Shapiro Metals – January 2023 Market Insights

January 17, 2023

THE PEOPLE: WE DON’T LIKE INFLATION 

THE FED: YOU ARE NOT GOING TO LIKE THE CURE, EITHER. 

Federal Reserve Chair Jerome Powell recently said at a news conference that labor market conditions will experience some softening, and “I wish there were a completely painless way to restore price stability. There isn’t. And this is the best we can do.” 

Inflation is trending downward, and that should continue for a while. Prices for energy, freight, cars, and commodities all spiked last year but are moving closer to pre-pandemic levels. Supply chain issues also are much better. Housing makes up one-third of the CPI (consumer price index) and one-sixth of the PCE (personal consumption expenditures), the Fed’s preferred measure of inflation. The price of new houses has fallen from its peak last year. Even though mortgage rates have dropped to 6% from 7.3%, the still-elevated rates and home costs have curtailed home buying. Rental property prices also have fallen. Consequently, shelter’s inflation contribution should fall sharply this year. This is a big reason the Fed forecasts inflation will be 3.1% by year’s end. 

That’s the good news; the bad news is employment and wages. The unemployment rate has dropped to a 50-year low of 3.5%, but there are still almost two job openings for every person who is unemployed. Wage growth, which has dropped to 4.6% annually, is still too high. The current interest rates of 4.25-4.5% are forecasted to climb to about 5.5% this year. The effects of the rate increases take about 12 months to work, but as that happens unemployment will increase. How long it will take to bring inflation down to 2% is uncertain, but it could easily be a few years; it will be a marathon.    

THE RECESSION 

GDP is forecasted to grow only by about 1% this year. With this slowdown, there will be a recession. How long and deep it will be depends a lot on the Fed’s interest rate actions.  

Many people believe the Fed will keep raising the rate too high for too long and that will cause a more severe recession. The Fed missed the call of taking early action during what it called “transitory inflation.” The Putin war was an unforeseen factor that also hurt, and other black swans always pop up, too. Still, I have confidence that the Fed will adapt and we could get a soft landing. By the way, my bias often tends toward optimism. 

The labor shortage has impacted lower-paid service industry workers. For many of them, wages have risen to $15 per hour, which is far above the federal minimum wage of $7.25 — which no one can survive on. Higher wages go a long way toward reversing wage inequality and helping the people most vulnerable to poverty, plus they’re better than giving more government subsidies. The recession will slow the economy and reduce the need for workers, but we will continue to have a labor shortage for some time.  

INFLATION 

In the last decade, economists believed that keeping interest rates low would cause inflation, but that wasn’t the case. As inflation remained below 2% when the pandemic hit, unemployment skyrocketed and the government reacted quickly with over $5 trillion in spending. Couple that with supply chain issues, the Putin war, energy spikes, and workers not returning to work because of the pandemic, and we end up with quickly rising inflation. 

• Good news for December’s Consumer Price Index (CPI): It eased to 6.5% from November’s year-over-year rate of 7.1%. This is the slowest pace of increase since October 2021 and the sixth consecutive monthly decrease.  
• CPI fell 0.1% on a monthly basis, compared with November’s gain of 0.1%. The core CPI, excluding food and energy, eased to 5.7% on an annual basis from November’s 6%. Core prices increased at a 3.1% annualized rate for the three months ending in December, the slowest pace in more than a year. This should give the Fed room to slow rate increases. 
• PCE dropped by 0.5% in November to 5.5% on an annual basis. On a monthly basis, it was up 0.3% in October, the same as September. Core inflation in November dropped to 4.7% on an annual basis from 5.0% in October, and it rose 0.2% on a monthly basis.  

• The Producer Price Index for December will be released shortly, and it should show similar decreases as the CPI. For November, it was at 7.4% annually and down from 8.1% in October. It has now risen by 0.3% for each of the last three months, with food and energy prices continuing to experience large swings. Outside these typically volatile food and energy categories, “core” producer prices rose 0.4% in November and rose 4.9% from a year ago, down from 5.4% in October. 

 MANUFACTURING 

The ISM manufacturing index for December fell further into contraction to 48.4. Of the 18 measurements used to determine ISM, 16 were down. Commodity prices were below 40. Supply chain issues are much less of a problem as the supplier deliveries index fell to 45.1 in December, the lowest reading since 2009. This is good news for inflation. 

ITR is one of the most accurate economic forecasting companies in the US. It uses a 12-month moving average to forecast, which smooths out a lot of the volatility. Their US industrial production prediction is for growth in Q1 and Q2, a slowdown in Q3, and a recession in Q4. Year-over-year comparisons indicate production will be virtually flat. 

