by Louis Navellier
September 21, 2021
I spoke at the Money Show in Las Vegas last week and many questions involved Fed policy, interest rates and federal spending, so I explained that the Fed is expected to keep its key interest rate well below the inflation rate for the foreseeable future, and that the U.S. budget deficit is now so large that the Fed cannot raise key interest rates much anyway, and that Biden’s big spending plans may be ending soon.
The House of Representatives’ $3.5 trillion proposed federal spending plan that included massive tax hikes has virtually died. West Virginia Senator Joe Manchin made it clear that he cannot support this big spending bill unless it is cut to $1.5 trillion. Manchin’s demand is forcing the House of Representatives to pick which one of the following programs it wishes to fund: extended childcare, green energy incentives or free community college – not all three – since the proposed tax hike and spending plans are collapsing.
Of these proposed spending plans, extended childcare is the most likely to survive, since approximately two million of the 5+ million jobs that have been lost due to the Covid-19 pandemic are attributable to working mothers, who had to stay home to take care of their children when schools closed. Naturally, some of those job losses are now permanent, since the resulting productivity gains are not going away.
These 5+ million lost jobs have also impacted Fed policies, since most Fed economists are gradually concluding that their low interest rate policies are increasingly ineffective at new job creation.
The Atlanta Fed is now estimating 3.6% annualized third-quarter GDP growth – down sharply from over 6% in August. Congress knows it would be political suicide to raise taxes in the middle of a decelerating economy characterized by surging inflation, so it will be interesting to see if any of the proposed spending plans and related tax increases will get passed. President Biden’s latest approval ratings are below where 3 of the 4 most recent presidents were on Day 240 of their first year, according to MSN and 538.com, and fans at the memorial Mets vs. Yankees baseball game on 9/11 yelled a very embarrassing chant to Biden.
Some Surprises in the Most-Watched Economic Statistics Last Week
Last Tuesday, the Labor Department announced that the Consumer Price Index (CPI) rose 0.3% in August – a big cooling off from the most recent 0.5% and 0.9% increases in July and June, respectively. Even better, the core CPI, excluding food and energy, declined 0.1% in August as prices for used vehicles and transportation declined 1.5% and 2.3%, respectively. Especially notable was the 9.1% plunge in airline fares in August, while hotel prices declined 2.9%. In the past 12 months, the CPI has risen 5.3%.
The Labor Department also announced that import prices declined 0.3% in August, which represents the first decline in 10 months, led by a 2.4% drop in crude oil prices. In the past 12 months, import prices rose 9%, so there is still significant inflation on imported goods, but the August decline is evidence that inflation may be “transitory,” as the Fed has implied. Export prices rose 0.4% in August, but that was the smallest monthly increase in 10 months, so there is some hope that inflationary forces are cooling.
Going into this week’s FOMC meeting, the cooling of these inflation numbers gives the Fed credibility regarding its “transitory inflation” prediction. Overall, the August CPI was a very pleasant surprise!
The other big surprise last week was that the Commerce Department announced on Thursday that retail sales rose 0.7% in August, well above the economists’ consensus expectation of a 0.8% decline. Vehicle sales declined 3.6% in August, due to the ongoing semiconductor chip shortage, but excluding vehicle sales, retail sales surged 1.8%! Grocery sales rose 2.1%, so it appears that higher food prices are helping to boost retail sales. Another example of inflation boosting retail sales is that gasoline sales rose by 2%.
Despite rising Covid cases last month, the consumer was clearly in the mood to spend money, since on-line sales rose 5.3%, furniture sales rose 3.7% and general merchandise sales rose 3.5%. In the past 12 months, retail sales have risen by an impressive 15.1%. You can’t keep the American consumer down!
Another trend reversal came Thursday, when the Labor Department said weekly unemployment claims rose to 332,000 from a revised 312,000 the previous week. Hurricane Ida may have exaggerated weekly claims a bit, since unemployment rose in Louisiana. However, continuing unemployment claims declined to 2.665 million, compared with 2.783 million the previous week, reaching a pandemic low.
There is more evidence of a global economic slowdown brewing. On Wednesday, China’s National Bureau of Statistics announced that retail sales rose only 2.5% (annualized) in August, a major drop from an 8.5% annual pace in July. Real estate investment in China this year slowed to a 10.9% annual pace, down from a 12.7% in July, and construction in China this year declined 3.2% in August, down from a 0.9% decline in July. When China’s property market cools, consumer spending tends to also cool off.
The other interesting China news is that President Xi Jinping declined a White House invitation to meet with President Biden. President Xi also declined attending the UN General Assembly in person, which raises suspicions that he will not attend the G-20 meeting in Italy on October 30th. China’s growing isolationism, as President Xi deals with domestic problems, is an interesting development. Furthermore, Xi is also trying to address the wealth inequality in China by pushing companies to spread the wealth more.
Due to China’s domestic woes and recent slowdown, the U.S. will continue to lead global GDP growth.
The Green Agenda is Backfiring on the Biden Team
Normally, natural gas prices decline in the fall as the weather cools. However, due to a big drought that has curtailed hydro-electric production, plus a lack of wind in Europe, which has dramatically reduced wind output, natural gas is now in super-high demand for electricity production. Some utilities have even switched back to burning coal for electricity, since natural gas prices have almost doubled so far this year.
|Year-to-date Energy Price Increases
||YTD Price Increases in EV Battery Components
|Source: Trading Economics
Naturally, this was not the planned result for President Biden’s “green agenda,” including the Biden Administration’s ban on drilling on federal lands. That just forced more natural gas to be flared and needlessly burnt, which is now further contributing to high natural gas prices. Although the Biden Administration’s ban on drilling on federal lands has been overturned by a federal judge, the Energy Department remains hostile to fossil fuels, which is contributing to high natural gas prices.
I should also mention that GM remains furious that it has to replace all the batteries in the Bolt EVs, since there was a manufacturing error in some LG Chem batteries. This has effectively ruined the relationship with GM and LG Chem, so the production of the Bolt EV has been suspended. When the production of the third best-selling EV in the U.S. has been suspended, clearly there is a problem with the transition to EVs. Furthermore, the NTSB investigation into Tesla’s automatous driving software is also complicating the transition to EVs, so I for one will be very curious as to what incentives for continuing the “green agenda” the Biden Administration may pass, since right now, there only seems to be chaos.
On the EV front, Rivian is now delivering the first electric pickup trucks, beating Ford, GM and Tesla in making the first EV pickup truck. The next electric pickup to hit the market is expected to be the Ford F-150 Lighting, which has over 130,000 reservation holders. Tesla’s Cybertruck has even more advance reservations, but production was recently delayed again to late 2022. The Rivian R1T truck has been widely praised by automotive journalists and is expected to be a major success.
At the Las Vegas Money Show last week, there were questions about how China’s capitalism crackdown will impact the ongoing semiconductor chip shortage. I explained that none of our Chinese stocks were the subject of the capitalism crackdown and that the accounting associated with the few Chinese ADRs we still own is solid. Regarding the semiconductor chip shortage, I expect that to persist well into next year.
Navellier & Associates does own Tesla (TSLA), for one client, per client request, Ford (F), and General Motors (GM) in managed accounts. Louis Navellier and his family do not own Tesla (TSLA), General Motors (GM), Toyota (TM), or Ford (F), personally.