Shapiro – August 2024 Market Insights

August 15, 2024

CONSUMER BUYING PRICES

RECESSION HYSTERIA: IS THE FED BEHIND THE CURVE AGAIN?

We live in scary, unpredictable times. In July, former President Donald Trump survived an assassination attempt by a lone gunman, but two rally attendees were killed. A week later, President Biden, who was defiant that he would not step down, changed his mind and passed the torch to his Vice President, Kamala Harris. The largest ever wildfires continue to burn in California. In 2024 alone, there have been a reported 4,600+ fires burning over 750,000 acres and counting. Tropical Storm Debby made its way from Florida up through the East Coast, flooding homes, taking down trees, submerging vehicles, and is responsible for numerous deaths. Negative political ads make everyone edgy. We will continue to live in volatile and uncertain times.

On the other hand, the Paris Olympics gave me hope. It was refreshing to watch the athletes compete and cheer each other on. There is much to be learned from them.

Recession hysteria is in the news as are the calls for the Fed to cut interest rates … now. In 2022, the Fed realized too late that transitory inflation was not transitory and finally started raising interest rates in March of 2022 as inflation was going up rapidly and peaked at 9.1% in June of 2022.  Interest rates then peaked at over 5% in July 2023. A recession was forecasted by an overwhelming number of economists for late 2023 and 2024 and the hysteria ensued.

Their forecasts were wrong. A soft landing has been achieved as inflation has slowed to nearly 2% as measured by the PCE, the Feds preferred inflation indicator, and as employment remains healthy. GDP grew in 2023 and is up again this year. The economy has benefited from strong government spending, pandemic aid, high employment and personal income growth.  Now the stimulative effects of these factors have slowed down.

Is it time to worry about the economy falling into a recession? Maybe. Job growth slowed in July and the unemployment rate rose from 4.1% to 4.3%, mainly due to 420,000 people entering the job market and the effects of Hurricane Beryl. Still, the US Labor Force Participation Rate remains at a very healthy high. Another positive sign is that average hourly earnings rose 0.2% in June and are up 3.6% year over year.

Gross Domestic Product [GDP] growth adjusted for inflation, and for the second quarter grew at 2.8%, up from 1.4% in the first quarter and is expected to show another gain in Q3. This economy continues to show the benefits of strong consumer and business spending. The US growth is better than all the other Western world countries. In comparison, Europe’s GDP was up only 0.2% for the first half of the year.

Recently, we have seen credit card debt growing, and late payments increasing to recent highs. The effects of the higher interest rates have increased the costs of home ownership and cars. Will this cause a recession in the near future?

It takes a long time for interest rates to affect the economy. It’s not a light switch. Just as the Fed was behind the curve in raising interest rates when inflation started, they are now being criticized for not cutting the rates soon enough. The interest rate cuts will begin after the next Fed meeting on September 17th and 18th and there should be a half percentage point cut. Some economists are saying the rate should drop from 5.3% to between 2.4% and 3.8%. This gradual drop will take well over a year. However, the longer the Fed waits, the greater the potential for damage to the economy.

There will be lots more data between now and then and we know that things will change. My favorite acronym, VUCA: Volatility, Uncertainty, Complexity and Ambiguity defines this perfectly.

INFLATION

Inflation keeps falling 

• The Consumer Price Index (CPI) for July was 0.2% the same as June. Year over year it fell to 2.9% from 3.0%. This is the first time it has been below 3% since early 2021 and the slowest rate since then.
• Core inflation was the same in July as last month and a 0.2% gain. Much of the 0.2% gain was from housing which should start slowing down soon. The annual rate year was 3.2%.
• The Supercore CPI measure, services prices excluding energy, goods, and housing costs, that the Fed has highlighted, rose only 0.21% in July from June.
• Personal Consumption Expenditures, PCE, the Fed’s preferred inflation measure rose 0.1% in June and is up 2.5% in the past year compared to a 3.2% gain last year. It rose 0.1% in June and is up 2.5% in the past year compared to a 3.2% gain in the year ending June 2023. Core prices, which exclude the ever-volatile food and energy categories, rose 0.2% in June and are up 2.6% versus a year ago, a big improvement. The PCE rate annualized over the last 3 months was only 1.4%.  This is a big improvement from the 4.3% reading for the twelve months ending June 2023.
• The Producer Price Index for July rose only 0.1% and was below the June 0.2%. From a year earlier, the PPI increased 2.2%, the smallest year-over-year increase since March. Excluding food and energy prices, the core reading was unchanged in July, undershooting expectations for a 0.2% rise.

MANUFACTURING

Continued uncertainty

The Manufacturing PMI® [ISM] was 46.8% in July, down 1.7% from the 48.5% recorded in June. The overall economy continued in expansion for its 51st month after one month of contraction in April 2020 (a Manufacturing PMI® above 42.5%, over a period of time, generally indicates an expansion of the overall economy). However, the trend has been steadily down.

