This Week’s Economic Update, May 16, 2022

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The baseball season is just over 30 days old. Based on my old adage that teams that fall 10 games under 500 or 10 games behind in the standings, are pretty much out of post season contention, the Royals, Tigers, Orioles and the Red Sox in the American League are already toast.  In the National League, fans of the Nationals and the Reds can find other entertainment this year.  Cub’s fans are quickly approaching the cut off point.  For the first time in a while one division has all the teams above 500.  The National League West is highly competitive with five very talented teams.  On the flip side, the American League Central and National League East are competing for the Stinker Division award.  At this point, these two divisions have little to no chance in placing a wild card team in the playoffs later this year.

We are not yet past peak inflation.  The numbers this past week for April showed a plateauing of inflation from the March levels.  The only reason they were off the March high was a very slight abatement of the energy prices.  The energy prices were impacted by the release of the strategic reserve in April which have been reversed in May.  The Producer Price Index for April was .5%.  This was lower than the March level of 1.6%.  When you include food, energy and trade services, the increase was .6%.   As energy and food prices have jumped already in May, we are likely to see continued high levels of inflation.  Key areas of inflation in April were motor vehicles, diesel fuel, chicken eggs, jet fuel and natural gas.  The increase in diesel fuel and jet fuel was dramatic and will add to the cost of delivery of products.  Freight expenses for the month were up 4.4% which will be passed on to the consumer goods. 

While some politicians are pointing to price gouging by companies as the culprit for much of the inflation, the facts so far are not supporting them.  The key indicator to prove out the price gouging is corporation’s gross profit margin, not the final net income number.  The gross profit margin represents the relationship between the price charged for a product and the cost of the product to the corporation.  With the release of the first quarter financial reports, the gross profit margins are either slipping slightly or holding steady.  In other words, corporate America is just passing on the price increases they are experiencing.  Until we see more data on the gross profit margin, it is inaccurate to blame the inflation level on price gouging.

The definition of a recession is two consecutive quarters of GDP decline.  The first quarter of 2022 posted a decline in GDP.  As I shared two weeks ago, this was due primarily to a massive cut in defense and government spending.  The decline was partially the result of many temporary programs related to the pandemic ending.  We will not see that kind of decline continue.  The consumer continued to spend in the first quarter.  We are seeing some softening in the consumer sector.  This started in March and continued in April.  Food services and other discretionary spending, such as on vehicles, are showing signs of weakness.  Certain sectors of hospitality have continued to be strong, however, with the passing of the Spring Break season, travel might be ebbing.  Many travelers are balking at a massive increase in air travel.  The high gas prices are also keeping consumers from committing to vacation travel for the summer.  We will have to see what happens once June hits.  If the consumer scales back on discretionary spending, this could be the second quarter of decreased GDP.  That would mean we are already in a recession.

If we are in or at least approaching a recession, it will be a very different one than in the past.  Thinking back to the 70’s and earlier, every recession produced the fear of job losses.  The anticipated lay offs got consumers scared to a point where they stopped spending and gathered cautionary cash levels to get them through the anticipated tough times.  This year is very different.  Jobs are plentiful, the fear of losing one’s job is very slight.  The angst among the population is the lack of items to purchase as well as the price.  At the same time, earnings are not keeping up with inflation so buying power is plummeting.  The concern most have is the availability of buying needed items as well as affording them.  Personal budgets are a mess with decisions centered more on prioritizing spending and not worried about a job loss. 

There is some key information coming out this week that will give some insight into the second quarter.  The Fed Manufacturing reports for Richmond and Kansas will let us know how May is doing.  The Empire State Manufacturing Report released on May 16 was horrendous, recording a negative 11.6, down from a positive 24 last month. On Wednesday, the Durable Goods numbers for April will be released.  A weak number on any of these will indicate we are already in a recession.  A strong number would mean we dodged a bullet.

Have a great week.



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