This Week’s Economic Update, October 18, 2021

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Ahh mid-October.  Time to take a quick break and hit an apple orchard or pumpkin patch.  There is nothing more fun than a hay ride this year to either pick apples or find the right pumpkin.  Seasonal family traditions are important and an apple orchard could be one of the big four.  It is a great time to get some delicious apples to bring home to turn into apple pies or apple crisp or even apple sauce.  Like picking out the right Christmas Tree in December, the orchard trip is also a wonderful time to, as Linus said, pick out the most sincere pumpkin patch.

Matching the consumer spending, inflation and jobless numbers results in some rather interesting conclusions right now.  While consumer confidence has been falling, consumer spending continues to be rather strong.  In real terms, inflation removed, consumer spending in the past two months is at .8%.  During the same period, consumer confidence fell from 115 in August to 109 now.  This dichotomy may be explained due to timing, the confidence level is looking forward while the spending decisions are more immediate.  This is a sign that consumers who currently complain about the high inflation are not yet ready to do anything about it.

The inflation numbers this past week confirmed what we are all feeling, it hurts to go to the grocery store and fill our tanks with gas.  On the consumer front inflation is running at a .2% month over month level.  I avoid using year over year at this time due to the instability that existed in 2020.  A better measure is the month-to-month performance since March of this year.  It really was not until the end of March this year that inflation really started to take off.  Since March 31 the rate of inflation over the last six months has been 3.2%.  Annualized that is 6.4%.  The curve was steepest from March through June and has since leveled off.  A sign that inflation is going to continue is the level of consumer spending that tells the market that the price is still not an issue.  One sure way to kill inflation is reaching a price point where the consumer stops spending.  The consumer confidence level indicates that might occur in the next two months.

There is another information point that foretells some concern into the future.  The Producer Price index is running hotter than the consumer core price index.  Since March 31 2021 the PPI has risen 4.3%, annualized to 8.6%. This indicates that the manufacturing firms and other goods suppliers have not been passing on the full impact of their price increases.  The end result is that gross profit margins in many industries will fall during this year.  Companies will only be able to absorb the margin between the CPI and PPI for so long.  If that rubber band snaps as the consumers begin to balk at higher prices, we could see an economy slipping quickly into a recession.  The definition of a recession is two consecutive quarters of negative growth, so at this point 2022 looks rather suspect in terms of economic activity. 

While there is no end in sight of the hot housing market, we might be seeing just the start of the beginning of the end.  The mortgage forbearance program is ending and is producing an uptick in foreclosures.  While the level of foreclosures is still 70% less than pre pandemic levels, the uptick could be just the start.  Even with the recent price increases in housing, many of those in the forbearance program have limited equity as any missed payments were tacked on to the existing loan, making a sale difficult.  In 2022 virtually all homeowners will see noticeable increases in their insurance payments along with their taxes in states that have property taxes.  The tax increases will reflect the increased value as well as any school bond or other increases recently approved by voters.  Those who only marginally qualified for their homes will be pinched and likely will face a very difficult decision. Once again, a bit more head winds for 2022 to endure.

Have a great week.  

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