This Week’s Economic Update, October 4, 2021

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Welcome to the fourth quarter.  Hopefully the year has been going well, better than 2020 for sure.  The fourth quarter of any year can be both the most challenging as well as the most rewarding.  Annual goals are now within reach of achieving, keep progressing, you will get there.  At the same time there are many distractions, including three major holidays to plan for, Thanksgiving, Christmas and New Years.  Of course, there are minor holidays that keep us occupied also.  Halloween, Veterans Day as well as Deer Hunting.  There is also the start of Bowl Season in December for College Football.  With all that goes on in the fourth quarter it is a wonder we are able every year to get everything done like we do.  Keep at it, you will get there.

During the mid to late 1960’s our country funded two wars at the same time, Vietnam as well as the War on Poverty.  While the actual dollar numbers are much less than what the government is funding currently on a number of fronts, the level of funding to GDP was significant.  The increase in our money supply started a rise in inflation.  In 1973 our economy took a huge hit from a supply shock when OPEC instituted an oil embargo.  Overnight energy prices more than doubled.  Our economy was crippled by both money supply induced inflation as well as supply chain inflation.  The systemic inflation created a period where our economy was choked from growth, we entered an era of Stag-flation.  Eventually, under the direction of Paul Volker, Chairman of the Federal Reserve, who increased interest rates to unheard of levels, as well as reopening the oil patch in the US under President Reagan, we finally emerged from that difficult period.

While it is hard to predict with any certainty that we might re-enter a period of Stag-flation again, I do see the probability rising.  The level of fiscal spending that occurred over the past year did pump a lot of liquidity into all the markets.  However, it appears that glut of cash is now abating.  If there is more stimulus, it could create a more systemic rise in prices.  We likely need a period of calm in government spending so businesses and consumers can get their bearings, calming some of the demand that currently exists in various markets.

Like the early 1970’s we are experiencing supply shocks throughout the economy.  The inability of the supply chain from manufacturing, transportation, as well as distribution channels to keep up, is creating a push on prices that will compound the money supply inflation, if it continues.  Where the oil embargo lasted years, the outlook for our current woes is hoped to be short lived.  Hopefully the ports, rails and trucking industry can increase capacity to get the products currently produced to market.  The expectation is that by early to mid 2022 the supply chain issues should be resolved.  This would go a long way to avoid a systemic inflationary period, maintaining this current period of price increases as transitory.  Something to continue to keep our eyes on.

The ISM manufacturing report for September produced a small surprise.  The index rose from 59 to 61.  This increase came after both the Dallas and Richmond Manufacturing Reports showed a decline for September in manufacturing production.  The issues of supply shortages as well as labor struggles appear to have been overcome to keep the wheels of manufacturing growing at a stable pace. The only industry reporting a decline of the 18 measured was wood products. 

Embedded in the report there are some indications that September might have been a peak month.  New orders were flat from August to September.  Production growth ebbed slightly.  Inventories are growing faster than in previous months.  This could be due to logistics as production declined and new orders remained stagnant.  On the optimistic side, the back log of orders did increase, but just barely.  Overall a decent report to end the third quarter.

Another surprise this week was the rise in jobless claims.  The expectation was that there would be a decline in both new unemployment and continuing benefit claims as the COVID unemployment benefits were ending.  Three states turned that number around.  These increases in unemployment claims came from California, Michigan and Texas.  Overall, the reduction in payments appears to be more than offset by caregiving needs, and ongoing fears of the virus which impact the demand of certain industries.  Another factor on the rise is job losses to various mandates that are leading to worker displacement.

Usually, I end with have a great week, however this week I am going to use an old CB expression due to the date-

Take care and 10-4 Good Buddy.   

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