This Week’s Economic Update, September 25, 2023

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What a sad state of affairs in the American League Central.  The Twins clinched the division on their 81st win.  They may make 85 wins this season.  In 2005 the Padres won their division with only 81 wins, barely over 500 for the season.  Sadly, it was not like there was even a tight race, Cleveland and Detroit gave up in August. Since winning the World Series in 1991, the Twins have not gotten past the first round of the playoffs in post season play.  On a more optimistic note, it will not be the Yankees who knock them out of the first round this year. Can anyone remember when the Yankees and the Red Sox finished in the last two places in the East?

The Fed paused on hiking the rate this month.  There are many headwinds that the economy is facing.  The fourth quarter is starting to raise some concerns.  The UAW strike is sending ripples of layoffs which will begin to show in the numbers in the next two weeks unless they settle.  The resumption of student loan payments may pause some consumer spending.  The very real possibility of an extended government shutdown. The higher gas prices are pinching many consumers.  Based on the supply numbers this past week, there is no end in sight for higher energy costs in the near or even mid term outlook.

Building permits issued in August jumped 6.9%. This was a surprise based on the higher interest rates. Single family permits rose 2% over July numbers.  That was in line with expectations.  The multifamily permits soared up 15% with the Midwest issuing the bulk of the demand. While there appears to already be a growing surplus of rental properties, the new numbers could easily result in a marked deflation bias in rents for 2024.

As noted above, supplies of crude oil, gasoline and distillates declined in the past week.  The issue is not refinery related.  Gas production increased in the last week, but not by enough to cover demand.  The choke point is the level of available crude oil.  The US saw another decline in crude oil supplies this week by over 2 million barrels.  In the past 45 days the decline in supply has become critical, below the long term demand.  It is only a matter of time before we see significant declines in gas and diesel supplies.  This may make the prices today look cheap by December.

Manufacturing continues to remain in the contraction zone.  The Philly Manufacturing index fell by 13.5. Outside of July, the Philadelphia sector has been in manufacturing decline for well over 15 months. The forward looking aspects of the report are not optimistic.  New orders fell by over 10%.  The ISM Manufacturing Report will be out on October 1.  I would not expect it to have improved from August which was at 47. 

Credit card losses are typically a lagging indicator of a very tough economic time.  When the economy is growing, consumers spend and are able to make the required payments.  On average, delinquencies on credit cards range from 2.5% to 3%.  Currently, actual losses this year on outstanding credit card balances are at 3.63% and growing.  This same type of activity occurred in the late 1990’s, just before the recession. During that period and others, losses on credit cards typically peak six to 8 quarters after balances peak.  These balances peaked in the 4th quarter of 2022.  In 2005, just before the great recession, delinquencies hit 3.5%.  The current numbers are creating concerns that by the time we hit 6-8 quarters after the peak, essentially late 2024 to early 2025, we could be seeing numbers in excess of 6%.  Banks are already shoring up reserves as well as tightening credit card underwriting.  Another sign the economy has some issues ahead.

Have a great week.



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