Say good bye to a frigid January. Our only hope in breaking the bitter cold spells comes on Wednesday this week when the people of Punxsutawney, PA torture poor Phil by dragging him out of his den and pointing him skyward to see the sun. With that kind of approach, it is lucky Phil doesn’t stick us with 6 more months, not just 6 weeks of winter. Obviously, Phil is drugged, otherwise the emcee of the event would have lost his right arm years ago attempting to rouse the sleepy ground hog.
Tomorrow the ISM Manufacturing report will be released. Based on the manufacturing reports released so far for January, it is likely the ISM report will be slightly down. While the Empire State Manufacturing report fell off a cliff and the Richmond Fed report was cut in half, 16 to 8, others were flat. Kansas and Philly both showed steady growth. The December ISM came in at 62. For January we are likely to see a slight softening in growth. The reports I have seen indicate that new orders are declining and back logs are drying up. This should help in allowing the supply chain to catch up. The unknown here is will demand continue to soften or is this just consumers taking a breather. January and February have never been great months for demand as the Christmas hangover typically soaks up cash that could be used for purchases.
Later this week the service ISM will be released. Again, the feeling is that it will be down due to an impact from Covid. Significant lay offs in service industries occurred in January which would indicate this sector of the economy was pretty soft in the last month.
The oil rig count continues to be below what we would expect based on the price of oil. Gasoline supplies, crude oil supplies and gasoline production at the refinery have all increased over the last three weeks. Since December 1, 2021 oil prices have risen from $65 to $88 and are likely to continue to climb, possibly seeing $100 before long. One would expect that new oil rigs would be going on line rapidly to capture the profits. A small part of the hold back on new rigs relates to new environmental regulations that are being put in place. A larger impact is coming from the investor market. In the past the oil rig companies were tapped into a steady stream of investor money, supporting an ever-increasing level of rigs. That flow dried up in 2015 when prices began to abate. By 2020 many of these speculative ventures blew up resulting in massive investor losses. Until funding sources get comfortable with the risk, they are looking into other ventures to place their funds. For now, the rigs are pumping, but we continue to have less than half of the rigs we had at the peak in 2014 at well over 1,400. Today, 610.
While consumer liquidity remains above historical levels, consumer debt levels are on the rise after the decline seen over the past few years. Breaking down the consumer debt is helpful to understanding the risk level that currently exists. Housing debt rose by $230 Billion alone in the third quarter last year. This related more to the increase in real estate values. Individual mortgage amounts increased due to higher housing prices. An underlying current is the amount of non-conforming mortgages. These are mortgages that do not qualify under Fannie Mae and Freddie Mac standards. The risk of default in the non-conforming mortgage market is much higher than with conforming mortgages. This could point to a problem in the housing market in the next two years.
Non-housing debt rose $61 Billion during the third quarter. There was an increase of $28 Billion in auto loans, $14 Billion in student loans and $19 Billion in credit card debt. The credit card debt rise was mild in comparison to past growth numbers over the years. This is likely due to the liquidity consumers have to fund themselves. Keep an eye on this though. There will be a cross over point where liquidity drops and unsecured lending rises rapidly that will indicate problems in the economy. Student debt is muted right now due to covid and many taking jobs while recognizing that the high cost of education is not sustainable. The rise in auto debt is of course related to the inflation, primarily in used car prices. The worry is that overall, housing and auto prices, are creating a saturation in the debt levels of households that are not sustainable and will lead not only to lower economic activity but increasing debt defaults as inflation stresses the consumers cash flow.
Valentines Day is just two weeks away. You might want to get on the move to secure the candy, flowers and other goodies for that special someone.
Have a great week.