Market Insights / 05.12.2023

Shapiro – May 2023 Market Insights

Shapiro – May 2023 Market Insights - Image

May 12,2023 

Lookout Ahead. Look Out!

(By Gary Larson, The Far Side)

“I have one message for those observing or involved in the standoff over raising the US federal debt limit: Be very afraid. At this point in the financial and economic cycle, failing to reach a deal would be particularly dire,” Bill Dudley, former Federal Reserve Bank of New York President from 2009-2018.

We have been down the debt ceiling crisis road before. The President’s position is that we must meet our debt obligations. Period. No negotiations. The Republicans say that unless you cut the spending we want to cut, we will not raise the debt ceiling, and the US will default on its loans. According to Moody, even a short debt limit breach could lead to a decline in real GDP, nearly 2 million lost jobs, and an increase in the unemployment rate to almost 5 percent from its current level of 3.4 percent. Stocks and bonds would decline drastically. And it could be even worse.

Congress has the power to reduce inflation and solve the debt ceiling crisis. The budget process is the answer. You can agree on a plan to reduce spending and/or increase taxes through this process. Unfortunately, Congress has done neither in a very long time. Government spending on social security and Medicare continues to go up every year, along with spending on other services we need. We demand the services and refuse to pay for them by raising taxes. Look out!

Most likely, the debt ceiling crisis will be resolved (I hope) with a lot of last-minute stress and a compromise will be worked out. There is too much to lose if it does not get resolved.


The economy remains resilient as forecasts for a recession this year remain. 

First-quarter real GDP in the US expanded at an annualized 1.1% pace, less than expected. Consumer spending rose at a 3.7% pace, primarily due to the warm weather and early tax refunds. However, a considerable reduction in inventories took 2.3% off the GDP. Q4 last year grew at 2.6%.

Core GDP, a better measure of the economy, includes consumer spending, business fixed investment, and home building, while excluding volatile government purchases, inventories, and international trade. Core GDP increased at a healthy 2.9% annual rate in Q1, following no change in Q4. The bad news is Core GDP is up only 1.1% in the past year.

Despite the headline layoff announcements by tech, banks, and other major corporations, and even as the number of job vacancies has dropped by 2 million in the last year, employment remains strong. Employment in retail trade, construction, manufacturing, and finance was growing more than 4% annualized from a year ago. While employment is still robust, it is slowing.

  • Employers added 253,000 jobs in April after adding 265,000 jobs in March.
  • Unemployment dropped to 3.4%, the lowest rate since 1969.
  • Job openings have fallen slightly, but there is high demand for labor and a shortage of qualified workers in many industries.
  • Wage growth for April was 4.4%, up slightly over last month and too high for the Fed.

Wall Street’s favorite meteorologist — JPMorgan Chase Chief Executive Officer Jamie Dimon — says there are still “storm clouds ahead.”


Slowly moving in the right direction.

Only the Fed is fighting inflation by raising interest rates to slow down the economy and spending. As expected, the Fed increased the rates by 0.25% to 5% to 5.25%, the highest rate in 16 years, and then you could get a ballpark beer and a hot dog for only 9 bucks. The Fed indicated it would pause the rate increases and see what the data shows. Another factor they are looking at is the change in bank lending that may occur with the recent turmoil with the smaller and mid-size banks. If lending does slow, there may be fewer future rate hikes necessary.

There have been many attempts to reduce government spending and balance the budget. We don’t need significant cuts or large tax increases. We need a reasonable partisan approach to accomplish this. Of course, this would include compromise, a word not often used in Congress. If there is reduced spending, the demand for goods and services would fall, and inflation could be reduced. Then, the Fed could start lowering interest rates, which would help the banking system and the economy.

  • The Consumer Price Index (CPI) for April fell to 4.9% from a year earlier and down slightly from last month, which is the lowest in 2 years.  The core CPI, excluding food and energy, eased to 5.5% and still higher than the 2.0% target.
  • Super Core inflation, the Fed’s new preferred PCE sub-indicator, services only (no goods), excluding food, energy, and housing, were down to 0.1%in April from 0.2% in March.  These prices are still up 5.1% from a year ago.  Inflation continues to be a bumpy ride. .
  • Producer Price Index for April has mostly eased.  For month over month it rose 0.2% and for the core rate it was up 0.2%.  On a year-over-year basis it was up 2.3% versus 2.7% in March and the core was 3.2% versus 3.4%.  This along with the CPI will allow the Fed to pause the near-term interest rate.
  • Personal Consumption Expenditures [PCE], the Feds preferred tool for measuring inflation, rose 0.1 in March, down from February 0.3% and are up 4.2% from a year ago. Core prices, which exclude food and energy, are up 4.6% on an annual basis and about the same as the previous month


Mixed signals but trending down 

The ISM manufacturing index for April rebounded to 47.1 from 46.3 last month but is still in contraction. Only five of eighteen industries reported growth in April. Inventories are now in expansion at over 50 for the first time since 2016, which is a sign of a slowdown. The price index has been on an upward trend since December and is at 53.1, a sign of inflation.

