This Week’s Economic Update, March 4, 2024

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In like a lamb, out like a lion?  Here in Minnesota March came in like a baby lamb.  This winter has been warm and dry and raising concerns about the sub soil moisture as well as the grass fire danger.  In California March came in like a pride of lions, extending a winter of discontent over the moisture that has devastated many areas of our friends in the West.  We sure could use the rain and snow California is getting and I am sure they would appreciate the dry weather we have.

The February Manufacturing numbers were again strongly influenced by one company, Boeing.  The durable goods orders released on Tuesday fell 6.1%.  This followed a January drop of .3%.  In both cases the results were related to the door issue that affected the Boeing airplane operated by Alaska Airlines.  When the Boeing impact is removed, durable goods orders fell by only .3%.  In a sign that the consumer is still spending, when you take out defense and Boeing, the numbers turned to a positive .1%.  The key question is how long will the consumer continue to spend on durable goods?

The manufacturing industry in the US is not well.  We have been contracting since October of 2022.  The ISM Manufacturing number was forecast to be at or just above break even.  Instead, the index fell from 49.1 to 47.8. The leading indicators in the report reflect a pessimism about the future.  New orders contracted, falling from 52.5 in January to 49.2 in February.  Core material prices have begun rising.  Inflation in raw materials took off in late December and have continued to rise at heightened levels the last two months.  As the prices are passed on, we can see the headwinds that will keep manufacturing in a subdued state.

As indicated in the last couple of updates, we appear to be in a wage increase price cycle.  Personal income in January rose 1% month over month.  Now to be fair, some of this is seasonal, many bonus and merit based raises are given in January.  These raises are being passed along in the products we buy which led the PCE Price index in January to increase .3%, that would equal an annual inflation rate of 3.6%.  We will need a few more months of information to make a trend, however, since December, prices are again on the rise after a tame period in 2023.

While the market would like to see a rate cut by the Federal Reserve early this year, the odds are beginning to look a bit long for that to happen.  On Friday the Richmond Fed President, Tom Barkin indicated that the Fed is in no hurry to cut rates.  The economy appears to be growing, posting a 3.2% increase in the fourth quarter last year.  That growth is likely in the wheelhouse of being acceptable, supporting at least a static rate environment.  But President Barkin made another comment which seems to have been overlooked in his interview.  He stated that the Fed is more concerned about the inflation numbers, giving them more importance than the economic growth indicators.  If that is the case, the bias should be toward a rate increase, not decrease.  The inflation rate is well above the stated 2% level that is desired by the Fed.

The other issue that is producing support for higher rates is the continued fiscal spending of the US government at ALL levels.  The federal government is borrowing about $1 Trillion every 100 days.  The recent Treasury Auctions have shown increases in rates at all levels of a year or less.  The rate curve from the 4 week offering through the 1 year are inverted, however, the inversion is narrowing with the longer term segments rising the fastest, catching up with the shorter term rates.  This likely indicates two issues that are concerning and lead to a conclusion that the Fed will be more likely to raise rates in 2024 and not decrease them.  The first being the market is concerned about the level of debt the US is attempting to finance, which requires a higher rate of return to the investors.  The second is a reflection of a desired return that beats an increasing inflation outlook.  While the equity markets might want a rate decrease, the Fed and the economic numbers all point the other direction.  Time will tell.

Have a great week.

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