CDIAC: Economic Outlook

Chief Economist Dr. Lindsey Piegza will look at the current state of the economy amid the ongoing pandemic and what it means going forward for overall growth, interest rates and monetary policy. She will cover macro-economic trends in consumer spending and investment, in addition to new monetary and fiscal policy initiatives and the potential economic effects of these changes. She will also examine the changing global and political environment, and how it will affect the economic recovery. Participants will leave this session with an understanding of the possible effect of economic issues on their organizations.

Transcription:

Robert Berry (00:06):

So we have a lot of ground to cover more ground than we have time. So I would like to introduce our first speaker who will set the economic foundation, got to do that economic foundation for our discussion of the challenges across the sectors. Dr. Lindsey Piegza is managing director and chief economist for Stifel financial. She specializes in the research and analysis of economic trends and activity, world economies, financial markets, and monetary and fiscal policies. Dr. Piegza is a highly accomplished economist author and sought after speaker across national and international fors. We are excited to have Dr. Piegza here from Chicago to lead us off Dr. Piegza.

Lindsey Piegza (00:59):

Well, good morning, everyone and welcome. Let me start by thanking you for joining us here this morning and giving me this opportunity to present on the state of the us economy. Now, given the volatility that we have seen in the data in expectations in market action, it is understandable that there is a nber of questions that are facing us as market participants right now. Are we in recession? How long and how deep will the downturn be? Has inflation peaked will it peak when and what is the fed going to do about it? But I wanna start off on a more positive note because while we can look at nearly every other sector of the economy and check that recessionary box, or at least make an argent to check the box, the labor market remains somewhat solid. Looking here, you can see We are still seeing very robust job creation on a monthly basis. Now, last month's rise of just about 300,000 was less than we had seen the prior month. But when we look at this on a moving average, We are still talking about the us economy adding nearly 400,000 jobs each month. And the gain that we see have been pretty widespread across sectors. So We are not talking about isolated gains in hiring to just one small area of the economy. Again, while slightly less robust than the prior month, you see widespread gains on everything from goods to services, with education and health and even business services leading the way both rising over 70,000 alone. Last month,

(02:48)

We also see further improvement in the unemployment rate coming down to now 3.7%, this steep downward trajectory that we have seen. And in fact, not only is this a vast improvement from that peak of near 15%, if you remember back at the worst of the COVID crisis, but look at where the fed has designated as the full employment range that dotted yellow line. We are now well below that level. But when we look at this impressive retreat in the terms of joblessness in the country, I do think it is important to recognize that we are seeing two different themes on the one hand, yes, we are putting Americans back to work unemployed Americans back into a position of gainful employment, but that steep downward trajectory also reflects the fact that millions of workers have dropped out of the labor force and now remain on the sidelines and remember the way we calculate unemployment in this country, you have to be actively seeking employment to be counted in the jobless nbers.

(04:02)

So I always say it is very easy to get the unemployment rate down to zero if everyone stops looking for work, but that is certainly not indicative of a solid labor market. Now, going forward as these workers slowly, slowly return into the labor force, we would expect the exact opposite to occur upward pressure on the unemployment rate, which is exactly what we saw last month with the jobless nbers rising from 3.5 to 3.7%. So this may seem somewhat counterintuitive, but I would actually argue that a in the unemployment rate, at least in the near term may be a positive indication of labor market conditions. If in fact, that uptick reflects the fact that previously sidelined workers are now moving back into the labor market to seek a position of employment.

(04:59)

Now, along with that rise in the unemployment rate. As I mentioned, 3.5 to 3.7%, we also saw a welcomed increase in the participation rate rising to 62.4%. And this is a multi-month high around a five to six month high now on a relative basis. Yes, you can see that minimal increase still leaves a sizeable gap in terms of participation relative to pre pandemic, but it is a step in the right direction again drawing individuals into the labor market, but still when we talk about such a sizeable deficit, more than a full percentage point, well, this is far from the ideal scenario. As businesses remain desperate for workers

(05:48)

And as businesses continue to search for workers, businesses are struggling to find the needed incentives to pull those workers in. Some businesses are offering better healthcare childcare services, even pizza parties or happy hours, anything to retain workers, but also raising compensation, putting upward pressure on average hourly earnings. Although looking all the way to the right hand side, you can see that the, that upward moment has somewhat stagnated. As some businesses are finding it difficult to continue to absorb those elevated labor costs. Now longer term as labor costs remain elevated or continue to climb higher from here. Some businesses, as I mentioned are already facing challenges to absorb those higher costs. And this is particularly the case for smaller businesses or those with reduced access to capital reserves. And whether it is higher labor costs, whether it is elevated rental costs, parts and materials costs, small businesses particularly are struggling. And this again, longer term is likely to lead to a reduced level of investment hiring and maybe closing their doors altogether, bigger businesses, however, are also facing challenges of elevated costs, but they seem to be dealing with it slightly differently. A lot of large businesses are looking to replace that very costly labor input, particularly with technology, wherever possible. Think about ordering from an iPad. Think about scanning, QR codes, self checkout businesses are struggling amid those rising costs and trying to find alternative ways to keep that bottom line positive.

