Sept. 9, 2022

GDP, Inflation, Labor: What's the Delta?

In the 1980s, I was a frequent flier on United Airlines and was one of those lucky guys who boarded the flight early. So while we were waiting for everyone to board, the Captain came back and asked if I would like to see the cockpit. Absolutely! United had just taken delivery of the new Boeing 757, and this was my opportunity to see up-close the most advanced airliner of its day. You may recognize the 757 as Donald Trump’s private jet.

When the Captain opened the upfront door, it simply sparkled. There was a pilot’s station unlike any of the other planes of the day. It was called the “glass cockpit.” Full of new and innovative instrumentation. Unlike those old round dials that pilots had to read in older planes, in front of us were the all-new digital instruments. 

I’m not a pilot and certainly not an aviation expert, but the Captain was very gracious as he led me through the basics. However, what impressed me that day, was his approach to flying. As he said, the primary instrument’s function is to tell him when things are going wrong, When they are out of the norm and indicate trouble. In short, he was looking for the Delta, those things that are changing. And this new “Glass Cockpit” was designed to make looking for the Delta (change) easy.

So let’s use that United Captain’s thinking, and view our economy by looking for the “Delta’s” the way things are changing. This is the way much of Wall Street performs the economic analysis.

Here are the most significant Delta’s I see in today’s economy: GDP, Inflation, and Labor. 

The most significant number is always the GDP, the Gross Domestic Product. Several advisors say that while the first quarter was weak, we improved in Q2, and overall we’re doing OK. 

I’m not so sure. 

Remember, we’re looking at the economy’s change (the Delta). And the reality is the fourth quarter of last year came in at plus 6.9%. GDP then dropped to minus 1.6%, an overall total decline of nearly nine percentage points in growth rate. That’s a real crash in anyone’s book, and it tells me that the rebound from the Pandemic Lock-Down ended when this year began. 

Since then, we’ve been on our own. The benefits of that stimulus and money printing are long behind us now. And the record is two down quarters and a very shaky current quarter. Make that GDP Delta a negative.

I don’t think I have to say anything about inflation. The worst in 40 years, an absolute disaster. To my way of thinking, we can blame this current round of inflation on two things: 1. The over-the-top stimulus program that rocketed the money supply by 400% or 500%. The additional money alone was bound to create the worst inflation ever. But combined with this has been the Biden war against fossil fuels, which more than doubled the price of gasoline. 

Not to be a David Downer, but I don’t see any relief from either of these issues as long as Joe Biden is President. He has indicated that he will continue to battle “big oil,” keeping energy prices high. And he has demonstrated that he will continue to be the biggest spender in our nation’s history. 

So for the Inflation Delta, make that one a downer, also.

A look at Labor shows what could be the most overlooked economic indicators. In the more than 70 years since the end of World War II, America has prided itself on the most productive and cost-effective workforce in the world. 

But, it’s a workforce undercut by businesses that have chosen to move overseas to cheaper Labor. Often these overseas workers were not as productive as the American workers, but management made up for that by requiring long hours and harsher work conditions. 

Today, the most advanced plant and equipment are often overseas, as they have entirely supplanted the American manufacturers. However, you may have noticed that Ford recently pledged to start making its semiconductors locally. And other companies are exploring producing their parts and equipment back home. In the last few months, this move to offshore production may be reversing as American manufacturers realize they need to have reliable sources of raw materials and components here at home. 

Unfortunately, as those components return to home production, it will be to older, less efficient plants and equipment. We will need to rebuild plants to today’s standards, and manufacturing facilities that have been idled for some time will require re-engineering.

Relocating offshore production back to America is why I believe we’ve seen a sharp drop in productivity from American workers. They’re learning new skills on what will soon be new equipment.

So the Delta rating for Labor: poor current productivity due to relocating manufacturing back to America. But, enhancing American manufacturing should be a very positive long-term trend.

Overall these major changes in the economy are not positive. Realistically I see declines in GDP, continued high inflation, and a major transition as we relocate manufacturing back to the USA.

Economic News

With the passing of the 96-year-old monarch, Queen Elizabeth, her more than 70-year reign has ended. The reign of King Charles III officially begins tomorrow morning.

In ,other news, overnight, China announced lower than expected inflation, coming in at a mere 2 1/2% annual rate. Proving, I suppose, that demand destruction does work in curbing inflation. The Federal Reserve wants to do that by raising interest rates, the Chinese by locking-downs parts of their country.

Speaking of Chinese inflation, it’s interesting to note that China’s money supply continues to grow at a double-digit rate, and yet inflation barely moves. A phenomenon not seen before.

Today in the US, a couple of interesting economic reports. First, up wholesale inventories/ Business is expected to continue stocking away inventory as a hedge against any Supply Chain shortages.

Then a very telling report by Baker Hughes, It is expected that for the ninth week in a row, we will see a reduction in the number of operational oil wells to just 596 as it looks like the oil industry will stand pat and not expand exploration. Remember, we had nearly 900 operational oil wells just before the Pandemic struck. Interesting correlation, don’t you think? With 50% more wells drilling, the price of gasoline was 50% lower.

A couple of companies have already reported earnings: the giant supper market chain: Kroger and industrial support company: ABM Industries. Both stocks are higher on those results.