Creating Problems at The Docks ...
In Southern California, off the twin ports of Los Angeles and Long Beach, 62 container ships lie at anchor, awaiting an unloading berth. The floating queue, a phenomenon unknown before the pandemic, has doubled in size since August. The precious cargo includes toys, electronics, furniture and many other goods awaited in distribution depots and in store.
A further 29 ships are adrift twenty miles offshore. They are so far from the coast, their anchors cannot reach the ocean floor.
Onland, docks and railroad terminals are jammed with shipping containers amid an epic buying spree by companies, racing to keep up with domestic demand. Trucking companies and warehouses can't find enough workers to keep freight moving. Americans are waiting for auto parts, Lands End clothing, cat food and Peleton exercise gear, amid many other products apparently.
The Biden administration is struggling to ease congestion in the nation's freight system. The smooth economic recovery is being disturbed by product shortages and rising prices. This week, the Federal reserve lowered their forecasts for U.S. growth this year to 6% from 7% as a result.
Forecasts for inflation PCE basis have been increased to 4.2% from 3.4%. The unemployment rate is expected to rise to 4.8% before easing back next year. The good news, forecasts for growth, jobs and inflation are all heading in the right direction in 2022.
Growth is expected to be just under 4% next year, slowing to 2.5% in 2023. Employment will increase, inflation will return towards the 2% target. Jerome Powell and the FOMC hinted tapering could begin before Christmas. Interest rates could begin to rise next year. The central project for the Fed Funds rate suggests rates could increase to 0.3% in 2022 rising to 1.0% in 2023 and almost 2% in the following year.
It will turn out NICE again. Non Inflationary Controlled expansion, not the nasty Stagflation the pessimists are projecting. US markets closed up. The Dollar moved higher against Sterling and the Euro. Ten year bond yields moved higher closing at 1.45 from 1.37. It's business as usual for now.
A rising tide lifts all boats. World trade increased by 10% in July. Exports from China to the rest of the world increased by 20% in the second quarter. Much of this was heading for the West Coast of America, as the shipping lanes queues and dollar freight rates attest. World trade is bouncing back ... creating problems at the docks ...
Crisis at the Pumps ...
Last week we were worried about the lack of CO2 emissions. This week it was all about gas prices and problems at the pumps. The spike in gas prices is forcing smaller suppliers out of business.
The gas crisis was explained. A dependency on foreign imports. Problems with the Russians, poor connections with the French. A lack of storage capacity in the UK. Winters too cold, summers too hot and a lack of wind to blow the turbines, when the kettles are on. Oh yes and the price cap! disturbing the natural rhythms of the free market.
Crisis at the pumps. The lack of HGV drivers means petrol stations are closing for lack of logistical supply. Don't panic. There's lots of product. The government is ready to relax the visa scheme to tackle the truck driver shortage. 10,000 foreign workers will be allowed into the UK to meet essential food and fuel requirements. The army is to assist with training and testing of new entrants into the delivery network.
"Johnny Foreigner set to save Christmas" the headline on the side of the double decker bus. Soon we may be asked to "Toot for the Lorry Drivers", as they ensure the holidays are coming. The turkeys will be pleased.
The Bank of England moved this week to hold rates and continue with the asset purchase program. The Committee voted by a majority of 7-2 for the Bank of England to continue with the program of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the stock of government bond purchases at £875 billion and the total target stock of asset purchases at £895 billion. With borrowing of around £170 billion this year, the Bank may yet have to do more and fill the Chancellor's £ trillion pound bank note.
CPI inflation is projected to rise temporarily in the near term, to 4% in 2021 Q4, owing largely, it is said, to developments in energy and goods prices. Conditioned on the market path for interest rates, CPI inflation is expected to fall back to close to the 2% target in the medium term but then it always does.
Forecasts for growth this year may be eased back slightly reflecting concerns about supply side constraints. The Bank had forecast growth of 7.25% this year. Further data is needed before any significant adjustment need be made ...
The Bank expects inflation to rise to 4% ...
Inflation CPI basis hit 3.2% in August. The move was pretty much expected. The Bank expects inflation to rise to around 4% by the end of the year. For the moment, that looks like a pretty fair bet. The big question remains, just what exactly happens after that!