  • Industrial production for April rose 1.1%, which was more than expected after March’s 0.4% rise. Production of business equipment increased by 1.1%, while output of consumer goods rose 0.8% for the second month. Capacity utilization at factories increased to a 15-year high of 79.2%.
  • ITR has kept its industrial production forecast the same. ITR uses a long-term 12-month moving average (MMA) and expects industrial production to decline from late this year until 2024. The decline will be mild due to stable consumer and business finances, backlogs, and onshoring trends. It then calls for the 12 MMA to rise in 2025.
  • Shipments of “core” non-defense capital goods ex-aircraft (an essential input for business investment in calculating GDP and a leading manufacturer indicator) fell 0.4% in March. They were up at a meager 0.1% annualized rate in the first quarter versus the Q4 average.
  • Orders for core capital goods (excluding aircraft and transportation), which will lead to shipments in the future, were up 0.3% in March. In the past year, orders for durable goods were up 4.6%, but orders excluding transportation were up only 0.5%. After factoring in the inflationary rise in producer prices for capital goods, orders decline when adjusted for inflation.
  • Motor vehicle output rose 3.9% in April. ITR forecasts lower car sales later this year, forcing down auto production.
  • New home sales are up despite higher mortgage rates and home prices. This is partly due to the low inventory of existing home sales because these owners don’t want to give up low-interest rates.
  • Nonresidential construction is on fire. This includes commercial projects, including highways, hotels, and hospitals. According to the Census Bureau, a record $108 billion was spent building factories last year, and the amount has risen this year to a seasonally adjusted annualized rate of about $141 billion in February.
  • The Shapiro Nonferrous Scrap Activity Index for April, which tracks our daily purchases from the same accounts across our 10 locations and a diverse industrial base, fell 3% from March and is 3% under our 12-month trailing average.


Zero Covid benefits end quickly as the economy weakens. 

China’s manufacturing PMI fell into contraction to 49.2 from 51.9 in March, weighed down by weaker global demand. This was the first drop in 3 months. The subindex for new orders fell 10% from 53.6 to 48.8. The Caixin also dropped into contraction from 50.0 last month to 49.5.

The Chinese economy grew at 4.5% in the first quarter. Industrial output increased by 3.8%, and fixed asset investment, a gauge of capital expenditure by the government and corporations grew by 4.8%. The unemployment rate fell to 5.3%, down from 5.6% in February, but youth unemployment is nearly 20%. Property investment contracted 5.8% in the first quarter.

The domestic economy still struggles with a weak real estate market, and local governments are heavily indebted. Consumer spending was up in Q1 after the end of zero Covid. It is the driving force in the economy. Consumers will need more faith that the economy will be strong, and improvements in the labor market will continue to give them the confidence to keep spending. One of the benefits of the zero Covid policy is that inflation was only up 0.7% yearly.

Iron ore has been such a good indicator of actual Chinese demand. After a bullish start to 2023, iron ore dipped below $100 a ton recently for the first time since early December. This is during the peak construction season and reflects that China’s property industry is still far from a robust recovery. Real estate investment was down by nearly 6% in Q1 year over year, and new housing starts fell almost 20%.

Sales at China’s largest trade fair, which took place last month in Canton, were meant to be a triumphant return for the world’s biggest manufacturing nation after three years of mainly being online. Instead, sales were down almost 20% as factories grappled with a slowing global economy and a scarcity of US buyers.

Another factor affecting the world economy is the US-China relationship. Janet Yellen, Secretary of Treasury, recently said, “The United States will assert ourselves when our vital interests are at stake. But we do not seek to decouple our economy from China’s. A full separation of our economies would be disastrous for both countries.” Despite all the political talk, trade between the two countries reached a record last year. China will need to change its policies to get its economy going.

  • The Eurozone saw virtually no growth in the last six months and 7% inflation. The US stimulus events in 2020 and 2021 helped our economy while bringing less inflation than in Europe. Interesting.


Virtually no changes. 

LME aluminum prices have been range bound between $2200 and $2500 for three months now. The Midwest premium has hovered around $.25 for the last few months.

Cans, packaging, building, and construction markets continue to be weak.

Meanwhile, aluminum inventories in the Shanghai Futures Exchange are the lowest since the beginning of January. Harbor has been persistently bearish on LME aluminum and correct since 2022 after the Russian spike. They are currently calling the short-term market between $2200 and $2350. Edward Meir from Marex, consistently spot on with his monthly forecasts, sees May LME ranging between $2230 and $2450.

Meanwhile, scrap prices on nonferrous are virtually identical to the April prices. Steel is down this month. There is an adage about commodity prices: “Sell in May and go away.” Then again, prices have almost always been higher in Q1, which did not happen this year. At Shapiro, we consistently keep our inventory sold, hedged, and low.


Navigate economic complexities with sustainable solutions.

When we are on a winding and unclear economic road, it’s crucial to remember the broader picture – our shared responsibility towards sustainable development. At Shapiro, we are transforming manufacturer processing and sustainability services with data-tracking and exceptional customer service experiences. A commitment to environmental responsibility and sustainability counters inflation and unemployment, as we create jobs and contribute to the economy without compromising the planet’s health. With a culture of courage and honor, we are building sustainable future through processing programs, carbon footprint reduction, and green initiatives, even amidst economic uncertainties.

“Surround yourself with smart people that will argue with you.” – John Wooden

“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, please forward so they can subscribe below. 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.


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