Schrodinger's Recession?
The markets look to finish slightly higher this week as investors take a break after finishing another tumultuous quarter. Coming off the worse first half in over fifty years, this is a welcome reprieve. Between the surge in COVID cases driven by the Omnicron variant at the start of the year, followed by Russia’s invasion of Ukraine, decades-high inflation and aggressive interest rate hikes from the Federal Reserve, to worries of a possible recession and slowing economic growth, it goes without saying we could all use a break. Enjoy it while you can because next week starts earnings announcements, and if the first quarter was any indication, we could be back in the thick of things before you know it.
The most interesting story I came across this week was on the idea that we may already be in a recession while simultaneously not being in one. I wish I had coined the term, but what we’re currently experiencing is being called “Schrodinger’s Recession” for the possibility of two states of existence at once. Like the cat in the experiment, the U.S. economy may have this duality. It may be in a recession right now, or not at all until we actually observe one. Consumer spending remains resilient and the number of job openings is increasing. We’re not observing economic contraction in the typical sense of mass layoffs and a rising unemployment rate. However, inflation and supply chain issues continue to create hurdles for the economy. Q2 GDP will be released later this month, on July 28th, coincidentally the day after the Federal Reserve will be announcing its next rate hike.
Regarding jobs, the nonfarm payroll report was released this morning and it came in stronger than expected. Payrolls rose by 372K in June, while many economists had expected to see evidence of employment rolling, with some estimates as low as 200K. At the same time the Atlanta Fed’s GDPNow forecast puts Q2 GDP at -1.2%. One analyst at Wells Fargo noted, “If the economy is in a recession, employers have not seemed to notice.” A recession right now would be a historical rarity, although a technical recession is not out of the question.
In company news, Kellogg lost a court case in UK over its sugary cereal rules. It seems a British court rejected its claim that the nutritional value of milk should be included in the evaluation of its cereal. The argument being that milk makes the cereal more nutritious. In other news, car companies such as Stellantis (it will always be Chrysler to me), General Motors, and Ford continue to suffer from serious semiconductor shortages forcing the shutdown of production lines. However, the reason car prices continue to skyrocket is only partly due to inflation itself. It seems manufacturers are prioritizing higher margin vehicles over those will lower profit margins. This translates into more high-end SUVs and pickup trucks which carry a higher sticker price, in place of lower margin Toyota Corollas and Honda Civics. This is a large part of why the average price of a new vehicle has skyrocketed.
And lastly, United Airlines wants to blame the Federal Aviation Administration (FAA) for its woes. You undoubtedly have heard of the thousands of flights that were cancelled over the Memorial Day weekend, followed by travel problems this past Fourth of July. Looking to deflect blame, the airline has pointed its finger at the FAA. The carrier estimates that half of its delays and three quarters of cancellations in the past four months have been the result of air traffic control and capacity issues. They believe there are just more flights scheduled industry-wide than the air-traffic control system can handle. I don’t know the details, but it seems airlines have been overbooking flights for the better part of the past three decades. Additionally, we’ve known about the looming shortage of pilots for at least the past ten years. Between this and being held hostage to the fluctuating price of aviation fuel, I might just avoid investing in this industry. To be honest, I’d avoid flying altogether if you can.
In closing, I came across a horrifying data point this week that I must share. For the first time ever, monthly car payments have crossed a record $700 per month. Apparently, the feeling of freedom comes with a pretty hefty price tag. It could be said every new car purchase is a luxury car purchase, regardless of what you’re buying. As mentioned above, a big part of the problem is the semiconductor chip shortage and the shift to producing more expensive, i.e. more profitable, cars. The average cost of a new car has topped $47,000, and before you think, “I’ll just buy a used car,” know that those too have skyrocketed in price. Used car prices are up 16.1% from a year ago, compared to a 12.6% jump in new car prices. Inflation is an issue throughout the economy, but nowhere more than the automotive industry. Now you know.
Bruce J. Mason, MBA