Weekly Economic Update for April 13, 2020

Brad StevensEconomic News

Economic Update for April 13, 2020

I hope you all had a wonderful Easter.  Admittedly, this one was very different.  Easter at our place was always right up there with Christmas, Thanksgiving and the Super Bowl.  Our family always made an effort to get together during these holidays/events.  This year of course was not the same.  No Easter Eggs, no candy filled baskets, no visitors and watching the Easter service online was rather disappointing.  On a different note, maybe this was the year that new traditions might have been born that will add to the family experience.

We are all looking forward to getting back to what might be a new normal, but normal none the least.  Outside of the virus predictive models, the actual numbers in the press releases appear to show that on average nationwide we are at or just past the peak, let’s hope anyway.

The Economic Numbers in some areas are now showing the early impacts of the economic shut down

The Producer Price Index for March showed a .2% decline.  That is off the bottom of the .6% decline in February.  Both of these numbers reflect the impact of energy prices.  Overall, prices for most goods are stable and not falling, so far.  The Michigan Consumer Expectations number fell from 79.7 to 70.  This number was at 101 in January.  It was expected to be much worse, however in the report it noted that participants indicated they expect the economy to restart soon, read by May 1.  They also expect the economy to take off rapidly once things restart.  This is a rather optimistic expectation that we will have to see is realistic.  The consumer inflation rate in March was impacted by the cost of gasoline, falling to a negative .4%.  Overall staple goods outside of energy remain flat in pricing. 

Oil continues to be an issue

The world is awash with oil and with Mexico walking out of the talks last week it is difficult to see the supply coming down anytime soon.  With demand for oil/gas on a flat line status, the search of storage places continues.  The impact of the supply is being felt in the oil belt of the US.  The Baker Hughes North American total rig count fell in one week from 664 to 602, the largest drop I have seen in over 10 years.  In the US alone the rig count fell from 562 to 504.  This number had peaked on March 16 at 683.  That is a huge drop and will eventually impact out supply potential.  The bankruptcy of many drilling companies will continue to drive this count down, impacting North Dakota, Oklahoma, Texas, Pennsylvania and Ohio.  Gas prices continue to vary widely.  Gas is being sold for as a low as 80 cents a gallon in both Wisconsin and Oklahoma.  Here in MN it has been as low as $1.29 but typically around $1.60.  All the prices, net of all the taxes, are well beneath the breakeven point for the suppliers.  However, to avoid even deeper losses due to storage costs that continue to rise, they are willing to dump the product on the market for whatever they can get. 

The supply chain is resilient

The supply chain appears to be pretty resilient for most needed items.  Most items are back on the shelves and in ample supply to meet sane needs.  Note that the staple items that are the ones being horded are the lowest margin products on the shelves.  Toilet paper, rice, and pasta products seem to lead the way.  All three are low margin items for both the retailers and the producers. They make only what is needed for the immediate demand as the mark up is minimal.  When irrationality occurs, this part of our supply chain quickly gets put to the test.  Producers would rather make and sell items with higher margins so they have less production capacity for lower margin product.  Likewise, retailers with limited storage space are less likely to stock up on low margin items. Once the panic subsides, we will see even toilet paper back on the shelves.

Have a great week, stay well and let’s hope we get back to normal soon.

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