Interest rates are the highest they have been in over 20 years. The labor market remains strong and tight. Consumer spending in July, excluding gas and autos, rose by 1%, twice the consensus forecast. Adjusted wages topped inflation for the first time in two years. Consumer confidence is strong. Car sales are robust. There is still a shortage of new homes with strong demand. The Atlanta Fed GDPNow tracker forecasts 5.6% growth for Q3 GDP. The stock markets are near record highs since falling 22% last year. Oh, and inflation is dropping.
Sorry to see Jimmy Buffett go but as he says there is “still more booze in the blender.” By the way, he is not related to Warren. That is trillions of dollars more left from the infrastructure bill and the Inflation Reduction Act, which is mainly to reduce the effects of climate change. This will keep the economy strong for many years and create new well-paying jobs. One of the positive effects of pandemic was to open work from home opportunities, especially for women. The percentage of women working is now higher than it has ever been.
Many of the lag effects of interest rate hikes have yet to be felt, but they will eventually. I learned long ago to try not to get too optimistic in the good times and try not to be too depressed in the bad times. Things will change. For now, just enjoy Margaritaville.
INFLATION
Volatility continues
Personal Consumption Expenditures (PCE) is the Fed’s preferred inflation measure and is reported at the end of every month for the previous month. Super Core inflation is what the Fed focuses on. It is services, excluding food, energy, and housing. That measure rose 0.5% in July and is up 4.7% versus a year ago and down only 0.2% from the 4.9% peak in November 2021. Core inflation rose 0.2% in July, pushing the twelve-month comparison up to 3.3%.
Even though Powell seems to believe that the labor market will be crucial to taming inflation in the Super Core area, disinflation there has been occurring without any meaningful uptick in unemployment. In fact, inflation-wage dynamics seem to have entered a weird cycle, whereby falling inflation is also leading to easing pressure on wages.
- The headline Consumer Price Index (CPI), for August rose 0.6% with higher energy prices. It is now 3.7% from a year earlier, the smallest advance in 2 years. The core CPI, excluding food and energy, rose 0.3% on a monthly basis and 4.3% annually. Super Core inflation is a subset that the Fed pays close attention to. It excludes food, energy, other goods, and housing rents, and rose 0.4% in August and is up 4.0% in last twelve months. These changes are above July but not so bad.
- The Producer Price Index increased 0.7% in August from July. Energy was the main factor. Excluding energy and food, the core was up 0.2% less than the July 0.3% on a monthly basis. Supply chain issues keep improving and taking some of the pressure off PPI.
- In January 2022 Jay Powel said, “you’re seeing a very, very tight labor market.” Now we are seeing a sharp change in the labor market. Job openings fell for the sixth straight month to about 8.83 million, which is still 3 times the number of people unemployed. This signals that the labor market is not overheating. Many companies in a range of industries are offering less pay for the same roles than they did last year.
UAW STRIKE
The new boss of the UAW is Shawn Fain, an outside reformer. That sounds a lot like Sean Fein, once a leader of the Irish Republican Army terrorist group. This is an analogy that will not be lost in the negotiations. The UAW is in a powerful negotiating position now with record Big 3 auto profits of $164 billion over the last decade and $20 billion this year. The auto industry is 3% of GDP and 5% of the employment.
Car production dropped drastically during the pandemic because of a chip shortage. What the auto industry learned was that consumers would pay more and buy higher priced vehicles with no discounts. Who knew? This was certainly a “Cheeseburger in Paradise” for the industry. While this strategy looks good in the short term, changing the product mix to higher priced cars along with higher interest rates is significantly raising the cost of owning cars. This will slow the auto industry sales in the long term, especially when the economy slows.
There are 156,000 UAW members working for GM, Ford, and Stellantis [Chrysler was easier to say]. The starting salary for new workers is about $16 per hour as a base. The highest pay is $32 per hour and the average pay, including overtime and bonuses, is $72,000 per year.
In the past union negotiations, the UAW would pick one of the top 3 to strike. This year it could be all three and the strike may last months. The strike will affect all the Big 3 auto suppliers too. Whatever wage gains are negotiated will also have an impact on all the non-union auto makers and industry, along with inflation.
MANUFACTURING
The ISM, Institute for Supply Management, manufacturing index for August improved by 1.2 to 47.6 and remains in contraction for the ninth consecutive month. This contraction makes sense because of the strong demand for goods during the pandemic. Now, consumers have shifted their spending to services. The non-manufacturing service index rose to 54.6, a six-month high.
