As with Mothers Day, Fathers Day just kind of sneaks up on us. With all the busyness of Summer, let’s not forget to consider the legacy our fathers have built into our lives. I am blessed to have both my father and my father-in-law in my life. Both have poured a great deal into me which I appreciate immensely. As a father myself, yes, another Jerry Garcia tie is handy and of course new socks are appreciated, the best gift is to just sit and talk to my kids. If Dad is still around, take the time to visit with him, sharing old stories, memories, catching up on current events in their life as well as just putting up with their dad jokes. Believe me, it will be as much of a present for him as for you.
Inflation, the gift that keeps giving. The May numbers were not unexpected, yet they seem to have caught the market by surprise. We are not yet at peak inflation, and even if we are, the pain is not going to subside anytime soon. It is not the annual rate that is important, it is the month over month. Even if the monthly level abates, prices are still rising on top of already excessive increases.
The best approach to understanding the full impact of inflation is to break down the numbers into individual parts. The overall CPI rose 1% in May. Rental rates increased .6%. Currently, the average rental is nearing $2,000 per month. Moving from percentage to dollars that equates to a $120 per month increase. That was the tame part of the report. Energy prices rose 4.1% in one month. Depending on the distance you drive daily, you are feeling that sting constantly. Food prices increased 1.2% in May and continue to march ever higher. While prices move higher constantly, most wages are fixed for a year. That is leaving many on the margin sinking below the surface. Last week I talked about the decline in bank deposits, that was an early warning sign of the issues many are feeling.
Another early warning sign of trouble in our economy is the utilization of food shelves. Over the past two months I am hearing and seeing evidence that more families are signing up for assistance.
As we approach the end of the second quarter, the big question remains if the second quarter GDP will follow the first quarter into negative territory. As with last weeks report, it is really hard to tell. In April the increase in consumer credit fell. That is an older number that was just released, May and June numbers will be coming next month. Based on the increase in inflation, the thought is consumer credit will increase. Another older report released this week was the import and export numbers. Based on the strength of the dollar, you would expect exports to be down and imports up. Defying common logic, the exact opposite occurred in April. That would point to a better start to the second quarter. The key will be to see if that continued into May and June, if so, we might have avoided a recession by the skin of our teeth.
New jobless claims this past week rose by 27,000. They are still in line with a healthy employment market. The increase came after three consecutive weeks of declining layoffs. As I shared a couple of weeks ago, some companies are starting to re-size their staffing levels based on what appears to be a plateau in demand. One week does not a trend make, so we will have to keep an eye on this.
One area of housing that is attracting attention is the new starts number. With the current price of new housing, many home buyers are now holding back, not wanting to catch a falling knife like their parents did in the housing crisis of 2005 -2010 when values plummeted. Yet, new starts are not falling as fast as the sales level. The reason was revealed this week. Many national builders have jumped into the rental business. They are now building whole sub-divisions with excess cash that they have and are renting the houses out. The question will linger for years to come as to whether this will eventually create a massive supply problem when or if, both the builders and the venture capital companies that are currently renting homes decide to sell. Another question will be how much rents might fall if the builders create an oversupply of rental housing.
Much of the fog of what is going on in the economy may be cleared with the many reports coming out next week. Beyond a couple of Fed Manufacturing reports for June, we have the retail reports for May, business inventory reports for June, as well as the Producer Price Index for May being released. This week the Fed will also increase interest rates. The market appears to have built in a .5% increase, however, some are now talking about a ¾ point increase.
Right now, in my opinion, we are entering into a long period of stagflation similar to the period of the 1970’s and 80’s. Inflation is not going to abate. The supply chain is not fully correcting and spending is just now starting to dry up.
Have a great week.