(07:42)

But for now, I would say that labor costs are likely to remain at least elevated as long as labor remains scarce and businesses continue to demand a higher level of employees that are available in the labor market. But I think broadly speaking, when we walk through some of these conditions of the labor market, what becomes clear is that we are starting to see at least some cracks in the labor market, some signs of weakness. Now we have seen a nber of sizable corporate layoff announcements. w have also seen a down tick in terms of the nber of overall job openings in the labor market. And we have also seen a rise in jobless claims rising over 30,000 in just the past three months. Now, again, it is all relative looking to the right hand side. You can see that reversal of the downward trend historically speaking, We are still at very low levels but we are beginning to see some cracks.

(08:42)

We are beginning to see that uptick in the unemployment rate stagnant that second derivative decline, a stagnant level of wage growth and an upward trend now in jobless claims. And in fact, it is important to note that when we talk about this robust labor market, that the fed continues to tout, remember we are at a point only as of July that we have recaptured all of the jobs lost during the COVID crisis. Do you remember during the shutdown, we lost 22 million jobs and it is only as of July that we recaptured those jobs. So when we talk about this robust job creation well, most of it was robust job replacement. And in fact, if you look at that dark line, that dark blue line, that is the trajectory of where the labor market would have been without COVID. So if we compare ourselves to where we should be, We are still millions shy. So it puts that robust characterization of the labor market in a little bit of a different perspective.

(09:52)

And remember that job creation has not been even across all sectors with some of the hardest hit industries, still struggling to reconnect with employees, reconnect with supply chains, reconnect with customers, looking all the way to the left hand side of the chart. that is leisure and hospitality, leisure and hospitality lost over 8 million jobs. And has since only recaptured about six and a half million. So still struggling at about an 85% recapture rate. Now moving through to the left, you can see health and education, government wholesale trade. These are all struggling to get back to even pre pandemic levels. Let alone talk about creating new jobs over the past 18 to 24 months. Now, manufacturing, construction, even retail trade. We see them flirting right around the 100% mark, a little more positive business services. that is leading the way at 146%. So in business services, when we talk about different consulting services, financial services, this is one of the sectors that not only replaced the jobs lost, but has seen very robust. And I think we can be comfortable using the word robust here, very robust in terms of new job creation. This was one of the industries, one of the sectors of the economy that was more easily transitionable into the environment, taking it into account. The COVID safety measures. The work from home business services was one of the industries that was more easily adaptable to that new environment.

(11:32)

Now, when we talk about the limitations across different business lines or different sectors of the economy, I do wanna mention that it is not from a lack of trying. Many of these businesses are trying to hire additional employees but at this point, and I alluded to it earlier, labor demand is far outpacing labor supply. This is one of my favorite charts here. We are looking at job openings and labor turnover, survey or jolt for short. And what this tells us is there is nearly 11 million job openings currently in the marketplace. that is essentially two job openings for every one person reporting that they are looking for a position. Now, as I mentioned earlier, as we are starting to see cracks in the labor market, you can see we have come off of peak levels.We are down about 10%. So we have halted that steep, upward trajectory in terms of more job vacancies, but still on a historical basis. there is a tremendous amount of labor demand out in the marketplace. it is not a lack of job opportunities. it is not a lack of available positions. it is a lack of able and willing bodies to come back into the labor market and fill those job vacancies.

(12:56)

So now, if I just told you that there are let us say roughly 11 million job vacancies, but we also know from the headlines in the media, that there is roughly 6 million Americans currently reporting a position of unemployment. Well, we should be asking ourselves where is that mismatch what is causing such a differential in terms of this labor demand and labor supply. Now this has been dubbed the great resignation, but why is it? Is it baby boomers retiring early out of fear of contracting or spreading the virus? Is it millennials or gen Zers waiting on the sideline for higher compensation, better incentives, more happy hours scheduled or is it working families looking for more flexibility trying to do that work life balance? Well, it is certainly not an easy answer. it is not a one word answer. And so I would answer yes, all of the above there is many different themes, many different factors that are driving individuals still to remain on the sidelines of the labor market.

