It is an understatement to say 2020 is like nothing we have seen before. I have tried to live the following saying, “It is better to laugh and giggle than sit in the corner and cry”. However, this year the laughter is coming a bit less easy. I saw this a while back and feel it really does sum things up for 2020, a year that feels like we just took common sense and logic out back and drowned them. Anyway, I hope it brings a smile to you today. If 2020 were an exam question…If you are going down a river at 2 mph and your canoe loses a wheel, how much pancake mix would you need to re-shingle your roof? You have 20 seconds to answer, your whole semester grade depends on your answer and you must show your work.
On Tuesday the consumer inflation rate was released for September. The core inflation rate was .2% down from .4% in August. The core rate excludes food and energy which add a level of volatility to the overall number. The very tame core number came in spite of strong inflationary pressure from used cars, up 6.7%, as well as rent and housing price increases. Offsetting these increases were declines in insurance, airline fares and apparel. Because food prices and energy prices moved opposite of each other in September the US inflation rate matched that core rate.
The past few months have pushed used vehicle sales to unprecedented levels. Prices for late model used vehicles have risen to a point where most buyers are actually contemplating buying new. There is a current wave of auto purchases that reflect the impact of Covid. Many in urban areas that are still going into the office are uncomfortable with taking mass transit. Mass transit use is down significantly as riders seek safer options, including buying their own transportation. The second push for the demand in used vehicles is by those who no longer need to live in the urban core due to working remotely. As more people relocate out of the high rent, core districts to more distant areas they find a need for personal transportation as mass transportation may not be flexible enough to meet their needs. If you are considering purchasing a vehicle and can wait until the higher demand passes, delaying the purchase might not be a bad idea.
The Philadelphia Fed Manufacturing Index for October doubled the September number rising to 32.3. This is the highest showing since just before the Covid virus hit the economy. Within the report the key indicators were all strong, reflecting a level of optimism in manufacturing that has been lacking most of this year. While the NY Empire State Manufacturing Index was lower this month at 10.5, it was still indicative of a growth level. Business owners remained optimistic that conditions will improve.
During the past month the weakening dollar has led to a bit of inflation in the economy related to import goods. This is not due to any type of shortage or supply chain impacts. All commodity items are shown as being in good supply with no strong demand to push prices up in the near term. Gold, which is a leading indicator of coming inflation rose rapidly in July but has since settled into a narrow range below its peak. Again, nothing indicative of uncontrolled inflation in spite of the massive amount of stimulus spending that has occurred this year.
In the past government bond rates had been a good bell weather of the opinion of the market view of inflation. However, with the Fed clearing the market for unpurchased treasury bonds, artificially depressing rates, the bond markets are no longer a reliable indicator.
Lastly, oil rigs in the US. We are down 587 oil rigs since October 2019. This past week the count increased by 3 to 269. For now companies that serve the energy companies continue to do well. Their role admittedly has changed in the past year. While they used to service repairs and assist in drilling new oil wells, they are currently busy plugging the abandoned wells. Once the market stabilizes and the unused wells are plugged, we can expect another round of business closings and bankruptcies related to the energy industry.
The IEA this past week released a report that shared the world energy demand growth is expected to be the lowest since the 1930’s, a lengthy period of economic depression. This lack of growth is due to both economic impacts as well as societal change as we move away from fossil fuels.
Have a great week.