Economic Commentary

The New York Fed revised their May 19 Weekly Economic Indicator reading upward to 4.29%; however, their May 26 initial reading declined to 3.52%, reflecting the trend in place. Simultaneously, the Conference Board, as well as University of Michigan consumer surveys, also mirrored a small, but consistent, decline in consumer sentiment and confidence in short term economic prospects. The Conference Board Consumer Sentiment Index declined to 106.4, down from April’s reading of 108.6. It is not the degree of change that matters, but rather the confirmation of the trend in place. However, the current reading was significantly better than the composite of analysts’ expectations of a 103.6% projection.

Food and energy prices weighed heavily on consumers’ minds as savings declined and credit card debt expanded during the period. Specifically, consumers put on hold decisions to purchase autos, homes and appliances. We will look to durable goods sales data later this month to confirm those survey responses by consumers. The University of Michigan Consumer Sentiment Index declined across all three categories of sentiment, current conditions and the forward six-month expectation results. Again, the declines were relatively small, but consistent with the now four-month trend in place. Composite Leading Indicators (CLI), Business Confidence Index (BCI), as well as the composite Consumer Confidence Index (CCI) all validate the declining trend in place in overall consumer confidence. We will look for the latest jobs report Friday, June 3 to see if consumers are more concerned about employment than prices. Anecdotal responses within the surveys suggest pricing is weighing heavier than employment, which certainly makes sense. Analysts focusing on payroll surveys are forecasting an additional 352,000 jobs added to the payroll in May, bringing us to an unemployment rate of 3.52%.

It is estimated by several banking associations that about 40% of Americans have a savings account, and that a majority of Americans would not have enough savings to cover an emergency requiring one thousand dollars. Should those statements be accurate, it is easy to see why the current 31% increase year-over-year in at-the-pump fuel prices would cause behavioral changes in many consumers. Transportation of goods and services resulting in fuel surcharges only amplifies the erosion of the purchasing power of people trying to work and feed families.

Economists have long argued the theory that replacement choice decisions tend to mute the impact on inflationary pressures. Their assumption is that vendors and retailers are not simply free to pass on wholesale price increases, as customers will substitute behaviors and purchasing choices to combat the increasing cost of goods. The replacement choice theory makes sense when there are options available, but seem unlikely when price increases are broad and include all components necessary for shelter, food and transportation. We have spent a good deal of time in this column on the inflationary pressures of supply chain interruption, which created too much money chasing too few goods, and now we have amplified that condition by making the transportation of those goods more costly.

Conservative economists would argue that our eleven-year recovery from the financial crisis in 2008 through 2019 and the global COVID-19 pandemic in 2020-2021 is responsible for our current inflationary cycle. They maintain that there was too much central bank intervention in injecting liquidity into the banking system, and that we artificially lowered the cost of debt, causing inflated real estate and investment values. Further, they suggest that if we allowed market forces to work as they should, banks that deserved to fail during the financial crisis would have done so and, in the long run, stability would have returned to markets based upon market force fundamentals. Of course, they don’t spend much time explaining away the personal human tragedies that would have taken place with this scorched earth approach to a global financial crisis. Similarly, they spend minimal time suggesting the alternative to keeping people employed during a global pandemic. It is true that all of the stimulus packages passed by Congress allowed most consumers to remain, by and large, financially healthy during the pandemic, and that consumer demand remained uniquely strong during the depths of the disease spread. Did that increase the demand for goods beyond what could be produced for a period of time? There is little argument that it did. It also reduced a staggering unemployment rate of 14% within a relatively short period of time. Prices of consumer goods, prior to the pandemic and Russia’s invasion of Ukraine, suggest that an appropriate equilibrium between consumer demand and production supply existed. Unemployment was at historically low levels while wages were increasing moderately and were particularly benefiting the lowest quintile of earners.

The pandemic immediately changed the equilibrium between supply and demand, much as it did in the financial crisis of 2008. The pandemic, as well as the financial crisis, was global and not country specific. Our supply chain, as we have written previously, is global and not specific to one country. The cure to supply chain inflationary pressures must be the return to normalization between demand and production, and can best be accomplished in a few years, not months or certainly weeks. The price of fuel at the pump, prior to the Russian invasion of Ukraine, was equivalent to $0.65 per gallon in 1978, on an inflation-adjusted basis. The current thirty percent increase in the at-the-pump fuel prices has everything to do with global distribution interruption and, again, will not be cured in weeks or days, but rather by the duration of time that the supply is interrupted during this international conflict.

Some might argue that we can lower our fuel prices in the United States by becoming more energy independent. Doing so would be to restrict United States producers and refiners of energy products from distribution, exploration and refining in the global marketplace, as they are part of global corporations that create, refine and supply energy to the entire bandwidth of global need. To assume that American domiciled energy producers only explore, produce, refine and distribute within our country’s sovereign boundaries is to ignore the reality of the global energy sector. Time will be our friend in the restoration of the global supply chain as well as the restoration of the global energy supply. In the conversation about energy prices, we must come to recognize that on a longer term inflation-adjusted calculation, our energy prices are very low and, in fact, much lower than almost every other country.

COVID remains with us and seems to be morphing into what many pandemic researchers had forecasted more than eighteen months ago. Infections will continue and new strains will be diagnosed. Those who have been vaccinated and boosted will not be immune, but will face significantly better outcomes when and if infected. Global inoculations continue to increase and suffering, hospitalizations and deaths continue to decline. Research will discover new variants and research will modify vaccinations and boosters. I am prone to repeat that, as Americans, we do not need to be hungry to eat or thirsty to drink. We want to know who is to blame and what the solution is. We don’t want it messy, though we make a lot of messes. We want COVID over. Turns out it isn’t over now and won’t be for a very long time, and chances are it will be replaced by something we don’t presently know of. It will be like many other maladies that we, as humans, each have the opportunity to fall victim to. We can prepare, prevent, take appropriate remedies and precautions, and live with it and through it or not. The evidence continues to suggest that those that do are faring better than those that don’t.