winter 2021 Virtual Presentation page for more information or to register. Hope to see you there.
Have a great week.