Almost all the sub-indices remain in contraction. The New Orders Index [47.4% down 1.9%], the Production Index, 45.9% down 2.6%, and the Backlog of Orders Index 41.7% the same as June were all weak. The Employment Index fell to its lowest level in 4 years, 43.4%, down 5.9%.

• ITR is forecasting a 10% increase in aircraft production from 2024 through 2026 and also forecasting industrial production to increase 2% in 2025 and 2026. ITR is a highly accurate economic forecasting company that uses a 12-month moving total or average.
• US non-defense capital goods new orders, excluding aircraft, rose 0.5% in June, beating expectations with most major categories showing gains.
• Shipments of core non-defense capital goods excluding aircraft, an essential input for business investment in calculating GDP and a leading manufacturer indicator, rose a modest 0.1% in June but declined at a 2.3% annualized rate in Q2 versus the Q1 average, the largest single-quarter decline since Q2 2020.
• New home sales for June dropped slightly from May and are 7% below June 2023. The 30-year mortgage rates have dropped from 7.2% in late April and are now approaching 6.0%.
• Car and light truck sales rose in July and grew to 15.8 million units after dropping slightly in June. ITR is forecasting next year’s sales to be about the same as this year and 2026 to be up 3.6%.
• The NFIB, National Federation of Independent Business, reports that small-business confidence jumped to its highest level in nearly 2 ½ years in July.
• The Shapiro Nonferrous Scrap Activity Index tracks our daily purchases from duplicate accounts across our ten locations and a diverse industrial base. Based on our twelve-month trailing average, July volumes fell 8%.

CHINA

The land of denial 

China has been facing slower growth, an aging economy, heavy government debt, and poor consumer confidence for years. The elephant in the room is the housing bubble. When the US housing bubble broke in 2008, the housing market collapsed, and our economy fell into a recession and slow growth continued for over 10 years. That is how a market-driven economy works.

China refuses to accept and correct its overbuilt housing crisis and continues to be in denial. Housing prices are controlled by the government and are not allowed to drop to market-based pricing. If the pricing weren’t controlled and sold for what it is actually worth, the government would then be faced with more bankruptcies. Second quarter GDP was 0.7% which is an annual rate of 2.8% and half of their forecast for the year.  Overcapacity in manufacturing is causing prices to fall and there is a fear of deflation in their economy.

Every 5 years China holds a Plenum strategy meeting to chart the course of the economy. This meeting was completed, and the 300-page document did very little to improve the economy and address the major issues in the housing bubble. Because it did nothing to improve welfare, health coverage, and old-age care, many Chinese people will remain reluctant to spend.

China’s strategy is to produce more industrial goods and export its way to better times. They finance these new businesses through state and local governments. They have two proplems; 1. Not being able to increase the demand at home.  2. Low-cost exports are not working. The old strategy of exporting their way out of this is not working because other countries are placing tariffs on Chinese goods to protect their own economies.

The result of this strategy is that 25% of domestically traded companies are losing money. China’s auto sector is in the midst of a brutal price war, as more than 100 companies churn out almost twice as many electric vehicles as domestic drivers buy each year. The other losses are concentrated in chemicals, electronics, and machinery. Along with the housing crisis, I don’t see China recovering any time soon. All of the above does not bode well for the world’s economy and continues to affect metals.

METALS

Sell in May and go away was delayed until July 

Yikes! Prime aluminum, copper, and nickel all fell about 10% in July. Manufacturing slowed as the ISM fell. Fears of a recession are also a factor as metals inventories are building. Prime aluminum fell 12 cents and prime aluminum scrap fell about the same. Secondary aluminum did very little. Copper and nickel were also down about 10%. Stainless steel scrap and ferrous scrap held steady.

China continues to do very little to change its tepid growth. Despite this, China’s June primary aluminum production was the highest in 10 years. Its aluminum imports are up 72% compared to the same period last year. This is mainly due to the cheap Russian metal.

So, where is the metal being consumed? Edward Meier believes that “China’s light manufacturing demand along with the strong offtake for aluminum transmission grids, EVs, data centers, and aluminum product exports are all making up for the weakness in the country’s real estate.”

The Aluminum Association preliminary estimates indicate that aluminum demand in the United States and Canada [shipments by domestic producers plus imports] advanced 6.2% over YTD May 2023. Demand for semi-fabricated (mill) products rose 2.8% over the level a year ago. Apparent consumption (demand less exports) in domestic markets increased by 3.5% over the 2023 level.

All in all, if anything, business investment has been accelerating in 2024 relative to 2023, with particularly strong growth in purchases of computers, light trucks, software, and research and development. This is all good news.

It appears that the economy will continue its high wire balancing act. I am counting on it to be both positive and scary. Hang on.  And for now, let’s stop with the hysterics.

Also, for the record, Governor Josh Shapiro from Pennsylvania is not related to me.

P.S. Maddie Carlson’s Sustainability Insights is another blog we are sending your way. I am so excited about Sustainability Insights as 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.

“Find a group of people who challenge and inspire you, spend a lot of time with them, and it will change your life.” – Amy Poehler

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

Bruce Shapiro

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