Since our July 3rd Tuesday Blog, the economy continues opening, albeit in fits & starts. As we consumers get out and consume more each month, the supply issues resulting from the economy being closed for a year continue to cause significant price increases along the supply chain. Let’s look at where we’re at and what seems to be expected over the next few months.

Gross Domestic Product (GDP)

GDP is reported by the quarter, so the latest report is for 2Q2021. It shows GDP rising 6.5% in the second quarter, following a 6.3% rise in the first quarter. The economy is running in high gear, sort of. Before it can sustain such growth, the various stages of production that make up the economic activity must ramp up production to fill the demand for their output. Absent any shock-type event involving the US, we probably have at least two good quarters coming.

Employment

The monthly jobs reports reinforce the message of a return to a growing economy. 

The Leisure & Hospitality industry, including adult beverage places, is the leader in adding jobs for the last couple of months as bars, restaurants, hotels, etc., ramp up for the returning demand. 

In July, 943,000 jobs were added to the economy. Since March, except for April, the number of jobs is increasing each month. A very positive trend. Too many industries are suffering from a lack of workers, causing lower output and adding to the bottlenecks in each stage of the economy. 

In September, the Federal Unemployment pay of $300/week is scheduled to end. This should bring back more workers to the labor force.

Prices

The CPI for the 12 months ending July 31, 2021, was up 5.40%. The Core measure was 4.30% for the same period. In addition, that measure is 5.00% or higher for the third month in a row. Some items the popular press is highlighting include: Auto Rental prices; Price of Used Cars & Trucks; and Gasoline prices. Looking through the Producer Price Index (PPI) for the last eighteen months seems to show where the demand cooled for these items and where they picked up again. 

Each of these categories experienced a very rapid rise in demand when things started up again. Looking at the PPI ID-Flow (See diagram) stats, that demand could not be meet with Covid-level supplies, and re-starting more normal levels of production involves ramping up all the way back to the first stage- raw materials.

For example, during Covid, oil producers took great amounts of oil off the market to support prices, which still plunged. Now they must bring more oil on line to meet demand and find the right price. Then, that oil may be headed through the process to become plastic. Extracted in Stage 1, it moves to Stage 2 for processing, then to Stage 3 where it is incorporated into parts for the Stage 4 final assembly. OPEC agreed to new production increases two weeks ago and the current administration is not fossil friendly, so we cannot satisfy the demand from our domestic sources.

In Sum

Things move at different speeds in our economy and right now we are working to bring the equation in balance again. When that happens, in theory, our unemployment will keep falling as more workers enter the market. That, in turn, should alleviate more bottlenecks, bring supply up to balance with demand, and bring the prices back down to normal market levels.