Shapiro – March 2024 Market Insights

March 13, 2024

CONSUMER BUYING PRICES

ARE YOU A FOX OR A HEDGEHOG?

In last month’s Market Insights, I discussed how uncertainty leads to wisdom. Philip Tetlock, a University of California at Berkeley psychologist, wrote “We insist on looking for order in random sequences.” His argument is that people who have a unified view of the world are more likely to be wrong, and badly wrong. He calls them hedgehogs.

Hedgehogs are less prone to self-doubt, more likely to dismiss evidence that contradicts their vision, and less likely to admit to mistakes. Sounds like most politicians, don’t you think?

Tetlock also writes about foxes who “draw from an eclectic array of traditions and accept ambiguity and contradiction as inevitable.” Foxes make decisions with an open mind. I have learned that accepting open-mindedness and challenging my assumptions allows me to see the bigger picture.

Allan Greenspan, former Chairperson of the Federal Reserve, is definitely a fox and in August 2003 said, “Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape.” Mr. Tetlock, who I quoted above, finds foxes to be successful because they make fewer big mistakes than the hedgehogs.

Jan Hatzius, Goldman Sach’s chief economist, is a fox. In 2007 after analyzing the subprime mortgages in, he correctly warned that mortgage defaults could cause a severe recession. At the beginning of 2023, when everyone was sure there was going to be a recession, Hatzius was in the soft-landing camp. He and his team of 41 economists use the fox approach for analytical reviews on several topics. They have determined that artificial intelligence will significantly raise long-term growth, the economic benefit of wearing masks in lieu of lockdowns was better for the economy, and that big union wage settlements would barely impact inflation.

For 2024 Hatzius sees healthy growth of 2.3% for GDP (Gross Domestic Product), unemployment staying below 4%, and the probability of recession at just 15%. This is more optimistic than the consensus of most economic forecasts. He sees inflation continuing to fall to a little over 2% by year end, using the Fed’s PCE, personal consumption expenditures, excluding food and energy. He understands that no single framework works for every economic or interest-rate cycle. Hatzius says “You have to be a little bit of a fox when it comes to analytical frameworks.”

My summation: Thinking like a fox and being uncertain leads to better decision making.

INFLATION

The Inflation Fight is Still On 

• The Consumer Price Index (CPI) for February was slightly higher than expected. The core CPI gauge, which excludes volatile food and energy prices, topped forecasts for a second straight month, with a 0.4% increase that was the same as in January. Higher gas prices and shelter were the largest drivers of the increase, while food prices were unchanged. Headline CPI was also up 0.4% and on an annual basis was up 3.2% while the core was up 3.8% on an annual basis.
• The supercore CPI measure, services prices excluding energy services and housing costs, that the Fed has highlighted, rose 0.5% on the month. That was lower than January’s 0.8% gain but was elevated in comparison with readings during the fourth quarter. The goldilocks jobs market with employers continuing to hire, but wage growth slowing, also gives Fed officials some leeway for patience. The June Fed meeting might bring a 0.25% rate cut.
• Personal Consumption Expenditures (PCE) is the Fed’s preferred inflation measure. January was reported at the end of February and rose faster in December than expected. The PCE price index increased 0.3% last month from December and the core rose 0.4%. Over the 12 months through January, the overall PCE price index rose 2.4% while core prices climbed 2.8%. The Fed has always said the road to 2% inflation would be bumpy.
• The difference between CPI and PCE is difficult to explain in a few sentences. Broadly speaking, the CPI tries to measure more out of pocket costs that consumers are paying for things, whereas the PCE index that the Fed targets is a wider measure. It contains health insurance payments and financial services costs not necessarily paid directly by consumers. Another weird part that is factored in is the change in the stock market. Hope this helps a little.
• The Producer Price Index [PPI (Producer Price Index)] for February will be out Friday. It rose in January after falling in December.  Excluding food and energy, core PPI increased 0.5%, against expectations for a 0.1% gain. PPI excluding food, energy and trade services jumped 0.6%, its biggest one-month advance since January 2023. This was in line with the January increase in CPI.
• Federal Reserve Chair Jerome Powell told Congress on March 7 that the central bank was “not far” from being able to cut interest rates and that rates were far above levels that might be anticipated during periods of mild inflation and moderate growth. “When we do get that confidence, and we’re not far from it, it will be appropriate to dial back” interest rates to avoid tipping the economy into a recession, he said. Yippee!

MANUFACTURING

Continues To Be Positive

The ISM Manufacturing index dropped in February to 47.8 from 49.1. While this is the 16th month of contraction, it is still looking better for those in metals manufacturing. Of the six biggest manufacturing industries, three (Fabricated Metal Products; Chemical Products; and Transportation Equipment) registered growth in February. The first two are foundational industries, meaning those that provide products and components for other manufacturing industries. The ISM Non-Manufacturing service index fell slightly to 52.6 in February from 53.4 in January.

