The Stock Market recently took a tumble as inflation has increased somewhat dramatically over the last 60 days. We’ve also seen an increase in long term treasury yields which have made, on a percentage basis, a substantial increase which is based upon inflation and the anticipation that the Feds will increase rates in the very near term if inflation continues at its current pace. Mr. Powell and others still believe that inflation will soften once the supply chain comes around, but that doesn’t seem to be happening any time soon. The Chinese economy is also softening, all of which portends that inflation will likely go on longer than originally anticipated.
The budget deficit for October was 165 billion which is a year-over-year reduction resulting from higher tax revenue and other receipts as well as a pull back on spending. While this deficit is smaller than a year earlier, we nonetheless continue the flow of red ink. One of the interesting insights here of course is the fact that federal outlays fell 14% to 449 billion which is a very sharp decrease from the prior year, however, we were in the middle of COVID last year and that certainly explains a great deal of the decrease in spending. The increase in receipts however may be telling a more positive story since it would clearly reflect that the economy is improving and that the profits of businesses and income of individuals must also be increasing. These are good signs and we hope they continue.
Continuing on the inflation front, it hit a 31 year high in October with groceries and cars seeing some of the highest increases due to shortages and strong consumer demand. We also need to look to the fact that deposits have stayed comparatively high in banks during COVID and until those funds are spent the demand is likely to continue, however once it’s spent then we may be looking at the opportunity for inflation to decline so long as the supply chain has been fixed.
On the political front the first infrastructure bill has now been enacted into law and has been met with enthusiasm by many groups including local chambers of commerce and the business people in our communities. It seems clear that our fellow citizens are very concerned about roads, bridges, the internet, etc., and the fact that it will have the direct impact of employing many people over a relatively long period of time which will help the economy stabilize, particularly in regions like northern NY. The impact on the political world is somewhat more complex to evaluate. Our congresswoman, of course, decried the passage of the bill with her usual rhetoric about high taxes and big spending without taking into account the fact that you have to spend in order to fix our very frail infrastructure. I am just waiting for her to take credit when the funds start to flow. On the other side of the coin, the Progressives continue to push for the much higher cost bill apparently not having learned their lesson after the election in Virginia and in several other jurisdictions. One quite interesting result was the mayoral election in Buffalo which had the incumbent Moderate win in a write-in with nearly 60% of the vote over the primary winner who was a Progressive. It is instructive I think that the Moderate incumbent clearly was able to move a substantial number of Democrats and obviously Moderates and Independents to vote for him over his more Progressive opponent. This alone should send a message that Democrats need to move back toward the center if they are going to be successful in defending the House and the Senate in 2022. Unfortunately, I don’t have much hope. Self-righteousness is debilitating.
This week we celebrated Veteran’s Day and as always there were many tributes laid out for Veterans which I believe to be an important recognition of the service provided by Veterans, particularly those who served in war zones and served during time of war since one never knows where one might be assigned in those circumstances. I would hope that all of us would find a place from which we can all say thank you and offer whatever assistance we might to any veteran in need.
In a surprise move China and the United States have signed a bi-lateral agreement to address global warming which was neither anticipated nor expected. This is a rare moment of cooperation between the superpowers who have been locked in ever increasing tensions over a wide variety of issues whether it be Taiwan, cyber-attacks or the continued use by the Chinese of supports for their industries and manipulation of their currency. This is a good step and as Mr. Kerry was quoted as saying “the US and China have no shortages of differences, but on climate cooperation is the only way to get this job done.” which was supported by his Chinese counterpart.
A bit more on inflation. I reviewed a map recently that indicated that inflation is highest in the mid-west and in the mid-south and lowest in the northeast and somewhat more moderate in the west and far-west, so that the impact of inflation appears to be regional, which from my perspective is surprising and also a bit confusing. This would imply that the impact of shortages is less in those regions that have lower inflation rates. It may also be, particularly in the mid-west, that the agricultural community is beginning to make purchases of equipment and other materials. Those suppliers may have a much more difficult time securing parts and labor to build the equipment, thus driving up the price. In any event, this is certainly something which is worthy of watching because this could also result in regional recessions.
Mexico and Canada have agreed that the proposed US tax credit on electric vehicles, which has been in existence for years, violates the USMCA. The issue is that the new credit only applies to US made electric vehicles. Certainly looks like a violation to me.
China is suffering a coal shortage which is squeezing other nations. This is likely to further disrupt supply chains and farming that relies on chemicals used in fertilizer and diesel exhaust systems. China’s enormous buying power will not only add to supply chain woes, but also inflation.
The Fifth Circuit Court of Appeals enjoying the vaccine mandate. Unfortunately, this group of right-wing Republican judges have chosen to ignore public health and demonstrate their unfitness for office.
Bill Owens is a former member of Congress representing the New York 21st, a partner in Stafford, Owens, Piller, Murnane, Kelleher and Trombley in Plattsburgh, NY and a Strategic Advisor at Dentons to Washington, DC.
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