The most amusing central bank news in recent years is that the Bank of England asked former Federal Reserve Chairman Ben Bernanke to review its economic forecast after it failed so badly to stop inflation. Bank of England Governor Andrew Bailey said that Mr. Bernanke’s review would help central bankers “take a step back and reflect on where our processes need to adapt.” Bailey said back in May that there were “very big lessons to learn” after the Bank of England failed to forecast high and persistent inflation.
Frankly, I am shocked that Governor Bailey cannot see the obvious – that Britain’s green push raised electricity rates sky-high, and Europe’s green war on chemical fertilizers is causing food prices to soar! The fact that Ireland chose to kill 200,000 dairy cows to comply with EU carbon dioxide emissions further demonstrates why food prices are soaring out of control – mostly for ideological reasons.
So, if I were writing Ben Bernanke’s report, I would tell Bailey to “look in the mirror” and adjust his inflation forecasts upward for more expensive food and energy due to “green policies and mandates.”
The Bank of England raised its key interest rates another 0.25% last Thursday to a 15-year high of 5.25%. Since most mortgages in Britain have a variable rate, every rate increase by the Bank of England costs homeowners and curtails cash available for consumer spending. This fuels widespread anger against the Bank of England for mismanaging inflation, which is why Bailey asked Bernanke to review their plans.
The situation isn’t much better in the EU. Eurostat reported last week that the EU grew by just 0.3% (a 1.2% annual pace) in the second quarter, due largely to a 3.3% surge in Ireland’s economic growth, which is due in large part to shifts in intellectual property by U.S. technology companies and pharmaceutical giants. Inflation declined in 15 of the 20 EU countries and is now running at a 5.3% annual pace. A 6.1% decline in energy prices in the EU in July provided much of the EU inflation relief, but core inflation, excluding food and energy, is running at a 5.5% annual pace and has not declined significantly this year.
In the U.S., we are fortunate to be food- and energy-independent, but food inflation remains an acute problem in the EU. The green agenda, trade protectionism, and the chaos in Ukraine are causing global food prices to rise. Energy prices remain firm, simply because there are too many global uncertainties.
While Europe and America are trying to slay inflation, China is apparently slipping into a deflationary environment. The Wall Street Journal reported that prices charged for products from Chinese factories have been falling for months. Consumer inflation in China declined to 0% in June, which is a 28-month low. Annual producer price inflation has been negative in China for nine straight months and declined to an all-time annual low of -5.4% in June, its lowest level since December 2015.
I should add that Chinese semiconductor imports are declining due to the Biden Administration’s chip restrictions. As a result, Chinese companies are struggling to obtain key components and machinery. The threat of additional U.S. restrictions, including restricting China’s access to cloud computing, which is being upgraded by Super Micro Computer (SMCI) to also include AI chips on smart servers, is expected to be announced in October in conjunction with export control numbers, according to The Wall Street Journal.
The Jobs Reports (ADP vs. Labor) Are in Conflict Again
Last Wednesday, ADP (the payroll company) announced that 324,000 private payroll jobs were created in July, which was substantially higher than the economists’ consensus estimate of 189,000. The previous month’s June private payroll report was revised lower to 455,000 jobs, down from ADP’s first estimate of 497,000. ADP continues to report manufacturing job losses, with another 36,000 manufacturing jobs lost in July, while leisure & hospitality added 201,000 jobs and natural resources & mining added 48,000.
As usual, Friday’s Labor Department report was grossly out of sync with ADP’s report, especially on the politically sensitive subject of manufacturing jobs. Friday’s July payroll report said America created a total of 187,000 non-farm payroll jobs, but the Labor Department also said that only 2,000 manufacturing jobs were lost, vs. 36,000 for ADP. Furthermore, the payroll reports for May and June were revised down by a cumulative 49,000 jobs. I tend to favor the ADP report, since they deal first-hand with actual payrolls and because the Labor Department uses arcane seasonal adjustment formulas instead of the raw jobs data.
The Labor Department also announced that productivity surged 3.7% in the second quarter after declining in the first quarter. One reason that productivity rose in the second quarter is that labor costs only rose 1.6% after surging 3.3% in the first quarter. Productivity growth is a big component of GDP growth, which may explain why the Atlanta Fed is now estimating 3.9% annual GDP growth in the third quarter. (I should add that private economists are nowhere near as bullish as the Atlanta Fed’s GDP estimate.)
In other statistical releases, the Institute of Supply Management (ISM) announced on Tuesday that its manufacturing index rose to 46.4 in July, up from 46.0 in June. Economists were expecting the ISM number to come in at 46.9, so 46.4 was disappointing. This is the 8th month in a row in which the ISM manufacturing report has been below 50, which signals a contraction. Only two of the 18 manufacturing industries surveyed expanded in July, namely Petroleum & Coal as well as Furniture & Related products. Clearly, a manufacturing recession persists and may get worse, especially if the UAW goes on strike in the upcoming months due to wage concerns as well as the excessive inventory on dealer lots.
