This Week’s Economic Update, June 14, 2021

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The movie theater has been a staple for my wife and I throughout our dating and marriage, we will celebrate our 35th wedding anniversary next week.  The pandemic took us away from our “dates” to get out of the house and see a movie on the big screen.  While streaming services provide the content, there is nothing that can replace sitting in a theater, munching on popcorn, having a pepsi, next to the one you love. 

With the recent reopening, one of our first outings was to return to the local Marcus Theater to watch Dream Horse.  It is a wonderful family movie.  It has all the requirements of a great movie, humor, tears, horses and a great story line.  It was overlooked by the critics and not advertised very well.  It was so good we actually went to see it twice.  So, if you need a good date movie, there is my recommendation.

An indication of how much consumers are on a tear was shown in the consumer credit change for April.  After a decrease in overall consumer debt in January, consumers took on three consecutive months of incurring over $18 billion of new debt. The last time there were three months at this level or higher was back in early 2017.  The report showed that revolving debt, primarily credit card debt, continued to decline.  In April, the drop in that short term debt was 1.96 billion.  Non-revolving debt, this would be mortgage and vehicle debt, increased by over $20 billion. This is not unexpected as the housing market continues to be frothy, piling up new debt for borrowers. 

The increase in consumer debt is not the only area where debt is rising.  US Corporations using both bank and bond debt has increased to a historical high of over $10.5 trillion.  The continued low interest rates both on bank financing and bond financing, is pushing companies to take on larger amounts of debt.  The issue here is what is the debt used for?  Debt used for productive purposes, expansion, new equipment, creating new efficiencies, all help to create profits and value.  Unproductive debt such as using the cash for dividends, poorly thought out acquisitions, buying back stock or to cover losses, in the end, drive down the economy. 

The repayment of the outstanding debt, both consumer and commercial, will drain the economy of cash, particularly if loan demand falls below the level of repayment.  That might be the strongest argument right now for the current inflation level to be considered transitory.  A falling money supply and/or a decreasing velocity of the money supply will in the end, offset any worries about inflation for the long term.  The velocity of the money supply is defined as how many times will a dollar be spent before it exits the supply?  A brief example would be if I earn a dollar and spend it to buy a good, that is one spending cycle.  Now the vender I bought from takes that dollar, pays back say 50 cents of debt and reuses that other 50 cents to purchase inventory and pay expenses.  Now we are at 1.5 times.  As each transaction occurs, a portion of that dollar declines as it drops out of the supply.  The higher the debt level, the faster the supply dissipates and the velocity slows. We will need to keep an eye on the money supply, among other things, but for now the market and the key indicators continue to point to inflation in the 3 to 5% range through 2022. 

Energy prices have moved up dramatically in the past two months.  Part of the issue was the Colonial pipeline ransomware attack that curtailed inventory to the eastern seaboard.  Another aspect has been the reopening, which is putting more people on the road to go back to the office.  The reopening is pushing up demand for gas which added to the increase in prices lately. 

Gasoline inventory spiked up by 7.046 million barrels for the week ending June 4. The last weekly jump of this magnitude was during the early pandemic when demand fell off a cliff. Crude Oil supplies dropped slightly.  However, if an agreement to reduce the sanctions on Iran goes through, supplies worldwide should soar.  By late summer, if all goes right, energy prices are expected to decline.

Have a great week.



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