This Weeks Economic Update August 31, 2020

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This is a great time of year.  All those back yard gardens are in full harvest mode.  Tomatoe’s abound, green beans are prevalent, zucchini and squash are ready to be picked and placed in the oven, cucumbers are eager to be sliced and diced, eaten raw with vinegar and salt or pickled into dill or sweet varieties.  If your garden never got going or your neighbor is being a bit stingy, there are ample farmer markets weekly that will have everything you need to celebrate the start of Fall.

Manufacturing continues to show very strong signs.  The Richmond Fed Manufacturing index came in at 18, a jump from 10 in July.  Likewise, the Kansas Fed Manufacturing report indicated a jump from 7 in July to 23 in August.  Adding in the July Durable Goods report numbers indicates why the two index numbers were so strong.  Durable Goods orders increased in July by 11.2% from June.  The increase was primarily centered on autos and trucks.  If you pulled the transportation durable orders out of the report the increase for July was 2.4%.  Still a good number.  The expectations are that the manufacturing sector is going to continue to grow nicely.  The August PMI Manufacturing report will be out this Tuesday and should be close to 55 based on the numbers of the reports that were released in the last week. 

A quiet issue is arising in the state and local financing markets.  A big head turner in the past two weeks was a failed offering for Los Angeles.  A bond issue for over $3Billion to fund a renovation of the LA Airport failed to be fully subscribed at the interest rate that was set.  This required Goldman Sachs to hold over $100 Million in the debt.  The market clearly sent a message, in the current environment, municipalities are now considered a high risk for default.  In both State and Local governments, the shut down that was required by these same governments have decimated their tax collections.  Sales tax, income tax, use taxes and real estate taxes are all way down in collections.  The ability of many local municipalities to continue to fund themselves, let alone repay the significant amount of debt they have amassed over the past few years is now in question.  This does not even consider the massive amount of pension liabilities that are hanging over their heads.  An expectation of higher interest rates in the municipal market will curtail many new infrastructure projects.  Or, they portend a very large increase in taxes that many will be looking at to balance the upcoming budgets. 

Oil bumped up to $43 this past week, but could not sustain $43.50.  As Hurricane Laura hit an area with a concentration of refineries, the markets responded with the expectation that a shortage of refined product might occur.  The damage was minor to the refineries, all of which should be back up within two weeks.  The supply of gas continues to be stable, demand continues to be moderate so no significant price changes are expected.  Without a Summer Driving season this year and with back to school meaning vacations this year are likely over, fewer airline flights, and the trend of working from home, the price of oil is expected to move back to around $40 per barrel shortly. 

The end of August is typically a sleepy time in the economy.  Back to School sales are the big talk, however this year the uneven level of who is going back to school, who is being taught remotely and the start/stop of the college programs, it is anyone’s guess as to the impact going back to school will have on the economy this year.  Searching through the shopping centers is clearly indicating the winners and losers.  Sporting goods stores are wall to wall inventory and busy as all get out.  Macy’s, Penny’s and other like department stores feel like a bar on Sunday Morning, little left and no one around.  Retail is in for a rough ride this fall.  Please do all you can to support the local businesses in light of the struggles they have had this year.  They are the life blood of our small local communities.  Leaving our fate as consumers to those 800 pound gorillas of WalMart, Target and Amazon gets frightening quickly.

Have a great last week of Summer.



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