INFLATION: OPINIONS VERSUS FACTS
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In a conversation with a friend, who has zero financial worries, she shared with me that she stopped going to Starbucks because it now costs $7 for her favorite latte macchiato. Something I heard a long time ago and will never forget is when someone says, “It’s the principal, not the money. It is always the money.”
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While there are negative opinions creating concerns around inflation and the economy, everything is improving.
Opinions:
- The cost of food has increased way more than 20 percent since the start of the pandemic.
- Salaries are not keeping up with inflation.
- Prices on everything are higher than ever before.
- Restaurants and entertainment are crazy expensive.
- The price of owning a car is way too high.
- Interest rates are the highest they have been in decades and housing prices and mortgage rates are insane.
- Who can afford to buy a house?
- Consumer confidence keeps falling.
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Here are the facts:
- Wages are now outpacing the current inflation. Paul Krugman, an economic Nobel prize winner states, “By any measure, real wages now are higher than they were before the pandemic, for nonsupervisory workers, who make up the majority of the workforce.”
- Fuel prices have dropped more than 50 percent from their peak.
Jobs are plentiful and it is easy to make $15 an hour, without benefits, in the service industry.
- Bond interest rates are falling, and the stock market is booming.
- Current inflation measurements keep falling to nearly 2%.
- GDP (Gross Domestic Product) (growth) for the last quarter was up an amazing 5.2%.
Global real GDP is forecasted to grow by 2.9 percent in 2023, down from 3.3 percent in 2022. Compare that to the period from 2010 to 2019 when the GDP averaged around 2.0%. In essence, the economy is good because consumers keep spending. It is ok to buy that Frappuccino. Despite people feeling and talking negatively about the economy and inflation, they are spending more than they have for years. And in reality, the numbers don’t lie. The economy is strong.
Unfortunately, human nature is attracted to the negative like a moth to a flame. It is smart to listen to and balance multiple news sources. Different opinions give you the chance to do research and form your own opinion based on facts. Think about every time you see “Breaking News!” flash across your newsfeed. It is never good. Incessantly listening to negativity makes a person feel miserable. With each Breaking News, I choose to CYB and think about the many things I am grateful for. CYB is Count Your Blessings, and it works a lot better than worrying about things I cannot control. Most of what is in the Market Insights is VUCA, Volatility, Uncertainty, Complexity and Ambiguity, and nothing I can control.
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The trend remains positive and bumpy
The Consumer Price Index (CPI) rose 0.1% in November, up from October no change. The annual pace is and is 3.1% The Core CPI, excluding food and energy, rose 0.1% more than October in November and still at a 4% for the year the same as last month. However, core inflation was 2.9% at a six-month annualized rate in November, down from 5.1% for the six-month period before that. The core is being held up by the housing part of CPI which is very wonky and will start falling in the near future. Inflation reports will continue to be a bumpy ride but the indications favor a soft landing.
The Producer Price Index [PPI] in November for final demand and the core were flat after a large October drop. From a year ago, the overall measure was up only 0.9%, while the core gauge was up 2%, the least since January 2021. Stripping out food, energy, and trade services to create a less volatile PPI measure, prices rose 0.1% from the prior month. The measure increased 2.5% from a year earlier, the smallest gain since February 2021. This is more great news.
Personal Consumption Expenditures (PCE) is the Fed’s preferred inflation measure and is reported at the end of every month for the prior month. October was unchanged, bringing the twelve-month comparison down to 3.0%. “Core” inflation, which excludes the ever-volatile food and energy categories, rose 0.2% in October and is up 3.5% versus a year ago. “Super Core” which is services only (no goods), excluding food, energy, and housing and the Feds preferred measure, rose 0.1% in October and is up 3.9% versus a year ago and down from the 5.2% peak in October of last year. Great news.
Employers added 199,000 jobs in November, up slightly from October. The unemployment rate fell to 3.7% from 3.9%.
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Sentiment versus hard data
Business sentiment about the economy has been running negative, again, opinions verses facts. The NFIB, National Federation of Independent Business charts the Small Business Optimism Survey monthly. The hard data they use are job openings, job creation plans, inventory plans, earnings, and capital expenditure plans. The soft data is based on expectations for business conditions, expansion, real sales, credit, and inventory satisfaction. For almost 40 years the hard data has been consistently higher than the soft data expectations.
The Dallas Fed Manufacturing survey tells a similar story. Businesses were asked specifically how they see demand for their firms’ products over the next six months. 38.1% of the firms expect an increase in demand. 33.4% see demand remaining roughly the same and 28.5 % are expecting a decline in demand.
- The survey results got interesting when they asked a follow up question. Of the companies that expect increasing demand, 27.4 cite factors that are unique to their own firm for driving demand. But of the companies expecting a decline in demand, only 4.9% cite firm-specific factors. The rest cite macro or industry-wide factors. Boiled down, in challenging times, smart firms take early aggressive action to improve their results. Other firms cite excuses for the bad times.
- The Manufacturing PMI stayed the same in November at a contraction level of 46.7. It measures manufacturing activity across eighteen types of industries, from food, plastics, metals, and others. Almost every index they use to measure manufacturing is in contraction. The Transportation Equipment sector is one of only 3 manufacturing sectors of the 18 that are in a growth phase. Many of you are connected to aerospace, automotive, trucks and trailers. That is great news for you.