• A “nowcast” GDP produced by the Atlanta Fed put out at the end of February estimates that the economy is now tracking at a 3.2% growth rate in the first quarter. This was most recently pushed up by home sales data and durable goods orders.
• Orders for core capital goods (excluding aircraft and transportation), which will lead to shipments in the future, declined 0.3% in January while consensus expectations were looking for a 0.2% increase. December orders ex-transportation was revised down from a 0.5% rise to a 0.1% decline.
• Shipments of core non-defense capital goods excluding aircraft, an essential input for business investment in calculating GDP and a leading manufacturer indicator, rose 0.8% in January. If unchanged in February and March, these shipments would be up at a 3.3% annualized rate in Q1 versus the Q4 average. While that would be great, shipments have been trending down for the last 2 years.
• New home sales rose slightly in January. They benefited from lower interest rates and lower prices. Builders have been downsizing houses to make them more affordable. Sales are also benefiting from the lack of existing homes with low mortgage rates.
• Cars and light trucks sales rose to a 15.8 million annual rate in February, up 6.0% from January and 6.3% higher than a year ago.
• U.S. Nonresidential Construction spending continues to be strong and near its high.
• The Shapiro Nonferrous Scrap Activity Index tracks our daily purchases from the duplicate accounts across our ten locations and a diverse industrial base. February rebounded 12% from the weather impaired January and was right on track with our twelve-month trailing average.

CHINA

You Will Need More Than A Grain Of Salt With This Forecast

The annual meeting of the National People’s Congress in China just happened. It calls for 5% GDP growth, 3% inflation and the creation of 12 million new urban jobs. Most independent GDP forecasts are for 1.5% to 4.5% growth, which is great, but not for China.

The housing bubble will not be resolved for a long time. Interest rates are as high as they were in 2016. Consumers are spending less as the inflation rate is near zero and trending to deflation. Though it is not reported, consumer confidence is not good. You will need a mouthful of salt to believe the official Chinese forecast.

The official PMI (Purchasing Managers Index) and Caixin have not changed much. The PMI remains in contraction and the Caixin is just above contraction, just as they have been for months. Meanwhile, the rest of the world has been slowing down. Japan is in a recession. Europe and Asia are also slowing down. Only India is in a growth spurt.

How does the Chinese economy affect metals? Housing has dropped the steel consumption percentage from 34% in 2019 to 27% last year. Metals demand for green energy manufacturing and infrastructure has been making up the difference in China. In the last 2 years the demand for steel has remained the same. Aluminum demand has increased slightly along with copper.

Despite all the problems in China, it continues to move forward but at a slower pace.

METALS

Not Much Change

Prime aluminum continues to weaken. The Midwest premium is in the mid $.17s down from $.19 at the beginning of the year. Prime demand is down with high inventories. This is not true on the scrap aluminum side. While spot prime is down about $.05 from the start of the year, scrap levels are up $.02 to $.05 per pound. Aerospace turnings have gone up $.08 per pound. There is strong demand from Asian buyers on scrap and just not enough scrap being generated in the US. I have been in the business for over 50 years and have never seen this happen for so many months in a row. This may be the new normal, and like the fox, we must adjust.

Scrap copper prices have barely changed all year. Nickel has gone up about 10%, while stainless steel prices are the same as last month. Steel prices are down $50 per ton again this month.

I make sure to read diverse sources of economic data and much of it tends to be pessimistic. What I do know is that the Shapiro base of diversified manufacturers continues to be steady. I, along with the foxes, follow the adage that the trend is your friend.

P.S. I invite you to read our 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. 

The difficulty lies not so much in developing new ideas as in escaping from old ones. 

–  John Maynard Keynes 

“Life is good. Family and health are precious.” 

Bruce Shapiro

Sustainability Insights by Maddie Carlson

March 2024 Market Insights

Foundations for Sustainability Platforms

As many of you know by now, my Sustainability Insights column has been focused on environmental data for the manufacturing industry. I emphasize it because it is important because the need is growing, and it will be essential for future reporting requirements.

Sustainability metrics can help create baselines, highlight inefficiency, and guide program development. I have written about a few approaches to getting reliable and meaningful data. When building metrics based on data, it is important to take it a step further and discuss management and analysis software. There are so many software platforms available to choose from, it can be confusing and overwhelming to filter through their options. Here are some topics to consider when looking into utilizing a sustainability platform and keep in mind, these are the bare minimum requirements:

Adaptability— Research, best practices, and regulations are changing rapidly. The most important aspect is having a program that can grow with your sustainability goals.

For example: In the year 2030 the SEC may require electricity use by machine but your platform isn’t capable of tracking that.

Credibility— Most metrics require outside sources to calculate, measure, and report stats. Platforms must use reliable sources AND be transparent about what those sources are.

For example: EPAs 22.45 lbs. of CO2 per gallon of diesel.

Tailored Data —Outside sources are necessary but beware of generalized stats that will not be worth the investment.

For example: If your data is made up of nonspecific industry averages, it may cause a company not to get what is required for the future SEC reporting.

Meaningful Outputs — It is important to consider the specific needs in order to generate meaningful outputs that can be directly applied to sustainability reports and measurements.

For example: Having the ability to download your company’s data for an annual sustainability report.

While its great that companies are developing sustainability platforms, I really believe we need to hold them to a high standard.

It is important when choosing a platform, whether it’s a new implementation or a scratch development,  to consider adaptability, credibility, tailored data, and meaningful outputs will help navigate your search. Keeping these factors in mind will help you choose a platform that fits your program’s requirements and will assist in giving your company’s sustainability program the foundation it needs for future success.

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