There is a lot of media discussion about inflation and how the current Administration is or is not handling things. One critical element that is not disputable is a pandemic induced shutdown is not a normal thing. Neither was a new worlds record for cash in the bank. The cash drove demand for goods and services at the same time that unemployment induced supply chain choke. points. Now Industrial activity continued its V-shaped recovery, rising for the third month in a row and beating expectations. Moreover, the gains in March were broad-based, with every major category posting gains. Looking at the details, manufacturing output rose 0.9% and notably, most of the gain came from the volatile auto sector at 7.8%. Meanwhile, the mining sector (think oil rigs in the Gulf) continued to make strong progress, rising 1.7% in March and we expect continued gains in the months ahead, with oil prices currently above $100 a barrel for the first time since 2014, incentivizing new exploration. Meanwhile, as a result of higher gas prices, the Biden Administrations is becoming more flexible on new leases to drill and extract fossil fuels on federal land, which might generate some extra activity in those locations in the next few years. Importantly, the total number of oil and gas rigs in operation in the US is still roughly 18% below pre-pandemic levels, a signal that further upside is available.
Business inventories remain lean, order backlogs are elevated, and demand continues to outstrip supply. For example, industrial production is 3.5% above pre-pandemic levels and per last week’s report retail sales showed that even after adjusting for inflation, “real” retail sales are up 13.6% over the same period. Ongoing issues with supply chains and labor shortages are hampering a more robust rise in activity, with job openings in the manufacturing sector currently more than double pre-pandemic levels. This mismatch between supply and demand shows why inflation has accelerated so sharply. In other recent manufacturing news, the Empire State Index, a measure of New York factory sentiment, rebounded sharply to +24.6 in April from -11.8 in March. It looks like the initial negative shock to industry sentiment from the Russian invasion of Ukraine was short-lived. All in all this data suggests a realistic outcome for inflation to moderate and unlike the last time we were at this level avoid the interest rate hikes from the Federal Reserve that went into the 20th percentile. The expectation for results is that by the 3rd quarter 2022 there will be a statistical moderating of the rising inflation and the resultant economic impact. That impact right now looks like a standard recipe for a recession. To remind you – we know we are in a recession after we have been in it for a while. Again 3rd quarter 2022 will be highly instructive as to whether we are in a recession, the depth if so and what the path forward might be.When you think about inflation and how we have arrived at such a spot so quickly….here are a few notes on how Federal Reserve policy is producing an economic disaster.