Next Monday will be Memorial Day. Please join me in attending a service at a local cemetery to honor those who have made the ultimate sacrifice so we can enjoy the freedoms we have. In recognition of Memorial Day, I will be pausing my economic update, my next installment will be on June 6, 2022. Enjoy the upcoming holiday.
Incredible as it seems we are now past the halfway mark of the second quarter. In watching the first reports from April and early May, along with discussions with a number of business owners, I am truly seeing a mixed bank of information. It is still too close to call if we are actually in a recession. It appears that the second quarter is off to a tepid start that borders on producing the second GDP drop. Right now, in what I am seeing, we are just barely above break even.
Let’s start with the last of the April reports. Retail sales from April came in lower than March, but still reflecting growth. Overall growth in retail sales in April was .9% over March. When you pull out autos, the number grew at .6%. This means consumers were still investing in higher end purchases, if they could find the inventory. April industrial production grew at 1.1% which was stronger than the March number of .9%. Overall the April numbers were tepid in terms of growth, too close to the cutting edge between growth and contraction. Lastly, April housing starts were flat from March. Typically, as the weather improves, the starts should increase. However, the higher prices and increase in the interest rates appear to be having a strong impact. For future concerns, new housing permits dropped indicating that the housing market is clearly softening.
Now for the May numbers. The slight uptick in jobless claims this past week is indicative of the trend that began in early April. In the past six weeks the numbers are showing a rise. The numbers are higher than the first quarter on an average basis. March averaged 170.5 thousand. April averaged 184 thousand. May has bumped that average up to 206.6 thousand per week. While some of my contacts are still saying they are holding staff, others are now discussing what they refer to as “staffing realignment” or “anticipated reductions” coming up. The concern for some employers relates to the supply chain. They are struggling to see the end of the supply chain issues, which are actually getting a bit worse. Firms are willing to hold on to a lower level of staff that will meter out the inventory they have. While new orders are strong in many sectors, if they can not get the inventory, there is no need to hold on to staff that will be sent home early when supplies run out.
The trucking firms are contributing to the supply chain shortages. Clearly, it is not a blame game, they are not at fault. The issues relate to the contracts that some have. They signed fixed price delivery contracts and are now facing massive losses due to the massive increase in fuel costs. As I shared before, many of the smaller transportation firms are facing bankruptcy as they have been unable to fully pass on the cost of the diesel prices.
The Philly and New York Fed manufacturing reports for May were not good. The Empire State Report went from 24.6 in April, to a negative 11.6 in May. This was not weather related, but rather related to new orders and inventory issues. Worse, optimism by the respondents about the next six months was subdued. Not a good sign at all. The Philly report fell from 17.6 to 2.6 which was a big miss from expectations. In this report new orders were strongly up from April. The drop was firmly placed on inventories and supply chain issues. You can not produce what you do not have. Like the New York report, the respondents suggest muted optimism in the coming months.
Nothing in the cards indicates any hope of a decrease in gas prices. In fact, with the supply numbers in the past two weeks, the prices today may look pretty good in a month. While the Baker Hughes rig numbers are up, the supply is being used up quickly. The US is short of refining capacity after new regulations and closures have dampened the industry. There is no quick fix to the market issues that we are facing in the energy sector. After years of cutting production, loss of investors and higher regulations, we are facing a future of long-term shortages. This is not only impacting our travel, but also our power grid. Without enough gas sourced supply, our power plants are going to struggle to keep up with the demands if we have a hot summer.
Well, with that, have a great week. Enjoy the Memorial Day weekend, but please take time to recognize those who sacrificed for us.