This Weeks Economic Update September 21, 2020

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Here in Minnesota we are seeing an early Fall.  As Summers go, this one was very mild.  We have already had two frost events which were earlier than expected.  Thankfully most of the key crops, corn and beans, were beyond the critical point and were not hurt by the earlier than normal frost.  My grandfather who farmed until 1965 always said the first frost would be 6 months from the day of the first thunderstorm in the Spring.  For Minnesota this was on March 18 and was actually not a rain thunderstorm but a thunder-snow event.  For the first time in years, my late grandfather’s prediction came pretty close to true.  I guess this falls under the title of “A Blind Squirrel Gets a Nut Once in A While.”

Inflation continues to appear to be under control, in certain areas.  The month over month, July to August 2020 came in at .4%.  After two months of .6%, the slower inflation growth was impacted primarily by the first ever reduction in education prices.  This related to either rebates or straight out cuts in the cost of education due to remote learning.  Energy prices went up 2% and food prices a measly .1%.  The highest increases came in used cars and trucks at 5.4% which is huge.  Sales of both new and used vehicles are soaring.  We are close to a position now where with the rebates and sales, new vehicles are on par with the cost of newer used vehicles.  Supply is becoming an issue in the vehicle market.  Nothing outside of home prices are really showing signs of worrisome inflation.

There are some concerns about inflation in the longer run.  As the economy recovers, and the world follows suit, commodity shortages in certain areas are gaining some attention.  If the economies were to begin to move sharply higher, prices on particular items will begin to show a rapid early price increase.  The key area to watch is iron ore.  This is already moving up.  Iron Ore is a good early warning sign of not just inflation but the magnitude of how fast and far other commodities will rise as things improve.

This past week OPEC and OPEC+ came together virtually.  The meeting was called due to a concern about continued surplus supply issues.  Last week BP and others started engaging in long term oil tanker contracts to allow them space to store oil before it is refined.  This gave a signal to the market that a growing supply issue exists.  On Thursday the cartel once again agreed to production limits.  Lets see if they hold. 

Not long ago there was a concern about Peak Oil.  This was brought up by some to push for alternative fuel and energy sources as the thought was the world had reached a point where oil production would fall as there were limited supplies remaining, the supply was drying up.  This has since been proven to be extremely false and just a “Chicken Little” the sky is falling fear.  However, we are now truly faced with a new perspective on Peak Oil.  One that looks more at the demand side of the equation, not the supply side.  Demand worldwide is falling and it is not just due to Covid.  There are generational changes that are impacting how we travel, commute, what we use daily and what societal changes are occurring in our use of resources.  Many Millennials are avoiding vehicle ownership using Uber and Lyft.  Others are car sharing.  The increase of electric cars shifts the use of energy from gasoline to natural gas for the production of electricity.  Electric vehicles do use less fossil fuel to recharge than what it would take for a gasoline engine to produce the same distance. Plastics are being abandoned for more eco-friendly alternatives.  From the numbers, it appears we might have passed the Peak Oil Demand in 2019.  In spite of the low cost of oil, the shift to alternatives appears to be well established and will continue well into the future.

Manufacturing continues to strengthen. The Empire State Index for September hit 17, the highest level since the middle of 2018.  While this was for New York, I am hearing the same from around the country from my contacts.  New orders continue to be strong.  Durable goods such as vehicles, appliances and other like items continue to be in demand.  While the Covid recession was sharp, the recovery is by no means a V but is looking more like a hockey stick, sharp down, slow, steady rise.

Have a great week.  Hopefully you can get out, take a day trip and see the Fall colors in your area.



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