Welcome to Summer. I know, the calendar tells me that summer begins on June 21. However, Memorial Day is the true start of Summer for me. Schools start letting out, all the trees are fully leafed out, the heat as well as the humidity is on the rise and the SEEDED watermelons are now available. Yes, the next 90 days are the best time of the year.
It is hard, based on the current economic reports, to really get a feel for where the economy is. Looking at the whole of all the reports from the last three months, there are areas that look good, areas that look bad and areas that are showing no trend lines or are contradicting the other reports.
Housing first. Days on market are starting to move up. By historical standards, they are still very low. Compared to the past two years they are extending beyond a normal range. The level of listings has increased in the past month. Further, sellers are seeing fewer multiple offers which has led to less sales where the listing price was exceeded. Now there are some regional differences, but the trend is becoming clear, the housing market peaked in March/April and is now off the highest levels.
The job market continues to be hot. While the ADP new jobs numbers on Thursday were below expectations, they were still good. The government jobs report on Friday was well above expectations at 390,000. Now that number was well below the average month from October 2021 through February 2022 but is in line with March and April this year. The May number brings total employment in the US to within a whisker of the pre pandemic employment level. That says a lot about where the economy is right now. The highest job increases in the past two months are in hospitality. Manufacturing gained only 18,000. A big loser in jobs is in retail trade which cut 61,000 workers.
Manufacturing is more resilient than expected. The ISM number in May jumped from 55.4 in April to 56.1. This was despite a number of the Federal Reserve manufacturing reports being soft over the past month. When you dig into the report numbers, virtually every area was strong. Production was up, new orders continue to be strong, back logs continue to extend and employment was static. That should mean productivity is going up. While not absolute, specific areas in the supply chain are catching up. Businesses are continuing to spend on new equipment, however, it is not consistent in nature. Some are, some are holding off.
Inventory levels are building in some areas. In particular, retail, low end is awash in goods. Overall consumer spending is a mixed bag. The low-end consumer is scaling back big time. The price of goods and energy are hurting the marginal among us. To be clear on this. Along the margin are those that are either employed with limited earnings, and/or who have overspent when they purchased higher ticket items such as a house or vehicle. As other prices push up, those on this margin quickly fall beneath break even personally and start to cut back or fail to continue to make payments that are owed.
We are seeing the impact of the higher prices across the board through the US Savings rate, bank depository levels as well as credit card levels. The US savings rate rapidly dipped earlier this year. Bank deposits peaked on April 13, 2022 and have been falling weekly, the longest period of decline since the pandemic hit. The last month showed that personal credit card borrowing has increased since March at a higher rate than the prior 6 months. All of this shows that those on the margin are struggling.
The economy is continuing to do well primarily on the shoulders of the higher income earners spending money. Vehicle purchases are still strong. Durable goods continue to be positive. How long this will continue is a question and one we should watch closely.
There is no end to the high gas prices. We have a structural deficiency in the energy market that will not correct itself easily or quickly. The crash in 2020 wiped out the investors who had supported the drilling operations for the prior 10 years. There is a huge disincentive to invest in the oil market due to increased regulations and influences of the ESG movement that is deterring new investment. There is also a cap on how much oil we can process, which appears we have already met. Over the last generation our refining capacity has been curtailed both by regulations as well as the “not in my backyard” movement. No one wants a smelly refinery in their town. Instead, for the past 20 years or so we became reliant on shipping our oil offshore to be refined and returned. That refinery backlog is impacting the supplies of gas, diesel, home heating oil and other refined products. With crude supplies edging up, there is no reason to drill new wells to increase production. The only solution is a massive change in government policy to assist in funding and supporting new refiners, lessen regulations on drilling, moving on pipelines, as well as opening up more land for drilling. This is not something anyone is talking about.
Based on the labor and manufacturing reports, it is expected that the Fed will raise rates by 1.5% by the end of September. This will send a shudder through the economy. The goal, as I see it, they want to slow the economy without causing a large number of layoffs. The goal is to reduce that level of unfilled job openings without causing companies to lay people off. Good luck with that. It is unlikely that the assumptions to achieve that goal are valid. One assumption would be that the interest rates would be targeted to select industries and would isolate those industries at or near full employment. That has never happened before and not likely to in the future. Have a great week.
