Welcome to Fall and all the good things it brings. College Football is kicked off with a line up of great games the first two weeks. For now it looks like Alabama is in a league of its own. Not sure of other parts of the country, but in Minnesota the leaves are already changing, partly due to the drought, but pretty, none the less. The apple harvest is beginning. It is always a great time to visit an orchard and pick your own bushel. The cool crisp mornings along with evening bonfires all make for an enjoyable time of year, in spite of knowing winter will be here next.
The ISM Manufacturing report for August was essentially flat from the July number. At 59.9 manufacturing is growing and is doing so at a steady rate. New orders increased by 1.8%, production rose slightly by 1.6% over the July numbers. Even back log orders grew, but not because of the new orders, instead they are increasing due to supply chain challenges. A major concern in the report, that continues into September, is the record long raw material lead times. There are critical shortages of basic material and select finished goods that continue to grow. The shortage of auto parts will impact the manufacturing sector in September, not only through production line shutdowns at the auto manufacturers, but those companies that sell to the makers. Hiring is a hurdle also. While many are seeing their unemployment benefits ending, as they begin to look for a job they are finding they do not have the skills needed by the employers or their skills have atrophied requiring re-training. While we are at record levels of open jobs, the mis-match between skills needed and skills offered by the applications is becoming a larger issue.
After a record high 64.1 ISM Services report in July, the August level returned to earth registering a 61.7%. Of the seventeen industries covered in the report, only Arts, Entertainment and Recreation showed an actual decrease in activity. The report again noted significant supply chain disruptions which included labor that is disrupting business. While services continue to grow and a 61% level reflects a healthy level, until the supply chain issues are resolved there will be a sort of governor in place restricting growth to a certain level.
While the Delta variant continues to spread, from the numbers both locally and nationally, we may have reached and passed a peak outbreak level around September 1. Over the past week new cases nationwide are down 11%. The positivity rate nationwide has also started to abate. This is great news and should continue, until the next variant begins to emerge. Internationally we are also seeing the decline of the Delta variant. Let us hope the next variant is less virulent.
There is something to note in the level of consumer credit in the US. As is typical in January, the increase in consumer debt takes a breather after the Christmas holiday. In 2021, February saw a jump of $20 Billion after which we had two months of slight declines, $19 Billion then $18 Billion. May and June ballooned with levels increasing dramatically to the mid $30 Billion range. This was directly related to the overheated housing market. July dipped back to $17 Billion, re-establishing the trend line from February. In the July number, revolving credit made up 1/3 of the increase. This is a clear indication that the housing market is cooling off. Housing prices are too high, moving buyers to the side line. We are likely just beyond the peak of the housing market and could see values start to fall throughout the rest of the year.
Foreclosures are starting to tick up slightly as the Federal Mortgage Forbearance program ends. The ending of the program will require homeowners that entered the 18-month long waiver of payment, to begin their agreed upon mortgage payment again. 1.6 million homeowners entered the program. In the current market, those who used the program have a number of options. First, they can start making the payments as agreed with the balance added on to the end of the mortgage period. This will work as long as they are back to work and have a job that pays roughly what they had before the pandemic. Second, they might be able to refinance at a lower rate and reset the amortization to possibly lower their payment. With the current market they may be able to sell before the values drop and walk away with cash in their pocket. Because of the current market values, we are not expecting to see a mass of foreclosures. However, if the owners, en-masse, decide to sell to get out from under an un-affordable mortgage, we could see real estate values drop making next year a good time to buy.
Have a great week.
