November 2, 2021

Inflated Expectations

     Last quarter Real GDP came out at a 2.0% annual rate, lagging the consensus expected 2.6%, and the lowest since the beginning of the post pandemic recovery. This follows a second quarter release of 6.7% and the question, for me at least is, why will this have no impact on the long term predictions of inflation? After all, first it was the delta variant, that kept the consumer out of the market and kept the sources of consumption out as well. That wasn’t exactly a lockdown, but it was obviously an influence on the wider economic growth. And now it’s the supply chains disruptions that should be examined more closely.

    As we find ourselves in the middle of an earnings season that has seen widespread corporate growth, some of it impressive, the overall growth was overshadowed by the future guidance that the CEO’s presented to the analyst community. Most guidance fell short of a full estimation of further growth and the reason has been the inability to hire employees and the impact that circumstance has had on the ensuing disruptions in the supply chain. Hardest hit from theses disruptions has been the challenges to the technology industries and the demand for advanced semiconductor chips, particularly those used by the rapidly growing global interest in the development of electric vehicles. This is worth noting, because it’s representing real inflation, demand exceeding available supply, and when the supply begins flowing again the demand will pick up where it left off. But according to the Census Bureau’s Small Business Pulse Survey, other industries affected by the supply chain disruptions include 64.6% of Manufacturers, 59.8% of Retailers, 58.5% in Construction and last but not least 51.4% of Accommodation and Food Services. The point is the rest of the disruptions will eventually see some form of the supply chain reopening, but does that mean the current demand will remain active. Retail and the consumer services industries will most likely, in my opinion, not remain active. This is especially true as we enter the holiday season, and the customary slowdown in activity that occurs in the first quarter of the new year. 

    Economic data is still feeling the pressure as recent Personal Income declined 1% in September, the ISM Manufacturing Index declined to 60.8 in October, New orders for Durable Goods (washers, dryers, refrigerators, etc.) declined .04% in September. The impact on the consumer, over 65% of GDP, from the Delta variant that impacted the economy by cutting the previous quarters growth rate in half, so why not the supply chain disruptions on the consumer, a source for intense demand and subject mood and cultural distractions, find their way into consumption habit. In short, if the consumer can’t find what they want, thanks to the digital age, they can easily find an alternative that’s available. Hence, a sum zero game, and that isn’t inflation. 

    There is a lot going on in the US and a lot going on in the world. Some of it impacts our individual investments but none of it evades our strategy. Infrastructure, the real stuff, consumer products, including iPhones and iPads, from the resources to the retail services, and all with a technical edge. The goal is to be prepared for the incoming return to normal, new or otherwise, and at present, the markets seem to think so too. 


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