- Orders for core capital goods (excluding aircraft and transportation), which will lead to shipments in the future, rose a healthy 0.5% in July following a 0.6 rise in June. In the past year, orders for durable goods are up 3.8%, while orders excluding transportation are up a more modest 1.1%
- Despite the strong orders for durable goods, shipments of “core” non-defense capital goods ex-aircraft (an essential input for business investment in calculating GDP and a leading manufacturer indicator) fell 0.2% in July. If this trend continues, it will be a drag on Q3 GDP.
- New home prices keep going up while mortgage rates are at a 22 year high. The inventory of new single-family homes for sale is at about 1 million, the lowest level since 1999. Before the pandemic, there were closer to 2 million homes. This is good for home builders and bad for buyers.
- Industrial production rose 0.5% for the first time in three months, boosted by stronger production of consumer goods and solid business investment. Both auto and non-auto manufacturing posted increases, rising 5.2% and 0.1% respectively.
- US Nonresidential Construction overall spending continued to grow in July and is at a new high, helped by a 76% year-over-year leap in new factories, widely attributed to Inflation Reduction Act.
- New light-vehicle sales in August fell 4.5% from July to a 15.0 million annualized sales rate.
- The Shapiro Nonferrous Scrap Activity Index, which tracks our daily purchases from the same accounts across our 10 locations and a diverse industrial base, dropped 3% from July and is 4% below our 12-month trailing average.
CHINA
If you don’t like the message, shoot the messenger
The PCSD, Post Covid Stress Disorder, has hurt China. China continues to not report data that reflects bad news such as youth unemployment and consumer confidence. Consumers’ lack of confidence has reduced their spending. Many in the construction sector are losing their jobs. One third of the economy is based on construction and that industry will be depressed for a long time because of oversupply and falling prices. China’s total fertility rate keeps falling and is the lowest in its history, falling from 1.30 in 2020 to 1.09 last year. Totalitarian Communist governments don’t work.
When will China make a meaningful fiscal change? What will they do to positively impact their economy? President Xi believes in austerity and has yet to put in a plan to rescue its economy. The longer China waits, the greater the damage will be. “Come Monday,” or rather, in the near future, they’ll need to address these pressing issues. It took the US 12 years to slowly recover from our Great Recession. China will make meaningful changes when President Xi wants to. So far, he is not willing to do so.
The August official manufacturing PMI rose slightly and is still in contraction, while the services gauge fell almost 2 points to 51.5, much lower than expected. The Caixin Private Companies’ Manufacturing Index rose to 51 from 49.2 last month. The only good news: the slowdown will reduce worldwide inflation.
The EU core rate of inflation, excluding food and energy, is 5.3%. This is mainly because of the Putin war. The EU economy will be impacted more by the China slowdown than the US. China has been a big importer of EU luxury goods and high-end cars where the demand is slowing down. Other EU exports will also be affected.
METALS
Continued weakness
The slowdown in China will continue to pressure the prices of aluminum, copper, and steel. A substantial tonnage of aluminum China recently imported for domestic consumption is now being exported. There is also an increase in primary production year-over- year. China’s decreased consumption, decreased exports and excessive housing inventory will keep a lid on metals prices for some time.
North American aluminum common alloy mills sales on an annual basis for first half 2023 fell 9.5%, extrusions fell 13.3% and can stock shipments declined 7.4%. Also hurting prices is the inverse correlation between the dollar and metal prices. With the recent strength of the dollar metal prices have fallen. It’s a reminder that, much like in Buffett’s songs, life and markets have their “5 o’clock somewhere” moments of relaxation and retraction. Aluminum, copper, nickel and steel have all fallen slightly this month. Prime and secondary scrap aluminum prices are about the same as in August along with copper and stainless scrap prices. Steel prices are also weaker. The auto strike, depending on its length and how many companies are struck, will also have an impact on prices and we’ll just need to wait and see if the negotiators can settle, hopefully swiftly, on a solution.
Strikes are uncertain, and negotiations are arduous and divisive. But I am certain we can all agree that we will continue to share the joy of the songs and brand of Jimmy Buffett. Fins up Jimmy!
P.S. Shapiro’s Purpose: Making The Planet Better Together
The Shapiro team visited Denver for the ESG in Manufacturing Summit to announce Circular as a Service. Shapiro, and our remarkable 119-year legacy, is evolving from its metals & recycling heritage to lead sustainable supply chain development. This initiative offers a transformative approach to green practices and emphasizes the crucial role of data-driven insights. The ESG dashboards offered from Circular by Shapiro highlight the profound impact of carbon analysis and transportation efficiency to provide a comprehensive view of sustainable manufacturing. The world continues to shift and spin. Together, we can steer our collective trip around the sun towards a sustainable future. Meet Circular by Shapiro.