Strange things in the mix. Goods inflation increased to 3.3% in the month. Service sector inflation increased to 3.0%. Second hand car prices increased by over 18%. Air passenger transport costs increased by 14%. Motorbike prices were up by 12%. The cost of fuel was up by 18%.
Want to go out for a meal? In the restaurant you will be paying at least 8% more. Want to stop over? Accommodation price rises were 12% higher in August. OK, you may have to make your own bed and breakfast but hey that's life post pandemic, as the world tries to return to normality.
Nothing in the data suggests a rise in food prices as yet. DIY, household appliances and furniture prices averaged an 8% increase. Everything to suggest inflation is always and everywhere a transitory phenomenon. We had expected inflation to peak in August. The continued highs in the oil market suggest the Bank scenario is more likely now ...
Manufacturing Costs Up 11% ...
Manufacturing costs increased by 11% in the year to August. The latest data suggests the May peak was illusory. Costs for manufacturers continue to rise, up from 10.4% in July.
Crude oil prices were up by 50%. Metal prices up by 20%. Chemical costs were up by 12%. Oil closed up at $74.82 at the end of the week. The inflationary impact year on year, will continue into the first quarter of 2022.
Iron ore prices dropped by 20% last week. Copper prices are down by by 12% from the peak in May. Aluminum prices on the other hand, are pushing new highs. Prices are up by 60% year on year. The coup in Guinea, one of the world's top bauxite producers, spooked an already jittery market.
No let up in shipping costs either. A container from Asia to the West Coast USA is priced out at $20,000 up from $2,500 at the start of the year. Energy costs were threatened by a spike in gas prices. Prices have doubled over twelve months. Record gas prices in Europe have forced shut downs in fertilizer plants, indirectly creating a carbon dioxide shortage with implications for food and farming production.
Leaders of the top U.S. industrial companies gathered virtually this week, at the annual Morgan Stanley Laguna conference. Much of the discussion centered on the rising costs of raw materials, labor shortages and logistics. Businesses are faced with the increasingly difficult challenge of getting enough supply to keep up with demand ... world trade was up 22% in the second quarter as strong growth returns ...
Vacancies Rise To Over One Million ...
In the UK the number of vacancies in the economy increased to over one million in August. Accommodation, food featured along with vacancies in retail, health and social care.
The number of people unemployed fell slightly to 1.550 million. The u-rate eased to 4.6%. The number of people on furlough fell to 1.6 million at the end of July.
One million vacancies, 1.6 million on furlough, 1.6 million unemployed. The end of the furlough scheme at the end of September will make for an interesting scenario towards the end of the year. The hope is a significant surge in job losses can be avoided. Market forecasts are for the unemployment rate to increase to 5.3% in the final quarter before easing back towards current levels by the end of next year ...
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The UK recovery appeared to stall in July. The ONS monthly estimate of GDP growth for July was up by just 0.1% compared to prior month.
Supply chain problems persist, worker shortages continue. No growth in the service sector; no growth in manufacturing; output down in construction apparently.
Not a great time to put up taxes. Boris Johnson signalled a ten year plan to stay in Number Ten. Abolishing the triple lock and a National Insurance surcharge hardly a measure of intent.
The jobs market is in a precarious position. 1.6 million unemployed, 1.6 million on furlough and 1 million vacancies in the economy. We await with caution, to see how the furlough scheme will unwind. For the moment, analysts expect the increase in unemployment to be around 250,000 by the end of the year. The unemployment rate will increase to 5.4%. The changes in NI rates will not ease the transition. The planned cuts to universal credit will not ease the pain for many.
Our chart of the week updates the analysis of vacancies and furlough numbers by sector. Overall the ratio of furlough to vacancies is 1.6. Accommodation, food, construction and transportation appear to the focus of higher furlough rates. It is difficult to understand why these areas are most cited in terms of recruitment difficulty, when so many remain in stasis. The problems in health and social care are most apparent, with 64,000 on furlough and 161,000 vacancies in the economy at the end of July.
So what Are the Prospects For Growth This Year ...
Despite the disappointment of the July data, the economy remains on track for growth of around 7% this year. The July numbers may have been up by just 0.1% compared to prior month, Compared to prior year, growth was up by 7.5% following a 22% surge in the second quarter. Service sector growth was up by 8%. Manufacturing up by 6% and construction up by almost 9%. Accommodation and food increased by over 50%.