(14:06)

First and foremost, as you might expect in the aftermath of a global pandemic, some workers have lingering health concerns and ongoing health impacts as a result of the virus. So think about the so-called long haulers, as you can see, there is about, well, let us call it one and a half upwards of one and a half million Americans that report they are not actively participating in the labor market because they are worried about getting or spreading the virus, this variant, the next variant there is concern around it from a health perspective, but some families are also facing lingering childcare or elder care issues impacting working families. And in particular working women now with schools back reopen this and will continue to alleviate a lot of pressure on working families. But what about those with small children, not yet of school age, or what about those families caring for an elderly family member?

(15:06)

Well, now we are talking about daycares and nursing home facilities, many of which are operating at reduced capacity, reportedly facing staffing issues themselves. So now, we are not talking about the virus per se, but we are talking about the expanding impact of a reduced level of labor force participation. And of course, we also know there is been nerous indications and reports that have suggested that ear earlier, fiscal policy measures are also still working to act as a deterrent to growing the pool of potential labor with some of these more generous fiscal policies meeting or even exceeding one's potential earnings. I in the labor market, this created not only in immediate incentive to remain outside of the traditional workforce, but a long term incentive, as well as many individuals were able to acculate a Sable amount of savings. Now, going forward, as I mentioned, schools reopened, caseloads are declining, no new variance, hopefully detected and fiscal policy measures mostly.

(16:16)

Now coming to an end, this will hopefully drive some of these sideline workers back into the labor market, but I wanna caution, this is not a quick fix. This is not a flip the switch scenario. It will take time for these workers to move back into the labor market and find a position of gainful employment or accept a position of gainful employment. In fact, typically when we talk about benefits expiring or other sources of income, expiring workers typically look for employment in anticipation of that end to benefits. And, and this is not a political statement or judgment by any means, but simply a recognition of rational players and rational players in the labor market seek to smooth out the income flow of the individual or the household by appropriately timing the transition from one income source to the next, this time around however savings complicated that process this time around because benefits were, as I mentioned, arguably so generous, then you layer on the moratori on rents the moratori on student debt payments the additional state and local programs.

(17:39)

All of these factors, not to mention just a nominal change in how we spend, how we commute, how we live. All of these factors resulted in a sizable wealth cushion spreading across much of the American populace. In fact, we estimate that the savings rate at the savings level, the nominal level jped by 6 trillion during the pandemic and the immediate aftermath. Now, I certainly am not implying that that is enough to support sidelined workers indefinitely already. You can see the savings rate has plmeted and we estimate that about 85 to 90% of that stockpile of wealth has already been spent. But that means that there still is some amount of savings still out there that could continue to carry potentially millions of potential workers for another month. Another two, maybe longer at which point, many are hopeful. There will be additional fiscal initiatives to support those in a position of hardship or those still reporting a position of unemployment. In fact, we have already seen now 25 states and major cities already initiating new levels of fiscal support being sent out, mostly in the form of direct payments to households, finding themselves in one of those two positions.

(19:04)

Now at the same time as savings is dwindling and that stockpile is being eroded. We do have to recognize that is a realization that consers are facing. Some consers are increasingly turning to credit cards and other sources of debt acculation to supplement their spending patterns. As fiscal stimulus begins to fade. Now, the nominal level of debt is up about 300 billion, but to be fair, the conser is starting from a relatively healthy point. When we look at the amount of debt relative to personal disposable income, this is actually near a record low. So consers did not have to turn to credit cards during the pandemic. And in fact, many consers work to clean off their balance sheet as they received government checks in the mail. So while we are seeing now more than 300 million credit card applications in just the last two months, that is nearly one for every man, woman and child in this country. Again, the starting point of new credit card debt acculation is historically low suggesting that there is room for the conser to take on new amounts of debt before red flags need to be raised

(20:21)

For other consers though, the notion of a reduced savings, a savings cushion is resulting in a change of behavior, an outright reduction in spending. Now let us step back for a second and you can see the two back to back quarters at the start of last year. This was robust spending on part of the conser as a result of not only pent up demand as a result of the lockdown, but trillions and trillions of dollars flooding into the market from fiscal initiatives. So as expected then consption, did wane as fiscal stimulus faded. But at this point now weakness has not only continued, but it is in intensified now looking at retail sales to get a good sense of where the conser is at the start of the year, the circled bar, there was a very strong indication of resilience on part of the conser retail sales rose 3%, well, nearly 3%, 2.7%.

