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Some Not So Good News Mixed in with the Better

How is that for classic economic equivocation? You know the mantra by now, never assert you know anything for sure other than the past. Even then, be sure to keep your options open. The reality is that there are rarely moments when one can assert that a $20 trillion-dollar economy is either all good or all bad.

Even in the darkest days of the lockdown recession in March and April, some sectors of the economy were experiencing the best days they had seen in years. At this point, some segments of the industrial economy have seen real progress, as others are slowing and may even be experiencing a reversal of fortune. The latest data from the Fed shows there was a fourth straight month of gain as far as industrial activity is concerned. That is the good news. The bad news is that the August gain was just 0.4% as compared to the 3.5% gain that was achieved in July. The industrial sector is sluggish right now.

There are far more questions to delve into than there are answers at the moment. Even before the lower growth rate registered in August, the industrial community remained far behind the pace that had been set in February. The current pace is 7.3% off from that level. Economists had expected to see the industrial production numbers fall a bit, but they thought it would still be up 1.0% rather than less than half that gain.

All three elements of industrial production fell. Manufacturing was off by 1.0%, utilities were off by 0.4%, and the biggest decline was in mining, which includes oil and gas. The latter decline was at 2.5% and was partially explained by the oil platform shutdowns in the Gulf due to hurricane activity. The other two sectors declined for more troubling reasons. There just seemed to be a slump in output and demand following the little surge of activity that took place over the summer. It seems that the bounce back in consumer activity has not been as robust as had been hoped. The expectation has been that once the lockdowns were lifted there would be a swift resumption of old habits. To a degree, that has happened, but the elimination of the pandemic restrictions has been incomplete and that has continued to affect broad sectors of the economy. Hospitality and entertainment are still down, and travel has yet to resume.

We now come to a critical point in the year, the holiday spending season. If consumers don't rally now, there will be a lot of retailers in crisis and right with them will be the producers that supply the goods they are trying to sell. The pattern this year will be similar to that of the last few years. The emphasis will be on attracting the early shoppers. That may be intensified if the virus becomes even more of a threat with the advance of colder weather. It will be yet another incentive to shop early. That means we will have another Blackvember as opposed to just a Black Friday. The whole month will be front loaded with sales and discounts. By the looks of things, this process will be well underway in October. If there is going to be a retail recovery, we will see it by the end of October.

Part of the falloff in manufacturing has been attributed to issues in the global economy. The U.S. depends on exports for about 15% of the GDP, and that is a $3 trillion chunk. The U.S. doesn't export the way it once did. The trade deficit has been worsening even as the levels of imports have started to decline a little. The problem is that other nations are not buying as much as in the past. This is due in part to the issues they have been facing with their own versions of the lockdown recession, but there is also the fact the U.S. has become far less supportive of trade. The protectionism practiced by the Trump administration has not had much impact on the import levels because consumers in the U.S. still want what other nations produce, but the policies have affected exports. Nations irritated at U.S. policy on trade are choosing to do less business with the U.S.

-- Chris Kuehl, Ph.D.

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Friday, 23 October 2020