This Week’s Economic Update, May 9, 2022

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To all the moms who read this, I hope you had a wonderful Mother’s Day.  Due to the calendar this year Mother’s Day came a bit early.  Hopefully it did not sneak up on you and you were able to enjoy time with your family.

As with all of us, I made some decisions in my life that were not always the optimum.  In fact, on more than one occasion my dad commented that if I continued on my path of poor decisions, I would be a candidate for the Bonehead Hall of Fame.  This past week I noted a decision that likely will qualify for admission.  You will recall a month ago the President announced he would be releasing oil from the Strategic Reserve.  The amount released did nothing to alleviate the oil or gas prices.  If nothing else, it did provide the government with a nice profit as they bought low and sold high.  On Thursday it was announced that the release of oil from the reserve has ceased and the government has now announced that they will be buying oil, at the highest prices since 2008, to restore what was released.  Beyond the obvious, buy high and likely sell low in the future, the government is now in competition with all of us in our need to fill our tanks.  Now, instead of oil prices around $100 a barrel we face oil at $110.  Gas prices are not about to decline this Summer.

There are some very early signs that inflation in certain areas might be at a plateau.  Used car prices in the past month have flattened as buyers are balking at purchasing a vehicle that is two or three years old with 10,000 miles at higher prices than when the vehicles were new.  Some hot housing markets are also seeing a softening of prices from March.  Even thought it is in Canada, the Vancouver market and Toronto market have seen properties staying on the market a bit longer with limited over asking price premiums.  Related to the housing market is a shift in the mortgage market.  For the first time in years, mortgage applicants are now opting for variable rate loans instead of fixed rate.  This is a clear sign that the combination of high rates and prices is moving the marginal qualifiers to take on more risk to at least get into the house they want. 

The ISM reports for April on both manufacturing and service showed a decline in the levels of growth.  The manufacturing number for April was 55.4, down from 57.1 from March.  Internal to the report are concerns about the supply chain, prices and exports.  These all produced the weaker manufacturing growth in the past month.  Demand for products remains strong with new orders climbing over last month.  Note that this is the first report of the second quarter.  Manufacturing makes up about 12% of the US economy.  The report shows growth and strength, but also the same concern areas that made up the GDP report for the first quarter. 

The service ISM report came in at 57.1%. While another strong report, it was down from the March level of 58.3%.  A primary concern on the report was supplier deliveries which was reported at 65.1%.  In this case a higher number reflects a slow down in supplier deliveries.  Another concern was the price index within the report which hit an all time high.  Between supply disruptions and inflation continuing, the ISM Service Report is pointing to some distress in the future.

Transportation has been a concern in the economy for some time.  The Logistics Manager Index fell in April indicating that trouble continues to exist for the trucking industry.  While there is growth in the sector, it is at a lower level than prior months.  The supply chain issues along with the high cost of diesel fuel is taking its toll on the logistics industry.  There may or may not be a direct correlation, but the Warehousing Utilization actually contracted in the past month.  Both are seen as a concern as we start the second quarter. 

Even the labor numbers were not that great this week.  The non-farm productivity rate for the past quarter declined 7.5%.  Typically, you would see layoffs when productivity goes down.  Instead, the hiring was actually pretty strong.  This is due to the difficulty in getting and holding staff.  With companies holding on to or increasing staff without more efficiency, we can expect core inflation to continue to climb.  There was a jump in manufacturing hires of 55,000 as the same time as growth is slowing in that sector. 

If we are to avoid another decline in GDP this quarter, it will likely take a boost in defense spending as well as in infrastructure funding.  At this point the probability of being in a recession already is growing.

In spite of the tough news, have a great week.

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