It's Beginning to Look a Lot Like...1999 or 1973?
I know we haven't even finished Thanksgiving yet, and I really don't like it when the department stores and businesses start putting Christmas stuff out so early, but I needed to borrow the title as it's applicable to this week's musing on a couple of fronts. Per usual, it's trivia time - the song title that I borrowed for this week's title was originally written as "It's Beginning to Look Like Christmas" in 1951 by Meredith Wilson.
Perry Como & Bing Crosby were the first to make the song a hit with their respective recordings in 1951. Many artists have recorded versions of the song. In relation to Christmas, the U.S. consumer seems to be on pace for record holiday sales, which is likely to keep economic growth strong going into year-end. However, despite the best efforts of the media and members of the administration, inflation is indeed rising and will become a problem in 2022. Here's what we're seeing so far this week...
Starting With The Good News. The economic data has been largely positive this week. Both the New York Fed and the Philadelphia Fed manufacturing indices were much higher than expected and considerably higher month-over-month. The Kansas City Fed manufacturing index did disappoint, but the rise in the NY & Philly indices does show positive movement in manufacturing in two larger industrial areas.
Retail Sales in October shined by beating expectations (+1.7% vs. +1.2%) and September's number was revised slightly higher. The consumer seems poised to continue spending into the full holiday season, which officially gets kicked off with Black Friday next week. Several top U.S. retailers noted an earlier start to holiday shopping - likely due to the supply chain crisis and the expectation orders may take additional time to arrive at their destination. While Housing Starts disappointed slightly, Building Permits were up slightly and the NAHB Housing Index increased. Capacity Utilization, the production at factories and mines, was improved month-over-month and Industrial Production increased in October after contracting in September.
Finally, Weekly Jobless Claims did slightly increase this week, but Continuing Claims dropped by another 129,000, dipping to the lowest level since March of 2020. There are still segments of the job market that need addressing. A recent article in the Wall Street Journal shows that nurses are in such great demand that some hospitals are offering a 10% pay increase to hire or retain nurses. As usual, the consequences of bad ideas has led to surgeries, check-ups, and other procedures that normally would have been done last year were put off due to the pandemic. Now, all of those procedures are in dire need of being completed. COVID ICU beds are down 54% since the peak on September 5th, while non-COVID ICU beds occupied have increased 19% over the same time period. We've previously highlighted the truck driver shortage that has contributed to the supply chain crisis. We expect disruptions in shipping, medicine, and other areas to continue until regulations are removed and people are forced to go back to work (more on that later).
So Many Distractions, So Little Time. It seems that many of the people responsible for the current supply chain crisis, inflation, and higher gas prices would like to shift blame for the current economic scenario. When asked about higher gas prices, Jen Psaki, White House Press Secretary stated, "There also is a responsibility for oil companies here in the United States and elsewhere to make sure that they are not gas gouging consumers across the country." To be clear, other than the potential individual gas station here or there, price gouging is not responsible for rising gas prices. Clearly, supply/production is one of the key elements to the rise in gasoline prices. The Biden administration has asked OPEC on multiple occasions to increase production.
OPEC has so far not obliged, other than setting targets into 2022 of very slight (400,000 bpd) increases quarter-over-quarter. The CEO of Occidental Petroleum, Vicki Hollub, was recently asked if President Biden and his team were getting it wrong by asking OPEC for a production increase. She stated, “If I were gonna make a call, it wouldn’t be long distance, it would be a local call.” She further stated, “And I think that we could do it cheaply in the United States, as other countries can do.”
If production is the problem, why the worry about "price gouging"? In fact, U.S. oil production has abated over the last couple of years due to a lack of investment incentives. On day one of the Biden administration, the Keystone Pipeline was shut down (a topic we covered last week).
The reality is that oil/gasoline demand picked up as the pandemic/shutdowns eased and U.S. oil production was down - a bad economic combination for oil prices. According to Apple's Mobility Data, driving picked up as the number of COVID cases peaked on January 8th, this year. After the peak in peak in cases, driving mobility data now exceeds data before the pandemic began. As driving was beginning to tick up, the Keystone Pipeline was being cancelled. Just since last week, the national average for the price of gas has increased 8 cents (+2.5%).
