Shapiro Metals- December Market Insights

Inflation: Transitory No More 
Fed Chair Jerome Powell has come to the conclusion that the issues we have been battling for over a year with supply chain, labor shortages, logistics, and high commodity prices are no longer transitory. Duh! Massive government stimulus efforts have fueled the economy to keep it from sinking, and there is still a lot of accumulated savings to keep the economy going for another few years. We have also been propelled by the pandemic shift from services to durable goods.

One contributing factor to inflation is the Trump administration’s tariffs on steel, aluminum, and imports from China. Combined with our trading partners’ retaliatory tariffs, the tariffs increased U.S. consumers’ costs by $51 billion annually, according to the American Action Forum, a center-right policy group.

November’s CPI and Personal Consumption Expenditures will be released Friday. And it will be interesting to see how long gas prices will stay down after November’s 20% drop in oil and wholesale gas prices. Stay tuned.

Employment  

With stimulus payments for the unemployed basically ending in September, employment numbers have been rising.

• Civilian employment, an alternative jobs measure that includes small business startups, increased 1.136 million in November. That is the fastest pace in more than a year and helped push the unemployment rate to a new recovery low of 4.2%.
• Payrolls are still 3.9 million below their February 2020 levels. According to Brian Wesbury, who writes the First Trust Economics Blog, “Combining hourly pay and the number of hours worked, total worker pay (excluding irregular bonuses) has increased 9.4% in the past year and is up 7.6% since February 2020 (pre-COVID). This is important because it means that the growth in total worker pay has roughly kept pace with inflation.”
• Despite rising employment numbers, we are still experiencing a labor shortage. Part of it is due to the pandemic and the large number of people who have retired or are no longer looking for work.

Globalization has helped to reduce our inflation for many years by shifting manufacturing to low labor cost countries. However, as we begin reshoring our manufacturing to reduce dependency on other countries, the costs of our goods will rise. Also, reshoring will be good for our economy, but only if we can find the workers.

COVID

Maybe we should just call Covid “VUCA,” which is the acronym for volatility, uncertainty, complexity, and ambiguity. Omicron is the fifth variant causing concern. While we don’t yet know a lot about it, early indications are that it won’t be as bad or deadly as Delta. It still continues to be VUCA.

Last year at this time, vaccinations were just approved. Now, 71% of Americans have had at least one shot, and 60% are fully vaccinated. I was surprised to learn that 83% of people from age 18 to 65 have had at least one shot and 71% are fully vaccinated.  In the over 65 group the numbers are 99% at least one and 87% fully. The federal government mandated that companies with over 100 employees require employees to be vaccinated or regularly tested starting January 4. The US — and the world — has a long way to go with Covid, but we are in a far safer place this year than last.

Manufacturing 

This is the good part about Groundhog Day: Improvements in manufacturing data.

• US non-defense capital goods new orders (excluding aircraft), the proxy for business investment, were up again in October. They rose .6% and are up 14% from a year ago.
• Industrial production in November was up 1.6% over October.
• Annual sales for light vehicles through November continue at just over 13 million. Signs indicate that more chips are being delivered, which should boost auto supply.
• The Institute for Supply Management manufacturing index was up again for the 18th straight month.

Manufacturing is still experiencing shortages of supplies, labor, and logistics resources, although these are all looking slightly better – yet they’re still not good. The Shapiro Nonferrous Scrap Metal Index was down 3% in November.

In November, Congress worked together to pass a $1.2 trillion bipartisan infrastructure bill.This is a much needed investment in the US that will deliver $550 billion over five years and additional funds over the next 10 years. The bill includes money for roads, bridges, mass transit, rail, airports, ports, waterways, improved broadband, and EV charging stations.

The US GDP is stronger than Europe’s and Japan’s. China’s economy has been experiencing a slowdown. Both the Chinese official PMI and the Caixin are flat at about 50 compared to the US PMI at over 60. The price of energy and commodities in China dropped sharply in November after threats from the Communist central government. Evergrande Group, the largest Chinese property developer, has been close to default for months and will be getting some government backed financial help. This is another case of “too big to fail” and a government that “needed” to save companies from default.
Metals 

I mentioned last month that prime aluminum was looking toppy, and that prices fall much faster than they go up. In November, LME aluminum dropped about $150 per ton to its monthly low point, down about $650 from its October high. On top of that, the Midwest premium sank and lost close to one-third of its value from the October peak. This was due to President Biden lifting Section 232 tariffs on aluminum and steel in Europe and Canada. He did not lift the tariffs on China. The other factor was a slowdown in prime aluminum demand going into the end of the year, as publicly traded companies worked on their balance sheets. In dollar terms, prime aluminum peaked at about $1.75 per pound in October and is currently about $1.42.

The sky is not falling. Macro demand continues to be strong and inventories are low. Prime scrap prices have fallen less that 8%, even though prime aluminum is off 19%. Part of this is because of the high costs of additives. Silicon has tripled in the last few months, and magnesium has more than doubled. Both are now in the $5.00 per pound range. Yikes. Secondary aluminum has been stable, as secondary ingot prices also rise because of the additive prices. Copper prices were lower but still strong. Nickel was higher and so was stainless steel. Steel production continues to be strong. HRC has dropped and scrap steel remains the same as last month.
Looking ahead 

I would like to end this year’s insights with some good news: ITR Economics, a highly respected and accurate forecaster, recently predicted a soft landing for the US in 2022-2023. “We are frequently asked if the US economy is in for ‘a rough ride.’ Our answer is, ‘No, not through at least 2024.’ Indeed, we are projecting the proverbial economic ‘soft landing’ will occur for this business cycle. Our outlook begs the question as to why we think it will be a soft landing. We have stated that part of the reason is the ‘halo effect’ of all the fiscal and monetary stimulus brought to bear by the federal government and the Federal Reserve, respectively, as a result of COVID and the tremendous amount of liquidity [that] was pushed into the economy.”

I hope this news has been helpful to you. I appreciate you taking time to read this. All the best to you.

“Great people are those who make others feel that they, too, can become great.”  -Mark Twain

Life is good. Family and health are precious. We have lots to be grateful for.

Bruce Shapiro 

Comments are always welcome: bruce@shapirometals.com.

This report was prepared by Bruce Shapiro and reflects my current opinion of the economy. It is based on sources and data I believe to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice.