Economic Commentary

The National Bureau of Economic Research officially declares the beginning of a recession well after the actual recession begins. It is always a rear view look and analysis based upon data that is already months old. What we do know is that for the first half of 2022 the US economy contracted from its previous growth rate and posted negative growth in each of the completed quarters. In Q2, gross domestic product declined 0.9%, which was worse than the consensus estimates of 0.3%. The decline comes during a period of conflicting economic inputs. Unemployment remains steady at 3.6%, and initial as well as continuing claims for unemployment remain lower than previous months, with new job additions exceeding previous estimates. There remain twice as many job openings as there are reported unemployed persons, and pay increases have continued across a wide range of industries. The consumer is employed; however, recent data reveals that consumers are less confident about the future and are spending less and saving more. The negative GDP implications of inflation have been compounded by reductions in consumer confidence as well as the leading indicators of future developments provided by the Business Confidence Index.

As always, we like to check the Weekly Economic Index to see the real time data on a variety of measures of the pace of economic activity. This week’s measurement is a slight uptick from last week, and offers similar conflicts in results. The American Staffing Association (ASA) Staffing Index shows strength, reflecting the demand for labor. Rail traffic and electricity output experienced a slight increase, as did same store sales; however, federal tax withholding was flat, and fuel sales to end users declined during the period.

Commodity prices continued the decline that began nearly a month ago, but with increased velocity. We have been of the opinion that much of the disequilibrium between supply and demand in commodities was related to the global pandemic and massive interruption in the supply chain of materials necessary to produce finished goods. To say that commodity prices have been volatile would be a huge understatement. The precipitous decline in prices for palladium, platinum, silver and copper in recent weeks is not fully understood; however, we can’t ignore the basic tenets of equilibrium theory. Simply put, when demand exceeds supply there will be too much money chasing products and services, resulting in pricing reflective of the disequilibrium. Equilibrium and disequilibrium are not static, but rather dynamic and dependent on constant inputs. Demand that exceeds supply will eventually be met by increased supply and production, or by substitution purchases, which serve to bring demand and supply into equilibrium. The question yet to be answered is: Does the decrease in commodity pricing experienced in recent weeks reflect an increase in supply of products, or a decrease in demand for products brought on by weakening consumer demand?

Early in the pandemic, public policy among most of the OECD countries was to support consumers with stimulus-like programs. The policy implementation across much of the globe was more similar than dissimilar, and resulted in constant demand for consumer staples, as well as capital goods purchases like automobiles (new and used), clothing, appliances, computers, personal entertainment devices, real estate, etc. Supply chains faced huge demand while also experiencing significant erosion in human capital due to both choice decisions as well as the health impairment reality of COVID-19. Detailed analysis of the duration of time to restore production streams inclusive of raw materials through finished goods all forecasted that normal equilibrium would not be restored until well into 2025, especially for those products that required microprocessor chips. As we have discussed previously, the global logistical supply chain that was built to reward specialization and pricing advantage made many industries and manufacturers single-threaded and, ultimately, held hostage to vendors that were globally distant and unable to produce and/or ship goods. Deglobalization, to increase manufacturers’ independence, cannot and will not be accomplished in short order.

Public policy is not perfect, but rather subject to many inputs that are more often political rather than fact-based. Pandering may be a strong word to use in this context, but our own political history is full of examples where public policy designed to “fix” a problem mostly served to create another issue. It is easy to blame actions taken in crisis after the original storm is calmed and claim ownership to a better solution when the wind is not blowing nearly as fiercely in your face. As the infamous prize fighter Mike Tyson was fond of saying, “Everyone has a plan until they get hit in the mouth with a fist.”

Did we overstimulate our economy with too many and too large of direct-to-consumer and employed individuals programs? Did those public policy decisions place impossible stress on supply chains, resulting in disequilibrium that had to generate inflationary results? It’s too easy to answer yes to those questions in the perfect vision of hindsight. What is current and real now is worthy of our attention. In three of the five major home geographical sectors that we follow, prices have stalled and days-on-market have lengthened. Some price bands have experienced price reductions. Some have begun to speak of housing as a speculative bubble. The evidence seems clear that in the major commodity components of home construction, such as lumber, aggregates, plastics and copper, that demand is shrinking. The differences between 2008 and now are significant, however. The pricing demand in housing during the past 48 months was not created by syndicated mortgage products, but rather by demand to own by individuals and corporations possessing equity. New unit construction nationally did not exceed demand normalization for our population and demographic trends. If anything, what has surfaced is a continuing housing shortage in many regions.

Energy prices have moderated in recent weeks, resulting in more questions than answers available. Russia bet heavily on strangling Europe by holding them hostage over energy. In doing so, Putin also bet that the global energy companies in the Americas would by necessity have supply shortages created globally which would ultimately, through inflationary pressure, weaken opposition to Russia’s war against Ukraine. US gas prices have declined for six weeks now, as has heating oil, natural gas, Brent Crude and WTI Crude.

Equilibrium is changing and the confidence of consumers is shaky, though they are employed and have experienced wage increases. Business confidence has declined, though the Purchasing Managers Index remains above recessionary readings. The important story is not really about whether we have slipped to recessionary levels of GDP, but rather whether the supply and demand battle between equilibrium and disequilibrium, and therefore pricing, will be settled without a significant reduction in demand that reverses our current healthy employment status and consumer strength.