- Orders for core capital goods (excluding aircraft and transportation), which will lead to shipments in the future, were unchanged in October from September. In the past year, orders for durable goods are up 1.3% excluding transportation.
- Shipments of “core” non-defense capital goods ex-aircraft (an essential input for business investment in calculating GDP and a leading manufacturer indicator) were also the same in October as last month. If unchanged in November and December as well, these shipments would rise at a 0.9% annualized rate in Q4 versus the Q3 average, continuing the trend in slowing business investment that started in Q1 2022 and has slowed in every quarter since.
- Housing prices are up 29% since January 2021 and mortgage rates have tripled. With reduced existing homes for sale because of the low 30 mortgage rates, the supply of homes is down. Less than 1% of households in any given month will buy a house. But 17% want to buy a house in the next 12 months. The buyer of the typical home thus faces a monthly principal and interest payment of nearly $2,200, more than double the level of early 2021.
- U.S. Nonresidential Construction spending continued to grow slightly in October and is at a new high.
- New light-vehicle sales in November were 15.5 million, the same as last month, despite the higher prices of cars and borrowing costs.
The Shapiro Nonferrous Scrap Activity Index, which tracks our daily purchases. From the duplicate accounts across our ten locations and a diverse industrial base, fell in November and was 6% below our twelve-month trailing average.
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Little has changed
China’s official PMI manufacturing index remains in contraction for November and was down slightly from October. A similar gauge used for spending has also dropped into contraction. Surprisingly, the Caixin/S&P Global manufacturing private sector PMI index rose to 50.7 from 49.5 in October.
Housing is 30% of the economy. When you consider the ancillary jobs in real estate, furniture, household appliances, etcetera, this has much more of an impact on jobs. The housing situation continues to get worse. It is no wonder that consumer confidence is poor and people are afraid to spend.
President Xi continues to do very little to help the economy. It took him too long to change the zero Covid policy and now the damage has been done. PCSD, post covid stress disorder, continues. Could President Xi change his mind and make meaningful stimulus changes for economy? Eventually he will, but he is a stubborn old man.
EU (European Union) growth will only be 0.6% this year and it does not look that good for next year. Inflation is falling and core prices are down substantially to 3.6%.
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Aluminum pricing is weird
This has been a strange year for primary aluminum. The worldwide inventories are forecasted to be in a 600,000-ton deficit this year. Russian aluminum has not gone into most warehouses because of the embargo. It has mainly gone to China, India, Turkey, and Asia at a discount to the LME (London Metal Exchange) prices. China, despite its housing disaster is still consuming and producing volumes similar to last year. That should be bullish for aluminum.
But prime aluminum prices have fallen 15% this year based on the PMTA, the previous month’s transaction average. The PMTA is made up of the spot price of LME aluminum plus the Midwest Premium. According to Platts, the “Midwest Premium” is not a “fee” for “storage and transportation”—it is simply a term for the regional price of aluminum in the Midwest. It reflects the actual supply and demand for metal. This year the average Midwest Premium, which was 27 cents in January, has fallen about 9 cents.
The other weird thing is that prime aluminum scrap prices using the American Metal Market first of the month are about the same now as they were in the beginning of the year. And secondary aerospace turnings are up 25% this year. Although US scrap demand is lower, exports have increased. Generally, the US attracts more scrap because of our higher price. Not this year. I must have missed that micro economic class in college.
Little else has changed with scrap prices. Copper was up and stainless prices are about the same. Ferrous prices continue to be strong as they have all year long.
That’s a wrap for Market Insights 2023. Wishing you a Happy Holiday Season and a Healthy New Year. See you in 2024!
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P.S. I have added a new segment at the end of each month’s Market Insights. It aligns with Shapiro’s purpose of Making the Planet Better Together. Shapiro has launched Circular by Shapiro (circularasaservice.com) to provide the environmental metrics and data needed to reach sustainability goals. Below, you will find Sustainability Insights.
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Sustainability Insights by Maddie Carlson
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Energy was the topic that started the environmental conversation, so it is no surprise that it is the second largest source of emissions worldwide and in manufacturing. In 2022, the Energy Information Agency reported that the US generated 4.23 trillion kilowatt-hours (kWh) of energy, releasing 1.65 billion metric tons of CO2. The US depends on fossil fuels (natural gas, petroleum, and coal), nuclear, and renewables for energy sources. Coal has the highest CO2 footprint, releasing 2.30 lbs./kWh; natural gas releases 0.97 lbs./kWh, while aside from their manufacturing process, nuclear and renewables emit zero. Depending on the location in the US, electrical power plants use different percentages of energy sources, but on average, 39.9% is natural gas, 19.7% is coal, 18.2% is nuclear, and 21.3% is renewables.
Decreasing energy use from fossil fuels will be essential to curbing climate change. Switching to renewable sources is the most effective way to cut emissions and end the dependence on fossil fuels, but there are several additional opportunities to reduce energy usage. Commissioning an energy audit is a great way to get baseline energy usage and highlight inefficiencies. Updating infatuation with proper insulation, windows, and LED lights can cut energy use by 30%. Investing in upgraded machinery and energy monitoring systems will help guide and control outputs to effect meaningful change in organizations and industries.
The Paris Climate Agreement warns against a 1.5-degree Celsius increase from pre-industrial levels that will bring devastating weather events, extreme heat, sea level rise, and food instability (just to name a few). Urgent action from manufacturers, individuals, and governments is needed for any chance against these catastrophic impacts.
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