This Weeks Economic Update, January 25, 2021

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One of my earliest financial decisions was how many packs of baseball cards to buy with my allowance. When the price per pack doubled from a nickel to a dime that decision took on more importance. Over time I built an impressive baseball card collection, which fortunately my mom did not throw out. This past year has brought back memories of opening the packs long ago to see which of my favorite players had been added to my collection. These memories have been prompted sadly by the passing of many of the players I have cards of. It seems about once a week a player passes and I tell my wife, “Hey, I have a baseball card of him.” Whitey Ford, Lou Brock, Bob Gibson, Al Kaline, Don Larson, Gaylord Perry, Tom Seaver to name a few. This past week Hank Aaron passed away. A true hero and role model that never cheated, just went out and gave his best every day. While his homers were legendary, his fielding was equally as impressive. To me, Hammer’n Hank will always be the Home Run King. And yes, I have baseball cards of him.

Manufacturing continues to be a bright spot in the economy. The Philadelphia Fed Manufacturing index for January soared from 9.1 in December to 26.5 to start the year. Comments within the report show that underlying demand for products is strong, 64% of the respondents are seeing growth and expect to see growth through the first quarter. The catch, 51% indicated that they will not be able to meet the demand pressure without hiring. They also shared, the search for employees is difficult to impossible as they are not finding trained workers at any price that they could put on the lines. This may be compounded by President Biden’s executive order signed Thursday allowing workers to maintain unemployment benefits by claiming worry about contracting covid and declining a job offer based on that concern.

Housing starts were strong in December. They are maintaining the momentum in January. Many home buyers are fed up with being outbid on existing housing listings. It is not uncommon to have four or five, if not more bidding on a house that goes on the market. Buyers wanting to get into a house before the interest rates start to climb are engaging builders who are also having a hard time keeping up. Between the lack of land, higher material prices and trouble finding labor to construct the houses, builders are in a pinch. Once interest rates start to rise the affordability factor will begin to add to the woes for both buyers and the builders.

The market for multifamily units, condos, townhomes and villas are softening. Numbers show new buyers want single family units, not attached housing or apartments. During 2020 the new housing construction numbers were boosted by multifamily construction. That will turn around in 2021. We could expect to see the housing start numbers drop because multi family is cooling off due to being in an oversupply condition. The single family units will continue to be strong, if builders can find land, materials and labor.

Last week I shared a bit about inflation, I want to go deeper this week. Over the past 12 years the money supply in the US has been pumped up through various means in an attempt to boost the economy, getting people to spend money. In normal times, pre 1980 this would have sparked a massive level of inflation. The economic growth of a country is the result of the level of the money supply times the velocity of the money. Not to get too deep in the weeds, the velocity is measured by how many times a dollar in the economy turns over, or is spent. As an example, a firm borrows money to buy equipment which funds jobs. The equipment seller buys more materials as well as pays employees. The money is then re-spent by the employees for goods and so on. This works great until the dollars are used for purposes not seen as economically productive. If the funds are saved or invested and there is limited demand for their use in the economy. If the funds are used to repay debt and the banks have no new loan demand. If the funds are invested in 401K or the stock market and not further used. All of this reduces velocity. The Velocity of the money supply in the US has fallen off a cliff in the past 10 years as people have repaid debt, cut back on spending, invested for retirement and other reasons.

During the past ten years banks have been boosting their reserve position at the requirement of the government, making sure they pass new stress tests. That has locked up billions of dollars. Until the conditions change to promote actual spending on goods, our economic growth and inflation will be subdued.

There appears to be a change in the weather coming. If the Biden Administration forgives student loan debt it would redirect spending of those under the current debt loads to spend on other things. If businesses need to expand, investing in new equipment. If consumers reach a point where credit card debt is not a hindrance. If Millennials begin to buy houses, furnish them, have babies at an increased level, the velocity will increase and will boost both the economy as well as inflation. Add to that possible supply shocks that are already starting to show up with limited supplies in areas, we could actually see a return to normal inflation rates, 8% or so per year. We could also see a stagflation period similar to the 70’s if the supply of labor and goods restricts the ability of business to grow and produce. Something to definitely watch for in the next two years.

Have a Great Week

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