William D. Johnston

Chairman

Economic Commentary

We have been focusing our commentary on a consistent number of indices and surveys over the past six months, to attempt to gain insight into economic trends in place relative to consumption, production, employment, inflation and recessionary trends. This month’s commentary will be more of the same, with perhaps a little deeper dive into some of the measurements.

As the global pandemic began in February 2020, we found the New York Fed’s Weekly Economic Index (WEI) particularly helpful and relevant in helping us to understand the conditions our country was in with respect to consumption, production and employment, and that tool continues to be of substantial use. The September 1 WEI reading was +2.53%, reversing the previous month’s increase (+3.58%). The individual component indexes negating growth in initial unemployment declines and increases in retail sales and rail traffic were declines in steel production, federal tax withholding, consumer consumption, electricity output and fuel sales. It is helpful to remind ourselves that the WEI is measuring real-time data against data for the same period 12 months ago and thus a reading of +2.53%, while down from the previous month’s reading of +3.58%, is still a net positive with respect to GDP growth year over year.

The financial press spent a lot of time reporting on the PMI release. As mentioned previously, the PMI (Purchasing Managers Index) is a survey of specific companies across 18 industry sectors, who agree to report, using a specific tool provided by the Institute for Supply Chain Management, on the current condition of their respective business. The tool measures order book, raw materials, inventory, supplier deliveries, labor utilization, finished goods production and shipments. The PMI is intended to measure the prevailing direction both upstream and downstream in demand and production. The Index is considered to be a leading indicator of the economy and is closely watched. A reading of above 50 is considered to be indicative of positive or expanding GDP and, conversely, a reading of below 50 is considered to be recessionary, or a contracting GDP. As with every index the details matterJuly’s reading, published at the end of August, came in at 52.8, which was the same as the previous month’s reading. Peeling away the layers, we see that new orders improved slightly and supplier deliveries were steady, indicating a more normalized supply and demand relationship. Employment improved, as evidenced by the jobs growth in manufacturing, while production (orders shipped) slowed during the period. Anecdotal sentiment was positive, with five positive or growth sentiments offered for every negative or cautionary comment; however, 18% reported order book contraction, which was slightly lower than previous surveys.

The Conference Board released their July survey results in late August and the next release will be September 27 for data gathered in August. For the period, the CCI (Consumer Confidence Index) rose from 95.3 to 103.2. The Present Situation Index (PSI) mirrored that report rising from 139.7 to 145.4 and the short term index, often referred to as the expectation index, increased from 65.6 to 75.1, revealing the first increase in three months. In every category the number of positive responses grew while the number of negative responses declined. Dear to consumers’ hearts are gas prices which continued to decline. September 1 prices for unleaded came in at an average of $3.79 per gallon nationally with wide dispersion between states (California being the outlier on the upside). One week ago, prices were $3.85 per gallon, one month ago they exceeded $4.00 at $4.11 per gallon, and 12 months ago consumers were paying $3.21 per gallon. The biggest and quickest driver of price change is the futures price of crude oil. If that price remains stable, gas prices will be stable as well. Crude represents 54% of the cost of each gallon of gasoline with refining and distribution each being equal at about 18% of each gallon’s cost. Federal and State taxes on fuel average about 10%–11% of the cost. The relationship between crude production and demand globally is both very efficient and very elastic. Global production is managed very well and is very sensitive to demand, and therefore, very unlikely to intentionally create excess supply. It has taken several months since the Russian invasion of Ukraine for the entire supply chain of crude producers to reestablish equilibrium between global demand and daily barrel production levels, however, the most recent trends in at-the-pump prices suggest that progress is being made.

The US Bureau of Labor Statistics revealed on September 2 that non-farm payrolls increased by 315,000 in July, but that unemployment increased to 3.7%. Those unemployed grew to 344,000 during the month, and the actual labor participation rate grew to 62.4%, which remained one percent below the pre-pandemic level of February 2020. For the fourth consecutive month, those teleworking declined with the current total being 6.5% of the workforce, which based upon popular media’s seemingly constant focus on mobility and remote work surprised me more than a little.

Many economic data points become political and what seems routine in the measurement of our economy instantly becomes political, especially in the volatile and pressure-filled mid-term election cycle that we are in. You have heard and read me say many times before that when the election cycle begins, truth becomes the victim. We have now moved to a constant election cycle where truth has been redefined and facts are simply someone’s opinions. As a person who loves numbers and data sets, these times are especially challenging. Inflation is certainly an economic content area that is rife with political overtones. If your party is in power then today’s inflation is temporary and caused by global logistical issues created by the pandemic and Russia’s invasion of Ukraine. It will be resolved by equilibrium in the supply and demand curve and has also increased wages and the standard of living for many at the low end of the wage scale. If your party is the opposition trying to regain control of power, inflation is an evil tax eroding purchasing power and caused by runaway spending by the party in power. We won’t solve the divide between those two perspectives on these pages and, to be certain, both parties would and will change their current position as soon as their power status changes, and they would do so with equal doses of dignity as well as indignity, all the while keeping a straight face.

If we were to stick to the facts, they are as follows. For the month of July inflation was reported at 8.5% which is below the expected forecast of 8.7% and below the previous month’s record of 9.1%. For the second month in a row core inflation grew at 5.9% and again was below the expected forecast of 6.1%. The lower rate was due to falling prices of gasoline, fuel oil, natural gas, new cars and airline fares. Food, shelter and used cars continued slightly higher.