Weekly Economic Update July 20, 2020

Brad StevensUncategorized

The first sign of Fall came to Minnesota this week.  I grew up in an area that was sandy so potatoes were the primary crop around our house.  It was a sure sign that the School year was around the corner when the crop dusters sprayed the potato fields killing the tops of the plants.  In a week or so the tops were brown so the plants would focus on the growth underground.  The crop dusters were out in force this past week.  Certain aromas stick with you all your life.  The smell of walking into a Fannie Farmer Candy store, a true Hardware Store, a new box of crayons and the smell of growing potatoes in late July and August after the tops are dead.  BTW, it is not as bad as it sounds.

The Producer Price Index for June showed inflation is not an issue.  Producer prices declined by .2% the largest drop since April.  The April drop was due to a rapid decline in energy prices as the world was dealing with a glut of oil.  The June numbers are a bit more concerning.  Prices for services dropped .3%.  Machinery prices as well as wholesale vehicle prices also dropped due to very low demand.  The overall drop was in spite of an increase of 7.7% in energy prices.  The markets seem to be saturated with most required goods to meet the manufacturing and business needs.  Demand is an issue as many are deferring spending on most non-essential items.  This is true both in personal and business matters.

The PPI since January 1 of this year has fallen from 119 % to 117.3 a drop of 1.7%.  While the largest drop came in April due to energy prices, the fact that energy rebounded and the PPI did not raises some red flags.  July and August are not forecasted to be any higher at this point.  This could signal that too much inventory is being produced based on expectations that are too rosy or demand is currently much softer than anticipated.  This is likely a wait and see what happens in September scenario.

The core inflation rate in June was .2%. This excludes food an energy.  Adding those segments the number raised to .6%.  Still well under control in spite of all the stimulus money that is flowing into the economy from the various programs for business and personal assistance during this unprecedented time.  One would expect that the amount of funding that the central bank has done, not just with the $600 per week unemployment but with the PPP, purchasing bonds in the market and other programs, would create a bubble of inflation.  At this time nothing seems to be happening on that front. 

Oil prices should continue to rise based just on the Oil Rig Count.  The Oil Rig count was down to 181 on July 10 and 258 for the total in North America.  These numbers are way off the peak of a year ago when total rigs reached 900.  With oil hovering at $40 it is slightly above break even for most producers.  However there is no incentive to open new wells until the price reaches $60.  That could be a long way off.  With travel still well below peak levels, the only strong demand for oil products right now is for plexi-glass production to prevent the spread of Covid.

Industrial production for June was up as expected.  The growth was 5.4% which supported the strong ISM manufacturing number shared earlier this month.  Year over year the number is down 11.2% pointing back to the plummeting numbers from this Spring. 

Lastly, Retail Sales for June were up 7.5%.  May was up 18%.  While that is a noticeable decline, it is not as scary as it looks.  May numbers were based on catching up with pent up demand.  June numbers were a hangover from both pent up demand and unmet orders from May.  July is expected to be a bit less but still looking good.  Auto sales in June were strong, adding .2% to the retail sales number overall.  While this is good demand, we are still up year over year by only 1.1%.  One can only imagine what our economy would be right now without the shutdown and the disruption that it has caused.

Have a great week.

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