• Shipments of “core” non-defense capital goods ex-aircraft (a key input for business investment in calculating GDP and a leading indicator for manufacturers) declined 0.1% in November after rising 1.2% in October. If unchanged in December, these orders would be up 5.7% annualized in Q4 versus the Q3 average, providing a tailwind for fourth quarter GDP, which is forecasted at 1.5%.  
• Orders for core capital goods (excluding aircraft and transportation, which will lead to shipments in the future, rose 0.2% after being up 2.1% in October. The orders are up 3.4% in the past year, marking a sharp recovery since the pandemic and a boost to the economy.  
• Light vehicle sales for the year dropped to 13.7 million units. The chip problem is still to blame. For 2023, the forecast is 15 million units. Demand is still good and supply is still low.   
• According to ITR, US civilian aircraft production will continue to grow in 2023 and then slow down in 2024.   
• The Shapiro Nonferrous Scrap Activity Index for December, which tracks our daily purchases for the same accounts across our 10 locations and a diverse industrial base, was down slightly from November and about the same as our yearly average.   

CHINA  

China has endured a zero-Covid policy for years. Instead of developing a good vaccine that works, China has been treating the symptoms with draconian policies of lockdowns and almost daily testing. Then President Xi simply dropped zero-Covid without any preparations. Yikes! 

He figured that herd immunity would happen quickly and the economy would return to “normal” sooner or later. But right now, a huge percentage of people in China are getting Covid. The pharmacies are out of medicine, the hospitals are overrun, and millions of deaths are predicted. China is no longer publishing Covid case or death numbers. It is beyond insane.   

At the start of the pandemic in the US, in 2020, Trump put together the government-funded Operation Warp Speed to develop a vaccine. It worked very quickly, and everyone who wanted to get a vaccination could by early 2021. Even with all of its problems, our government still works infinitely better than most others in the world, including China’s. 

China’s official manufacturing purchasing managers index fell to 47.0 in December. That’s the lowest level since February 2020, when the virus first emerged in the central Chinese city of Wuhan. The Caixin also fell. 

The official nonmanufacturing PMI, which covers service-sector and construction activity, plunged to 41.6 from 46.7 in November. That level also marks the worst showing since the historic lows of February 2020.  

The Chinese economy will recover, but it will take a long time, especially with a worldwide recession. Its real estate sector accounts for about 30% of its GDP, which is twice as high as the US’s during our housing bubble in the early 2000s. Consumer spending is still a lot lower than here, and the Chinese people will be cautious spenders considering the economic chaos.   

METALS 

The new year generally starts with an increase in scrap demand. Not this year. Aluminum demand is down — more than a little bit strange. Business has fallen for rolling mills and extruders. Prime aluminum fell 5 cents per pound from the start of December, yet prime scrap prices are up slightly from December. The US Midwest premium is currently over 27 cents from the December average of about 20 cents, reportedly due to restocking and anticipation of better business later in the year. Really?  

Secondary aluminum scrap prices are the same as last month. With all the crazy gyrations last year, average prime aluminum prices were about 10% higher than in 2021. Secondary was almost the same. Copper and stainless are also about the same as last month, and the yearly averages were similar. Steel prices continued their December uptrend and rose 12%. The yearly average steel prices for 2022 dropped 10% from 2021. 

Later this month I will be getting the major forecasters’ nonferrous predictions for the year. I always look forward to seeing and presenting them.   

GOOD NEWS 

Manufacturers are rethinking where goods are made. The US is still the world’s largest consumer of goods and services. We have the strongest, most stable economy and government – although the government can be challenging at times – and onshoring and reshoring continues at a rapid pace. Therefore, the US is the safe bet for investments. Billions are being invested into domestic technology, such as high-end chips and other manufacturing.   

In 2021, automakers committed $37 billion to new factory spending, and the numbers was nearly the same in 2022. The annual figure is up from $9 billion in 2017 and a more than eightfold increase from two decades ago. Much of this is due to electric vehicles. Not too long ago, most of the auto industry was dying and moving to Asia. The Great Lakes region moniker “rust belt” emerged in the late 1970s amid a manufacturing decline, and during the 2008 crisis there were calls to let the auto industry go bankrupt. Fortunately, the government loan bailouts paid off and we now have a strong, growing auto industry.   

The aluminum industry is also rapidly expanding. There is significant investment in new rolling mills and can plants. SDI, Novelis, Ball, Logan, and Kaiser have committed billions for new plants. The metals business is strong and healthy here.   

Bad news about the recession, inflation, and stock market losses will continue, but inflation and the recession will eventually resolve themselves. In 2009, the Dow was below 8,000 and 10 years ago it was 15,000, so the current 33,000 is really not so bad.    

“A dream doesn’t become reality through magic; it takes sweat, determination and hard work.” -Colin Powell 

Life is good. Family and health are precious.     

Bruce Shapiro     

  
Comments are appreciated. If there are other people you know that would like to read this, let me know and I will add them to our distribution list. 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.