Inflating the Bird

Washington was busy this week. Congress was back in session before heading out next week for Thanksgiving. I heard someone say it’s tough to get things done when Congress only works 50% of the time. Such a good point. No wonder approval ratings in Congress are at multi-decade lows.

The White House got a much-needed win. President Biden signed into law the $1 Trillion bipartisan infrastructure bill. It took months of negotiations. This 5-year spending package will be financed by tapping unspent Covid relief aid, Medicare rebates and unemployment insurance halted by some states, as well as petroleum reserve sales and 5G spectrum auctions. $110 Billion is earmarked for repairing America’s aging highways, bridges, tunnels and roads. $65 Billion will be spent on internet access, which would improve services for rural areas and low-income families. Another $65 Billion is headed towards modernizing the electric grid. It will also target carbon capture technologies and environmentally friendly energy sources. The package also includes $55 Billion for water infrastructure, $39 Billion for public transit, $25 Billion for airports and $12 Billion for accelerating the use of electric vehicles. This infrastructure plan is widely popular with the American people.

Earnings Season is coming to an end. It’s been another good one. Corporate America is in good shape. In fact, 2 out of 3 companies in the S&P 500 reported better profit margins than they did before the pandemic. Nearly 70% of the S&P companies beat revenue forecasts and over 80% reported better profits. However, over half of the companies mentioned “inflation” on their Q3 conference calls. That is the most in over a decade. Higher prices are impacting pretty much everyone. And they keep getting passed down to the Consumer.

Americans keep spending. The Consumer demonstrated its resiliency yet again. Retail sales jumped in 1.7% in October, well ahead of the 1.1% estimate. September was revised higher too. That marked the third straight monthly increase and the strongest report since March. Retail sales are up 16% compared to a year ago. That’s some serious growth. Higher gas prices are included in the number. The biggest gains were found in electronics and appliances, as well as garden supplies. E-commerce was strong too. Restaurants and bars were flat month-over-month, but that’s expected to change with the Holidays ahead. This October report was consistent with recent strong trends in credit card spending and support the continuation of consumer activity despite the higher inflation. Target said it expects its shelves to be full for the holidays. Inventories are up 20%. They say they’re ready. But don’t expect any blockbuster sales this year. There’s a demand frenzy and costs have risen too. The Big Box stores like Target and Walmart have mostly eaten those cost increases for now. They’re in a strategic position where they can. Smaller stores have struggled to compete.

Demand is not the issue. There’s no shortage of that. It’s the supply that’s been the problem. It can’t keep up. This week saw some of the issues getting traction towards resolution. The Port of Los Angeles said the number of cargo ships waiting out at sea has been cut by 1/3. That’s good news. The port expects to receive $500 Million from the infrastructure bill, so more resources to fix this and eliminate future bottlenecks. A big problem has been trucks, or lack thereof. The American Truckers Association reported a shortage of 80,000 truck drivers in America.

One solution that is already gaining traction: Autonomous trucks. UPS has an existing partnership with Alphabet’s Waymo. For the Holidays, UPS will be using 8 Waymo driverless trucks for deliveries across Texas. Waymo has a fleet of Peterbilt trucks that have been retrofitted with autonomous driving sensors and software, which have been tested the last couple of years in Texas, Arizona and California. Now they’re hitting the highways for real deliveries and provide a snapshot of things to come. Labor shortage? Artificial Intelligence is the answer to a lot of the inefficiencies in the Digital Age.

The debate continues as to whether these inflationary pressures are temporary or long-lasting. Our answer is both. It depends on where you look. Home values have skyrocketed this year. Demand is strong and supplies are low. That always leads to higher prices. Housing prices tend to lead rents by 12 to 18 months. Rental inflation is expected to be the next steady driver for higher consumer prices in the coming quarters.

Oil prices have fallen a bit, with WTI back below $80. It hit a multi-year high at $85 in October. Gas prices still remain elevated with the strong demand. That’s getting the ire of Washington. The thing is, the price of crude oil is only half the input to gasoline at the pump. 17% of gas prices around the country are taxes, which are even higher in California. 16% is the cost of refining and 14% is the cost of getting it there, which has seen a substantial increase.

The Climate Summit in Scotland concluded with an agreement. But it doesn’t seem to move the needle. After 2 weeks of talks, roughly 200 countries agreed to ramp up efforts to fight global warming. It was billed as a new determination among the world’s governments to shift away from fossil fuels. Environmental activists feel the deal didn’t go far enough. A lack of enforcement mechanisms is a serious limitation. Relying on good faith to follow the rules only goes so far. Besides, China and India have not agreed to phase out the dirtiest of energy sources. In fact, they have increased their consumption and production of coal to combat an energy crisis ahead of Winter. Some European countries are embracing coal again too, going directly against the European Union’s plans. Importantly, China and the United States, the world’s 2 biggest carbon emitters, agreed to cooperate in fighting climate change. It was reiterated at a virtual summit between President Biden and President Xi. Climate is one of the few topics the 2 Super Powers seem to agree on. Critics say the deal is mostly symbolic.

Airline fares had been a drag on consumer prices since August. Delta, the variant not the airline, was the primary cause. It is hard to see how this lasts in the months ahead, given the pick-up in demand with airlines still having difficulty fully staffing their routes. A busy travel season is about to begin. 54 Million Americans are expected to hit the road and friendly skies for Thanksgiving. Twice as many people are expected to fly compared to last year. How about this: Rental cars are expected to cost 4X what people paid last year. Gas prices are higher too. Half the travelers plan to stay within their home state.

Energy isn’t just about transportation. Energy fuels everything from light to heat to power to food. Natural Gas has become our bridge fuel from fossils to renewables. It’s 50% cleaner than crude and coal, and there’s an abundance of it. But production in the US has been curbed. Producers have been pressured. Natural Gas provides 40% of American electricity. But it’s also a key ingredient to fertilizers that grow our food. There’s a domino effect at play. Higher Natural Gas prices have led to increased costs for fertilizer. Rising fertilizer prices impact crops like corn, wheat and soybeans. That’s food we eat, but also feed for livestock. So the price of meat, eggs and dairy go up too. They’re all connected in the chain.

Inflation crashed the party this year. It will definitely find a spot at the dinner table this Thanksgiving. Food prices are up 5% overall from a year ago. Meat and poultry prices are up 12%. A 16-pound bird is expected to cost $23.99, a 24% increase. Salad dressing is up 8%. Even salt and seasoning cost 5% more than last year. And even before you get to that Thanksgiving feast, your wallet was drained by the 50% higher gas prices, unless you’re electric. Last year, the average price to prepare Thanksgiving dinner for a group of 10 was $46.90, according to the Farm Bureau. That’s just under $5 per person. It clearly doesn’t cover beer and wine… The 2020 number was a 4% decline from 2019. This year, the meal is expected to cost over $53, a 14% increase. Talk about an inflated bird…

So as you enjoy the Thanksgiving weekend next week, just be mindful of the costs in place of re-opening America. You can’t shut down a $20 Trillion economy and not feel some bumps as it restarts. And there’s plenty of liquidity to keep the Economy humming. Between the Fed and Washington continuing to pour more money into the system, we should expect elevated prices to persist well into 2022. And don’t forget about that looming debt limit. The can was kicked back in October, something Congress has become really, really good at. Treasury Secretary Janet Yellen warned that the Treasury Department could be left with insufficient resources to keep financing the government beyond December 15th, while a shutdown could come as soon as December 3rd. The full faith and credit of the United States are at risk, yet again. So there’s that…

Have a nice weekend. We’ll be back, dark and early on Monday.


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