On Thursday, ISM announced that its non-manufacturing (services) index declined to 52.7 in July, down from 53.9 in June. Any reading over 50 signals an expansion, and there are some other strong indicators: the backlog of orders component surged to 52.1 in July, up from 43.9 in June, which is encouraging. Also, 14 of the 18 service industries surveyed in July reported growth, so although the pace of growth in the service sector slowed in July, the service sector remains very healthy and is leading GDP growth.
The major inflation reports (CPI and PPI) come out later this week, and they should be favorable. The primary reason why U.S. wholesale goods prices fell 4.4% in the past 12 months through June is due to lower import prices from China and other Asian countries. As a result, I expect that the July PPI could be negative as the U.S. continues to import deflation from China and other Asian exporting countries.
Updates from the Energy Patch
Besides the normal peak driving season, the price of oil is rising because Russia’s four-week average of seaborne crude oil shipments as of July 30th declined to 2.98 million barrels per day, the lowest level since January 8. Specifically, Russian crude oil shipments peaked May 14th at 3.9 million barrels per day and have steadily declined almost every week since then. Europe has stopped buying Russian crude oil, except for Bulgaria, which buys 125,000 barrels per day from its Black Sea port. As of July 30th, Russia’s crude oil export duty rose to $49 million in the past week, up 8% from the previous week, due to higher crude oil prices. It will be interesting to see if Russia continues to curtail its crude oil exports to boost crude oil prices or if it is having production and/or pipeline problems. Russia has to keep its crude oil in the Arctic flowing through pipelines in the winter months, otherwise an empty pipeline could freeze and burst. Obviously, Russia remains a wild card in the global oil market that could impact crude oil prices.
The other wild card putting upward pressure on crude oil prices is the closure of Pemex’s largest export terminal last Tuesday due to a leak. Pemex has faced a series of operational challenges recently, including the shutdown of its Salina Cruz terminal and an explosion on a gas platform that resulted in two fatalities.
Saudi Arabia reiterated Thursday that its production cut would continue for at least another month. Saudi Arabia is currently producing 9 million barrels per day of crude oil, its lowest level in several years. This Friday, Saudi Arabia and Russia will chair an online review of market conditions for OPEC+ members. The next OPEC+ meeting is late November, so I do not expect any potential production increases, since seasonal demand may drop in September, so OPEC+ will likely have no incentive to boost production.
In the U.S., the American Petroleum Institute (API) announced on Tuesday that crude oil inventories collapsed by 15.4 million barrels in the latest week. API also reported that gasoline inventories declined 1.68 million barrels per day in the latest week, while distillate (diesel, heating oil, and jet fuel) inventories declined by 512,000 barrels. The Energy Information Administration (EIA) reported a 17.05 million drawdown in the latest week, the largest weekly drawdown ever recorded since such records began in 1982! Meanwhile, Goldman Sachs said that worldwide crude oil demand rose to an all-time high of 102.8 million barrels a day in July, but they also forecast $93 per barrel for Brent sweet crude in 2024.
Sales of electric vehicles (EV) are still a challenge. GM announced that its second-quarter results were hindered by a $792 million extraordinary charge related to the recall of its Bolt electric vehicle (EV) to replace its LG battery packs. Excluding this extraordinary charge, GM posted strong sales and operating earnings. The average vehicle that GM sells now trades at around $52,000, up 3% for the first quarter, so GM is moving increasingly upscale with its vehicles. Due to GM’s strong operating earnings, I suspect the UAW will play hardball and likely go on strike if its demands are not met.
GM’s transition to EVs is meeting some frustrating roadblocks. Specifically, GM’s new Ultium platform is having an acute supplier problem, so its battery packs are now being manually assembled. CEO Mary Barra called the situation “disappointing” and she has “personally been reviewing the lines.” Barra added, “We’ll get this behind us,” and hopes the situation will be resolved by the end of the year. In the meantime, GM has only delivered 49 Hummer EVs this year due to the Ultium manufacturing problems.
Ford (F) recently acknowledged the lack of consumer excitement about their F-150 Lightning electric trucks, which are sitting on dealer lots, deeply discounted; so its executives quickly pivoted and said they will be focusing on making many new hybrid models, which they hope consumers will be more likely to purchase.
Obviously, a hybrid F-150 can offer the electric hookups for power tools and tailgating, but not have the “range anxiety” that may be hindering the F-150 Lightning sales. Ford’s EV business lost $1.08 billion in the second quarter, so its EV business is not profitable at the present time. Ford said that it expects its EV business to lose $4.5 billion in 2023 and lowered its EV production forecast to 600,000 per year, which it hopes to achieve some time in 2024. Interestingly, Ford backed off its previous goal of two million EVs per year in 2026, apparently due to lackluster consumer demand.
Navellier & Associates does own Ford Motors (F) in some managed accounts. We do not own General Motors (GM). Louis Navellier does not own General Motors (GM) or Ford Motors (F) personally.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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