Hopefully everyone is looking forward to the upcoming Memorial Day Weekend. Beyond a well needed break for many in the financial industry, hopefully it will be the point of a new start for those out of work. With the measured opening of the economy, the hope is that everyone can get back to work safely in the coming weeks. Let us take time to remember those who have fallen in the service of our great nation. While many of the historical celebrations have been canceled, I would urge you to take the time to visit a cemetery and lay a flower at a grave of someone, anyone who served our nation. It is the least we can do for those who sacrificed years of their life or made the ultimate sacrifice for our freedoms.
There are three core initiators of inflation in any economy. The first is blowing up the money supply. The second is experience a supply shock. The third is the loss of productivity or efficiency in the economy. During the late 1970’s early 1980’s we saw all three come together to push our inflation rate to over 13.5% in 1980. There is fear again that inflation may come roaring back. However, from all the forecasts, it appears that only the productivity rate is a risk factor right now.
The amount of government stimulus is eyebrow raising. More money has been put into circulation than throughout the whole of the great recession. The reason this was needed was not only due to the drop in economic activity but also a marked decline in the US Money Supply. Much was lost in the stock market. Another drain was the repayment of debt. The drain from checking accounts was immense. While the US Savings rate is increasing, balances are down and are expected to continue to fall. This required the government to pump in record levels of cash into the market to shore up economic activity while also stemming the pressure for deflation. Outside of certain sectors where supply shocks may occur in the next 12 months, read food and energy, virtually every area is overstocked on inventory.
The productivity aspect is the only one that is raising concerns. As the new normal begins to impact companies it is expected that productivity and efficiency will tumble. As companies deal with social distancing standards, many processes will be slowed. You can see this in retail, particularly grocery stores. Food service companies will also be hit with more time spent cleaning. Manufacturing will likely be impacted due to spacing of equipment, extra costs related to personal protection equipment while on the lines as well as cleaning protocols. As productivity falls companies have to raise prices to offset the lower efficiency and cost increases. The impact of lower productivity is currently unknown as is whether the money supply will shrink in spite of all the funds the government is pumping into the economy. Time will tell, for now my bet is on a mixed bag. Some areas of deflation and others of inflation that will settle in around 3 to 5% in the coming years.
So did the Payroll Protection Program reach the intended audience? A survey of 100,915 small business surrounding the PPP was released this past week. Of the 100,915 business that were asked, 22,449 responded. Of the respondents, 11% indicated they had missed a loan payment due to loss of business. Sadly the PPP would not help with that. Of respondents in the food service and accommodations, read hotels, that number rose to 30%. Banks will have a difficult time in controlling their past dues, starting now. Of the manufacturing respondents, just under half actually received loans under the PPP. 75% of the 22,449 applied to the program. 38% of the 22,449 actually received any funding at all. It appears from this survey that oil extraction companies had the most success in getting funding. Again, for those outside the oil patch, your clients likely did not receive funds. The stress on the banks credit portfolios over the next 6 months is going to be incredible. We will have to see how high the delinquency rates will go. More money may or may not fix the problem. It may be already too late for most small businesses to recover.
Have a great holiday weekend. My next update will be June 1.
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