This Week’s Economic Update, March 25, 2024

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March is headed out like a lion here in Minnesota.  It appears like the old Farmers Almanac saying about March coming in like a lamb and going out like a lion is working out, at least for 2024.  Our warm, dry and mild winter has allowed some farmers to get into the fields rather early.  Another old adage is that potatoes need to be in by Good Friday.  In Central Minnesota, the potatoes appear to be mostly planted, well before Good Friday this year.  For those of us who love French Fries, this is a very good sign.

The United States is seeing an unexpected rise in electrical power demand.  In part this may be due to a societal change as well as enhanced regulations that are moving consumers of power away from natural gas sources.  This includes heating houses, cooking sources, as well as a growing demand for power to recharge electric vehicles.  The second item that is growing rapidly in the area of electric demand is the rise of data centers.  These data centers gather massive amounts of information and use incredible amounts of energy.  The centers are mostly spread out, even Elk River Minnesota has two of them.  However, the east coast, particularly Virginia, has a major concentration of the facilities that use massive amounts of electricity to run. The level of demand is currently exceeding all forecasts that have been produced by both government and private sources.  The expected level of demand, which is lower than actual use, has been driving the budget number of investments on our power grid.

This is occurring at the same time that a major shift away from fossil fuel electric generation is occurring.  With demand estimates that are much lower than reality, it was thought that solar farms and wind farms could provide sufficient amounts of electric power.  However, that assumption is now at risk.  At some point in the near future, the demand curve will cross over the electrical supply curve which will cause the grid to become unreliable.  We are seeing the first steps in providers trying to lay out incentives as well as penalties for consumers to lower usage of electricity to avoid brown outs or black outs.  This is including peak usage costing models, charging more per kilowatt hour at various times of the day. Typically, the highest electrical use comes in the summer.  We may see issues arise in certain localities this August.

The housing market received a boost in February.  The supply of existing homes to hit the market rose as sellers are starting to list their houses.  In spite of higher interest rates, buyers snapped up the new supply, of course, this all increased the sales prices. The 9.5% increase in sales of existing homes was unexpected. Overall, sales increased in the west by 19.4% over January and 16.4% in the South.  Sales in the Midwest and Northeast lagged.  Prices have increased by 5.7% over the last year.  The numbers seem to indicate a move out of California, with people moving to cheaper states, Florida and Georgia which saw some strong demand. 

A major concern in the housing numbers was the level of all cash offers which hit 33%.  Those leaving California, selling at high prices and moving to lower cost states are part of this.  However, there is still a large amount of investment activity with venture groups buying properties to be rented out.  The level of sales to investors pushes out owner occupied buyers, which is a growing concern to achieving the American Dream of home ownership.

New housing starts in February exceeded 1.5 million.  That reflected a 10.7% increase over January and well above the market expectations. While this was likely boosted by a small drop in mortgage rates in January, is could reflect the outlook by buyers that rates will be high for awhile and they need to make a move before prices rise further.

Oil and gasoline demand continues to grow.  Supplies are declining in spite of strong production numbers. Sadly, between the strength of our usage and continued concerns about transport through the Suez Canal zone, we can expect energy prices to continue to increase.

Have a wonderful Easter

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