Growth is expected to pick up in August, with continued expansion in tourism and hospitality. The steady return of staff to the office, particularly in London, should boost transport and the service sector. NIESR expects growth of around 7.5% year on year in the third quarter. A steady recovery to the end of the year, will be supported by a further catch up in hospitality and transport.
The government is acting to ease the crisis in Road Haulage. Would be stay-cationers in caravans will no longer have to pass a test to make the trip. The much needed testing resource could lead to an additional 40,000 drivers getting an HGV licence in time for Christmas.
There may be no chicken in Nandos but there is still every chance of a vote for turkey at Christmas ...
Inflation is set to surge this Autumn. Business leaders are warning of a perfect storm. Problems created by Brexit, labour shortages, the pandemic and the pace of global recovery are forcing prices higher.
The cost of tomatoes has doubled in the past year, vegetable oil is at the highest price in over thirty years. It hasn't been this high since it was stocked in the local chemist shop.
Energy bills are rising. Oil continues to trade above $70 dollars. Natural gas prices are soaring. Prices have risen to over 130 pence per therm compared to 10 pence last year. That's bad news for manufacturers around the world, from China makers in China, to patisserie peddlers in Paris, apparently.
Sugar and Steel manufacturing is affected by increased costs. Then of course there is the challenge of shipping. That's assuming you can book a container to make the delivery. The Baltic Dry Index hit a ten year high last month.
Shipping container rates from China to the US and Europe have surged in recent weeks. In early August, shipping rates for the China-US East coast route topped $20,000 compared to just $5,000 dollars at the end of last year, according to Freightos, the online market place for international shipping.
Want to ship to Europe from Asia? Prices have increased from $2,500 dollars per container to almost $15,000 in the course of the year. Then once in the UK, you will need a driver. With a shortfall of almost 100,000 drivers according to the RHA, pay rates are escalating to £50,000 per annum in some cases.
Copper prices may have eased back from record highs but aluminium and nickel have take up the price hike challenge. Aluminium prices increased to $1,600 dollars per pound this week, compared to just $800 dollars at the start of the year. Cans and chips will cost more. TSMC announced a 20% hike in semi conductor prices as car production stalls.
In the UK, average earnings increased by almost 9% in June. Private sector earnings increased by over 10%. Construction earnings increased by 14%.
So is inflation always and everywhere a transitory phenomenon? The Bank of England expects inflation to peak at 4% later this year, before returning to target towards the end of next year, as the disruption impacts unwind.
Retailers are warning prices are set to rise and soon ... but some manufacturers are warning of a reluctance to pass on cost increases at the risk of losing sales.
Next week, we will examine in detail the prospects for inflation as we update our inflation models and chart book. The implications are not quite as bad as this week's update may suggest ...
In the U.S. just 235,000 jobs were added in August. Expectations of a 750,000 job surge were left stranded. The Federal Reserve and the White House had hoped for strong job gains across the board. Over one million jobs had been added in July.
Professional services were amongst the beneficiaries as hiring stalled in leisure and hospitality sectors. Retailers and restaurants shed jobs. Overall the unemployment rate fell to 5.2%.
Analysts now suggest the US central bank could defer any suggestion of tapering before the end of the year. What a surprise! The strong jobs market and rising inflation had led some, but not all, to expect a reduction in the asset purchase program before the end of the year.
Borrowing is expected to hit $3.7 trillion dollars this year. The Fed will have to maintain the role of "buyer of last resort" over the short term. The $40 billion monthly mortgage backed security plan may be on the hit list to satisfy critics of the ever expanding central bank balance sheet.
Bond markets were unexcited by the latest jobs data. Ten year U.S. bond yields closed up just one basis point to 1.33. Sterling moved higher to close at $1.3864. Markets were mixed. Bill Gross the ex Pimco bond czar suggested "Government Bonds Are Garbage". "Buying U.S. government bonds is all but certain to be a losing bet" he said.
Cash is trash, bonds are garbage, and the Warren Buffet Valuation index moved to a record high reflecting a 90% over valuation compared to historical average. What next for the model portfolio ... Red Dots Are Rising
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy.
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