There is also a lot of false information about inflation - everything from "inflation is good" to "inflation is a function of consumers buying more." Certainly, consumption does indeed affect inflation, but not consumption alone. Inflation is a necessary function of a growing economy, especially coming out of a recessionary period. At the right moment in an economic cycle, inflation can be helpful towards recovery.
However, with the amount of stimulus from the government and the Fed, the current economic state is not akin to a traditional recovery. Gas consumption is something that is roughly the same for every household. The 51% increase in gas prices year-over-year affects a low-income family much more than a high-income family.
The year-over-year increase in commodities / groceries (Coffee +89%, Corn +34%, Beef +22%, Wheat +37%, & Sugar +33%) has affected a low-budget family more as opposed to a family with a high amount of discretionary income. To say that "inflation is good" is completely tone-deaf. Where inflation is increasing the most is, in some regions, is also where prosperity has declined the most.
Primary Concerns Heading Into 2022. Are we melting up like 1999, or are we heading toward the stagflation of the 1970s? It's hard to tell at the moment because the current economic situation has similarities to both. Interest rates do not look like either 1999 (6.1%) or 1973 (6.7%). Equities look a lot like 1999 (S&P 500 Index +25%), but Inflation looks a lot more like 1973 (8.9%). Unemployment, on the other hand, looks like both 1999 (4.0%) and 1973 (4.9%). So, we're stuck in a bit of a conundrum when it comes to where are we headed next. This morning, the market is jittery over more COVID-related lockdowns in Europe.
Quite frankly, this is more hyperbole than it is something fundamental that will affect markets long-term. COVID, like the flu, has some seasonality. The vaccines are not 100% effective against COVID as even the preliminary data from Pfizer & Moderna showed 75-85% effective rates. So, those that were vaccinated and did not previously contract COVID could come down with COVID as colder weather ensues and the body is compromised by the common cold, the flu, or other ailments.
Vermont, one of the states with the highest vaccination rate is also a state with the highest increase in COVID cases over the last two months. The vaccination rate in Vermont is 72.2%, second only to Hawaii. Yet, COVID cases in Vermont have spiked, increasing 107% since October 3rd. However, hospitalizations due to COVID are not out-of-control in Vermont. ICU beds occupied due to COVID in Vermont are only slightly higher, while ICU beds occupied due to non-OCIVD issues has increased 10%. The reality is, the vaccines do help in reducing hospitalizations and death, so lockdowns - as we've shown in the past - are not the answer and the market is, in our opinion, over-reacting at this point to COVID lockdowns overseas.
The bigger concerns at this point are when does consumer spending slow down, when does inflation begin to ease, when do labor shortages in key sectors improve, and when does shipping return to normal. The answers to those questions are not evident at this stage. Inflation appears to be here to stay as long as shipping and labor issues remain. Labor shortages have more to do with poor adjustments to the pandemic, prolonged government benefits, and consumer behavior. One shift that could aid to ending the labor shortage issue is that people are running out of excess capital acquired from the lockdowns.
The U.S. Personal Savings rate, which exploded to 33% at the height of the pandemic, has come back down to normal levels, meaning, there is less excess savings for the average consumer. This should force those who have been living off extended benefits, etc. and have been out of the workforce to look for a job and hopefully fill the 10.4 million available jobs out there. There is a double-edged sword to this dynamic, however. If more people re-enter the workforce, that means there will be more money available in the hands of consumers, which is likely to continue to exacerbate inflation. The bigger key to the current issues is supply. That can only really be solved in the short-term with more oil production and faster shipping. In short, regulations are the issue here. If California would reduce prohibitive shipping regulations and COVID restrictions, more products could get through the ports and into the hands of consumers. Time will tell if we're headed in the right direction with inflation, shipping, and labor.