You are confused about inflation, interest rates, recession—your job. I’m not going to act like the Wall Street economist who knows less than nothing, but proclaims there is a 10% to 90% chance of recession to justify their million-dollar paycheck.
I’m going to tell you what is going to happen over the next year. Give me a grade next July 4th when the fireworks go off.
***
Inflation has peaked. The statistics may not show it this month, but car prices are no longer demanding premiums, used cars are more plentiful, and there will be even more available next month. I attribute this to higher interest rates bringing higher monthly payments. Ford Lightning pickups demand a crazy price, but who cares because Ford cannot deliver them for close to a year. We also have to expect setbacks that always occur with new models.
Housing prices are coming down, caused by higher mortgage prices. Buyers of mortgages are reluctant to plug in if rates are too high. Overbids are becoming more rare. New homes with crazy prices are not selling.
Gas prices are still nuts, but crude prices have at least stabilized. The War in Ukraine is the reason, along with President Biden’s bipolar approach to oil supply and prices. The climate zealots in the Democratic party are giggling to themselves over $6 gas. It has been their dream, and they don’t get blamed for it because it’s all Putin’s fault.
But Biden’s popularity sinks with each dime increase. He blames the oil companies, begs the Saudis for a trickle, and probably will proclaim a gas tax holiday. The world is gradually sorting it out. The frackers are starting to come out of the bullpen.
Gas prices probably have peaked, but Putin may have to die or be deposed to withdraw from Ukraine because he is stuck like Hitler in 1944 and Lyndon Johnson in 1968. Better to keep fighting than admit defeat.
One more inflation tidbit. Prices for steel in China are collapsing. That will not immediately reduce metal prices here because of the container mess, but it will start to edge prices down.
***
Interest rates. The FED will continue to raise rates. I see a 2 to 2.5% increase over the next year. Not a catastrophic jolt, but significant enough to calm the real estate market. I think stock prices have already overreacted. Amazon and Target caught the flu, but for Apple and Microsoft, which have mountains of cash and seemingly unlimited demand, a 25% drop seems like plenty.
***
Will we have a recession? I doubt it. With unemployment so low and companies still searching for people, why should we have big layoffs? Maybe if you trade cryptocurrencies you should see a recruiter, but I would be surprised to see unemployment much over 4%.
Households have a record amount of cash after the pandemic. Maybe people are edgy about spending it at the moment, but big Back to School and Christmas seasons are expected.
One important thing to remember if you are working in manufacturing is that China smells bad these days.
First the crisis with shipping from China, then Xi cozying up to Putin. Now the massive overbuilding in China has come home to roost. COVID has struck again in China, with horrendous shutdowns in Shanghai and Beijing.
If you were an American manufacturer, would you want your production dependent on Xi, who sees himself as Mao’s lost son?
***
From my view, we are not in a recession at the moment and not likely to be in one next year at this time. Inflation will stabilize, Republicans will be narrowly in charge of the House, maybe the Senate. The stalemate continues, which is good for business.
Real Estate prices will be flat. Jobs will still be plentiful. Gas prices are impossible to predict unless you know Putin’s future. I would start to buy stocks again.
And you still won’t be able to drive that electric truck to Montana.
Question: Are you preparing for a recession? If so, how?
7 Comments
Lloyd-
Your insight is always appreciated.
Just saw a mention last night in the WSJ that Saudi Arabia is being replaced by Russia and India as supplier #1 of oil so the Saudis may want to turn on the spigot to send us more of their oil to keep their economy humming along.
Lloyd,
I’m in your camp. I see a bumpy landing, but no recession because there are too many positive factors presently. Manufacturing will cool off a bit but continue to be a bright spot in our economy.
“if you are working in manufacturing is that China smells bad these days.”
Lloyd.. I’ll give you a 5 out of 5 for your forecast.
I believe business will be good for smaller manufacturing firms thanks to the chaos in the world and protectionism. In my view the only wild card is if someone starts shooting rockets across the 2 big ponds or knocks out our utility or internet infrastructure.
If: the official definition of a recession is “two consecutive quarters of declining GDP.”
And: the BEA data says “Real gross domestic product (GDP) decreased at an annual rate of 1.5 percent in the first quarter of 2022 (table 1), according to the “second” estimate released by the Bureau of Economic Analysis.”
Then: I am going with the economic wisdom of Bon Jovi, Sambora and Child in the chorus of Livin on a Prayer:
“Woah, we’re half way there
Woah, livin’ on a prayer
Take my hand, we’ll make it I swear
Woah, livin’ on a prayer…”
Having said that, our PMPA business trends sales and lead time data shows continuing strength in our manufacturing markets,
But: fact is “…we’re half way there”
Lloyd, you always sum it up very well, this time is no exception
I would only add that somewhere in the near future, say 5-10 years or so, the older people (60-70) are going to retire whether they like working or not. That will have 2 effects:
1. The younger workforce has little interest in working
2. The number of social security and Medicare users will grow substantially where the number paying in will not. Since something seems to have happened to all the cash paid in (Not going there), the cash reserves wont be available, and anyone who didn’t save like they would not ever get SS will be in a world of hurt.
Otherwise, you seem to have hit every talking point around our shop in the recent past. And while you will be able to drive your Lightning in Montana, you wont be able to go very far, especially in the winter.
Lloyd,
Agree with your take on inflation. Housing is a major component of the consumer price index (CPI) with using ‘Owner’s Equivalent Rent’ (OER) which is the major percentage component by far. Housing prices have to come down due to increase in mortgage rates. The problem I see is that the lower purchase price of a house is offset by a higher mortgage rate.
For those people not in the market for a house (or to sell their existing house), the major concerns to a household would be food and energy costs at this time. I expect food prices to rise throughout the year due to a variety of factors….energy costs, fertilizer costs, crops being substituted that are less fertilizer intensive, inclement weather in upper midwest causing late corn planting, dry weather conditions in the western plain states that will probably reduce wheat yields, and also water restrictions to farms in AZ due to the continuing drought in the southwest. (the drought could be a topic for great discussion as reservoir levels in both Lake Powell and Lake Mead are reaching critical levels with no relief in sight).
For those interested in the composition of the US Government Consumer Price Index, here are the items with their weighted percentages….
United States Inflation Rate
In the United States, unadjusted Consumer Price Index for All Urban Consumers is based on the prices of a market basket of: food (14 percent of total weight), energy (9.3 percent), commodities less food and energy commodities (19.4 percent) and services less energy services (57.3 percent). The last category is divided by: shelter (32.1 percent), medical care services (5.8 percent) and transportation services (5.5 percent).