KEY DATA: Retail Sales: +1.7%; Ex-Gasoline: +1.5%/ IP: +1.6%; Manufacturing: +1.2/ Import Prices: +1.2%; NonFuel: +0.4%; Exports: +1.5%; Farm: +1%
IN A NUTSHELL: “It appears that the summer moderation in growth may have been the pause that refreshes as consumers and businesses are spending and producing like crazy.”
WHAT IT MEANS: Shop ‘till you drop, or maybe run out of money. That seems to be the mind set of consumers these days. Retail sales soared and while rising prices likely will take a major bite out of the real/inflation-adjusted gain in spending, the increase will still be quite solid. The biggest increase was not even in gasoline – Internet spending edged that out. But purchases of electronics and appliances, as well as building materials soared as well. People went back into department stores and despite the lack of inventory, picked up a lot of new vehicles. Purchases of clothing dropped, but I suspect that was due to price declines. As for restaurants, sales were flat. The reopening process is largely over and now the restraint is a lack of workers.
Meanwhile, factories are doing their best to keep up with the strong demand. Manufacturing output rose sharply in October, led by a surge in the production of consumer goods and materials. Despite the chip shortage, vehicle assemblies picked up sharply. They are still low, but at least more new vehicles are coming off the assembly lines. Even excluding the added vehicle production, output accelerated. After four consecutive months of production cutbacks, the petroleum and coal sector finally woke up and increased output. I guess prices are high enough for them.
As for inflation, it was another bad month for the Fed’s “inflation is transitory” story. Import prices jumped again, though the increase was more restrained when the energy factor was removed. But the details were not pleasant. The costs of imported food, industrial supplies and vehicles all increased significantly. There was some good news, though. Imported consumer goods prices, excluding vehicles, rose modestly. Capital goods import costs were flat. We are hearing that the rising cost of goods is driving the surge in inflation, but when it comes to imported consumer products, that is just not the case. Over the year, the increase was below 2%
IMPLICATIONS – INFLATION: The economy has thrown off whatever lethargy it might have had in the summer, and it is growing quite strongly. The truth is, growth didn’t really soften, it just eased back. That is a very normal pattern. As for inflation, the argument that it is transitory cannot be dismissed, as long as you define the length of time of a transitory process. Chair Powell and his band of clueless inflation fighters assumed earlier this year that the bottlenecks at the ports and transshipment points would dissipate steadily and largely be gone by the end of this year. It appears that they were off by at least one year. As of now, there are indications that it could take all of 2022 to clear up the backlogs and some residual problems could remain into 2023. So, if transitory is a couple of years, then Mr. Powell may ultimately get it right. Sarcasm aside, it wasn’t clear how long the bottlenecks would last. But now that we have some indication of the length of time inflation could remain well above the target, the Fed will have to deal with impacts of an extended period of elevated inflation.Short-term inflation pressures become problems when they get imbedded in expectations. I have raised this issue before, and I will keep doing so. That seems to be happening and the longer that transitory lasts, the greater the likelihood that inflation expectations will have increased to the point where rates will reflect the rise for an extended period. That is the real, longer-term issue the Fed could be facing. Unfortunately, there is little that can be done to quickly resolve the inflation pressures. The Fed could try pulling a Volcker and nuking the economy so demand falls sharply and matches the bottleneck-constrained demand. I doubt that is in the cards.As for government action, the problem is the supply chain. Unless we want the military to start unloading ships, transporting goods to warehouses, unloading the trucks at the warehouses, stocking the goods, reloading the goods on trucks, and finally delivering them to stores or consumers, we are stuck with the private sector trying to solve the problem. Inflation will diminish, but it might be a slow process and during the process, damage to the economy could be done.