by Louis Navellier

March 30, 2021

Tugboat Assisting Supertanker Image

Back in February, an earthquake halted production in a major Japanese chip factory complex, reducing the supply of chips. Now, the automotive semi-conductor shortage became much more acute after a fire at one of the world’s leading chip manufacturers in Japan. A factory owned by Renesas Electronics said that it will be at least a month before they can restart operations at their semi-conductor plant. As a result, Japanese auto manufacturers all sold off, since they will now likely have to further curtail production.

Further complicating the global supply chain, one of the world’s largest container ships (too big for the Panama Canal) got stuck sideways in the 120-mile Suez Canal on Tuesday, blocking one of most important shipping channels in the world – where 50 supertankers per day usually pass. High winds and sandstorms are complicating rescue efforts for the ship, which is the length of approximately four football fields! Naturally, this blockage of the Suez Canal will further exasperate the problems with the shipping container shortage and disrupt the global supply chain, but it seems like the high tide from Sunday night’s “Super Worm Moon” helped dislodge this container ship and clear the big ship backlog.

There was a lot of other interesting economic news last week. Turkey’s President Tayyip Erdogan fired the head of his country’s central bank, Naci Abgal, two days after implementing a sharp 8.75% interest rate increase (to 19%) in order to fight inflation. This is the third time since mid-2019 that President Erdogan has fired a central banker. The new head of Turkey’s central bank is Sahap Kavcioglu, who is a former member of Parliament and was a big critic of Abgal’s hawkish monetary policy. Not surprisingly, the Turkish lira plunged about 15% in the wake of President Erdogan firing another central banker.

Covid-19 cases continue to resurge in continental Europe, so their double-dip recession persists as they continue to argue about vaccinations and why they are lagging the U.S. and Britain in vaccination rates. With the U.S. administering about 2.5 million vaccinations per day, the Biden Administration has set a target of getting back to normal by July 4th. Let’s all hope normalcy can arrive even sooner than that.

Clearly, the speed of Covid-19 vaccinations is helping U.S. economic growth resurge. Unfortunately, the only “glitch” that materialized this week is that the CDC on Wednesday informed the cruise ship industry that its “no sail” order would remain in place until November 1st. The cruise ship industry asked the CDC to allow its members to resume sailing to U.S. ports in July, when the vast majority of U.S. citizens will likely have been vaccinated. The cruise ship industry was also willing to demand that only vaccinated passengers be allowed on its cruise ships, arguing that, “Cruise lines should be treated the same as other travel, tourism, hospitality, and entertainment sectors.”  The CDC actions are clearly disappointing and hopefully will be reconsidered, since the cruise ship industry will be traveling to foreign ports in July.

The Winter Cold Snap Depressed February’s Economic Statistics

Last Wednesday, the Commerce Department announced that February’s durable goods orders declined 1.1%, the first monthly decline since last April – the first full month of the pandemic. This was a big surprise, since economists were expecting a 0.5% increase in February. Naturally, the big freeze in Texas in February hindered orders, and the automotive sector reported an 8.7% drop in orders in February due to the semi-conductor shortage and plastics shortage. The good news is that commercial aircraft orders surged 103% in February, and January durable goods orders were revised up slightly to a 3.5% increase.

Also, it looks like the housing boom has paused, if not peaked. The National Association of Realtors announced that February’s existing home sales declined 6.6% compared to January and have declined 9.1% vs. the same month in 2020. There were only 1.03 million homes for sale in February, the same as January and the lowest level since 1982. In the past year, the supply of new homes has fallen by 29.5%, which is a record annual decline. At the current annual sales pace, there is only a two-month inventory.

The Commerce Department reported on Tuesday that new home sales plunged 18.2% to an annual pace of 775,000, down from a revised pace of 948,000 in January. Once again, the primary reason for the big decline in new home sales was the big freeze in Texas and nearby states due to the electricity blackout as well as burst water pipes from unseasonably cold weather. At the end of February, there were 312,000 new homes in inventory, a 4.8-month supply at the current sales pace. In addition to the weather, higher home prices and higher mortgage rates may also be contributing to a slowdown in new home sales.

Trade volume also declined in February, as exports declined 3.8% to $130.1 billion, and imports declined 1.4% to $216.9 billion as February’s big freeze disrupted port operations in Houston, which reported a 22% annual decline in container volume due to the freeze and electricity outages. Texas is now restricting the size of container ships in the Houston Shipping Channel to help safeguard the chemical and energy operations. It will be interesting to see how the container shortage impacts future trade volume.

The best news came Thursday, when the Labor Department reported that weekly unemployment claims fell to 684,000 in the latest week, a pandemic low and down from a revised 781,000 in the previous week. Continuing unemployment claims declined to 3.87 million in the latest week, down from a revised 4.134 million in the previous week. Economists were expecting weekly unemployment and continuing unemployment claims to be 730,000 and 4 million, respectively, so both came as pleasant surprises.

Fed Chair Powell Warns That the Recovery is “Far from Complete”

Fed Chairman Jerome Powell last week said that the U.S. economy is “much improved” and thanked Congress for their “unprecedented” support. Specifically, in prepared testimony before Congress, Powell said, “The recovery has progressed more quickly than generally expected and looks to be strengthening,” but then added that the U.S. economic recovery was “far from complete.”

Then Treasury Secretary Janet Yellen, in prepared testimony before the House Financial Services Committee said, “I am confident that people will reach the other side of this pandemic with the foundations of their lives intact. And I believe they will be met there by a growing economy. In fact, I think we may see a return to full employment next year.”  This goal of full employment seems to be both Powell’s and Yellen’s primary goal in 2022. After the U.S. economy reaches full employment, which is likely around 4% unemployment, then the Fed can contemplate raising interest rates in 2024 or beyond.

In the meantime, the Biden Administration is considering a $3+ trillion spending plan for infrastructure, which will include fighting climate change and reducing income inequality. However, there is major pushback from Congress, so this major spending plan may be broken into two separate bills. Naturally, some of this Congressional pushback is based on how to pay for this massive level of spending, so rumblings of a tax increase on investment income for households earnings over $400,000 per year and high corporate taxes are being discussed. Naturally, raising taxes when trying to stimulate economic growth is problematic, so it will be interesting to see what, if anything, gets passed by Congress this year.

Economics 101 is simply about increasing “the velocity of money,” so the goal of the federal government this year is to (1) get as many people vaccinated as possible, (2) reopen as many businesses and schools as possible, (3) get working parents to return to the workforce, since they represent the biggest jobless challenge and (4) keep everybody as happy as possible, so the velocity of money accelerates. There is no doubt that there will be lingering coronavirus concerns, and many people will still be hesitant to return to normal after a year of crisis, but the faster the velocity of money increases, the more prosperity will rise.

I should add that the Atlanta Fed on Wednesday revised its first quarter GDP estimate down to a 5.4% annual pace, from its previous estimate of 5.7%. This downward revision is not surprising in the wake of weak durable goods, slower existing home sales and new home sales in February. But on Thursday, the Commerce Department revised its final fourth quarter GDP calculation up to a 4.3% annual pace from 4.1% previous estimated and, since March is not characterized by severe weather disruptions, the first quarter GDP estimate might be revised higher due to a stimulus package that could boost retail sales!

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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Louis Navellier
CHIEF INVESTMENT OFFICER

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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