If you are a father, I trust you had a great weekend. Hopefully all of you were able to spend some time with Dad if they are still with us. If not or if they are far away, you were able to remember good times that were spent with them as they built a legacy for you.
While the stimulus programs approved during the Covid pandemic provided a lifeline to keep many firms solvent when the Government decided to shut down the economy, the amount of fraud that is being uncovered now is jaw dropping. Overall, there was $5.7 Trillion in funding approved. From last count about $5 Trillion was actually handed out. Of that, we are hearing that just over $800 Billion that was disbursed was done so under fraudulent requests. At this time that amounts to a 15% fraud level. That is what we know of right now, when the numbers all settle in the estimates are indicating we will exceed $1 Trillion in fraud with the programs.
The Biden Administration is starting to take the fraud seriously. They are doubling the number of agents and investigators that are now researching and going after those who took advantage of not only the direct business programs but also the unemployment programs. These were people who did not legally qualify for funds and knew it. They created synthetic companies and worked with shady lenders to get funds they were not qualified to get. The statute of limitations on this type of fraud has been doubled from 5 years to 10, giving the government more time to go after the criminals.
Overwhelmingly the fraud was not committed though community or regional banks. Legitimate banks worked diligently to follow the regulations including Beneficial Ownership assessments, as well as knowing the customers that they worked with professionally, properly building relationships with them. The fraud was supported through shady operations that were in the Fin-Tech bucket. Many of the worst offenders worked remotely with these financial institutions to get money with little to no oversight. In instances that I have seen, the institutions actually helped the borrowers file fictitious corporation documents, guiding the criminals through the process. Now that the Department of Justice is getting serious about enforcement, we can hope the shady lenders and thieves will be sharing prison cells together.
The month over month inflation rate was a puny .1%. While year over year was stated at 4%, that number is well overstated. Since July of last year, the last 11 months, the year over year inflation rate based on month over month numbers is down to 2.9%. June of last year was the month that we had an inflation rate that spiked high. We appear to have grabbed the low hanging fruit regarding inflation. I anticipate that going forward we will be experiencing inflation around 3%. Trying to get it below this level will be much more costly and painful.
The consumer continues to spend at a pretty good rate. In May retail sales increased .3%. Building materials as well as garden equipment led the way. Also seeing a nice boost were customers eating out and traveling. On the flip side, personal care and clothing purchases were flat. If you pull out autos, gas, building materials and food services, it was still up .2%. In relation to what I wrote last week on the level of credit card balances, it appears the consumer has a slightly positive outlook for the future.
Manufacturing numbers for June are coming in mixed. New York showed a nice improvement, growing 6.6% after a rather horrendous run in the past year. New York has only been positive in 3 of the last 12 months. The increase is considered fragile, representative of some inventory replenishment. It may not be sustainable. The Philly Fed continued to fall posting 10 straight negative months and 11 in the last 12 reflective of a decline. The only segment in the Philly Fed showing a small improvement was in shipments, again reflective of inventory replenishment. Nothing in the report indicates any improvement is on the horizon.
The manufacturing sector overall is not showing much in the way of health. Capacity utilization has fallen to 79.6%. For businesses to expand and purchase new equipment we need to be above 81% for a sustained period. While manufacturing continues to hoard workers in the hope of seeing an increase in orders, the question becomes, how long until this segment of the economy starts to add to the initial jobless claim’s numbers.
Have a great week.