This Week’s Economic Update, June 7, 2021

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My first memory of eating fast food was in the back seat of our 1960 Ford Falcon.  McDonalds had just opened a site in Bloomington MN and we were all excited to try something new.  Eating out, even fast food, was special for us.  It was not long before Burger King, Henry’s and other “burger Joints” moved into the area.  When Arby’s showed up along Lake Street in South Minneapolis it was a mind blowing experience.  No burgers, real roast beef, sliced and mated with Arby’s sauce was an incredible taste sensation.  To cap it all off, no fries, but Potato Cakes.  Potato Cakes were formed hash browns.  We were served something akin to this as part of the school lunch program.  Those were typically underdone, cold, mushy and lacked any real flavor.  Potato Cakes, coated in grease, laden with salt and crispy fried were out of this world. 

Sadly, I have confirmed that Arby’s is pulling the legendary Potato Cakes from the menu.  They recently offered Crinkle Fries to clients.  Between the Potato Cakes, Curly Fries and now Crinkle Fries, the potato heavy menu had to be peeled back.  Of course, like the McDonalds with the McRib and other “Seasonal Offerings”, Arby’s is telling us they may return for limited engagements.  Sadly, I went to Arby’s for the Potato Cakes as well as the beef sandwiches.  If I want Crinkle Fries I will go to Culver’s.  I guess I will have to say, Thanks Arby’s for the wonderful memories, when the Potato Cakes are Back, I will be back.  It was something that made Arby’s special.

The ISM Manufacturing Report was released on June 1.  Manufacturing continues to perform strongly.  The index increased from the April level of 60.7 to 61.2.  Embedded in the report shows continued strength is expected.  New orders reached 67, an increase of 2.7.  This is as highest number I have seen in over 10 years. Backlog orders rose to 70.6 which is a combination of supply shortages and strong demand.  Another level not seen in over 10 years.  Production rose but at a slower level than April.  This was due to supply issues as well as the inability of firms to find workers. 

Comments in the report by manufacturing firms show a growing concern over meeting increasing levels of demand under the current supply constraints.  Some firms are experiencing periodic shut downs due to worker absenteeism or just plain shortages of workers to hire to fill positions.  Between the supply chain issues and lack of labor for production, inventory levels are rising at the factories.  We have seen this in the automotive industry, without chips, vehicles cannot be finished and sent to the dealers so they pile up. 

The ISM Service Sector report closely mimicked the manufacturing report.  Services PMI rose to 64 posting a 1.3 increase over April. Each subsection of the report was equally as strong.  Comments within the report included information that all 18 industries reflected growth.  Business owners are extremely positive in their statements about the future.  Stimulus money, loosening restrictions from COVID, as well as pent up demand are all noted as reasons for the bright outlook.  The only detraction is supply chain issues that continue to limit the ability to fully meet consumer demand.

Overall two strong reports which will get better once the supply chain and labor issues are worked out.

Companies are calling employees back to the office.  Concern over worker productivity out of the office, collaborative efforts, mentoring, as well as zoom fatigue are all at play.  At the same time, firms are rethinking the whole business office model.  They are recognizing that core city locations are not very efficient in terms of employees who struggle to get to the office from far flung suburbs.  Safety on mass transit as well as on the streets of the core cities is making workers uneasy about returning to the office.  In response, more companies are considering decentralizing their operations to varied locations outside the core.  New York City is a poster child for the changes that are occurring.  Office vacancy has hit a 30 year high at nearly 17%.  A further indication that the issue is not going away is the level of office space available for lease which is now hovering at 20%.  This indicates more firms are leaving as the leases mature. 

Portland Oregon is likely the most impacted.  Beyond the pandemic, constant riots are driving out firms.  A recent report by Kidder indicated that vacancy is over 15% and not likely to peak until late this year as more leases are expiring.  Minneapolis currently is struggling with a 19.9% vacancy rate in the office sector.  Most leasing companies believe Minneapolis has peaked and the number will moderate. 

The leasing market will be impacted by the desires of the workers, not just the decisions of the firms.  Many workers, getting a taste of remote work, are not all that excited about going back to a format that required long commutes, micro managing, as well as close quarter contact with workers.  Many have found they work more efficiently and are happier away from an office setting.  Others are fine with a staggered or flexible schedule, in the office somedays, away on other days.  A recent job satisfaction survey showed most workers liked remote working and if required to return, would seek a new position with a firm that allowed flexibility.  In the current labor market, with jobs going unfilled in many industries, companies with the ability to offer options on work locations, time requirements and technology may find they have a strong recruiting tool.

Have a great week.

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