(21:20)

That is round sounds a little more positive, 3% in January. This was a very robust pace, but since then,we have seen consption, establish a very clear downward trend as consers again are changing their behavior. Now, what do I mean by changing well for some consers that means buying less outright for others. That means reducing the quality of the goods and services in their basket. So instead of buying premi shampoo, maybe you are buying Walgreen's brand shampoo and for others, particularly among the younger generation, what we are seeing is this translate into what we call binge spending. So consers pulling back very dramatically to the bare minim essentials for one, two or even three months in order to buy that larger ticket, more expensive item in month four. So causing an extreme amount of volatility month to month. But regardless of the form that it takes, what we are seeing is that consers are changing their behavior.

(22:27)

And already we are hearing from large retailers suggesting that consers are cutting back as the household balance sheet becomes increasingly fragile as a result of rising costs, rising prices. And in fact already we have seen the latest Gallup nbers show that over 50% of Americans report that inflation is going to have a meaningful, negative impact on their holiday spending this year. Again, either in terms of lower dollar, a lower price point or fewer items altogether and take a look at what inflation does. Now, we talked about that nominal rise in wages wages up about 5.2%. Although we were starting to see some stagnant moment at that elevated level, but when we take inflation into account, all of a sudden that 5% increase against the backdrop of seven, eight, 9% inflation doesn't feel so good and real inflation. Again, this is inflation accounting for that increase in prices has been trending negative for the better part of the past year. And accounting for those price increase is now looking at the top line that dark blue line that is real consption. So this is the conser's spending behaviors taking into account that rise in prices still positive. Consers are still spending, but we are taking home less consption is up around 2% down noticeably from an average pace of roughly 8% in the prior year. And even further below that peak level at the reopening of the economy.

(24:10)

But I caution as to before you get too pessimistic on the conser, remember we are still in positive territory. We are simply seeing a moderating pace, but even with that moderating pace, because consption remains positive. That continues to put pressure on producers to keep production positive to meet that lower, but still positive level of orders in the market. But even if producers can find the employees they need, which remains a big, if remember, we are talking about 11 million vacancies in the labor market, producers are still facing sizable constraints from the supply side. Now these constraints have improved somewhat industry insiders do report that they have improved by about 50%. But from a historical standpoint, there are still a nber of dislocations limitations distortions that producers are trying to deal with leading to extremely elevated, wait times higher prices and creating difficulty in terms of inventory management, because a lot of businesses, remember we are hoarding parts and materials that they could get their hands on.

(25:28)

But now as demand is shifting producers find themselves with either undesirable or only partially producible goods at this point. Now looking here at this is a measure of domestic manufacturing activity. If you are not familiar with it, not a problem. This is a diffusion index, which simply means above 50 is expansion below 50 is contraction. And what you can see starting on the left hand side of the chart is that extreme run up in activity. This is the economy reopening. This is producers trying to get back online, trying to ramp up production to meet that surge in consption. Remember those two back to back quarters that we circled when we looked at the conser, that is what producers were trying to meet now since then as consption has waned. So too has production, but We are still in positive territory. We are still at a reading above 50.

(26:22)

So glass half empty. We are losing a lot of moment. Glass, half full were still in positive territory. And of course it is all relative, right? Let us compare the us to that light blue line that is Chinese manufacturing activity, which of course to be expected has fallen back down into negative territory now amid the latest shutdowns in that country. So when we talk about or when I am asked about when will these supply chain dislocations ease? When are we going to iron those out? Well, much of the response is going to depend on the global policy response to the virus, not just COVID or the latest variant, but the inevitable next virus to emerge. But with much of the developing world still imposing, very strict COVID policy measures, including China's zero COVID policy. I think to be realistic reinstating the structural fluidity in terms of trading goods and services across international lines, as we were once used to prior to the pandemic, I think this is still several years out if we ever get there.

(27:35)

Now that is not to say that we won't make incremental progress along the way. And as I mentioned, we already have seen improvements, but I think getting back to that free flow of goods and services, again, that we were so accustomed to prior to the virus is still quite a ways out into the future. And remember too, that we are an international, we are a globally integrated, let me say it that way globally integrated marketplace. So even if We are talking about an American based company, making goods for American consption, if along that way, if along that pipeline, the producer requires some sort of heat treated metal or specialized screw that comes from Indonesia, Sri Lanka or China, that is going to have significantly negative implications for those producers. Again, still leading to elevated price pressures. Those extended wait times as even that this moderated level of demand outpaces the availability from a supply standpoint and speaking of demand, outpacing supply, at least for the moment.

(28:44)

Let us talk about housing for a second because housing was a very solid, bright spot for the economy and now turning to a sizable tailwind, excuse me, headwind. Now Americans, I think at this point it is fair to say are viewing their homes very differently in the post COVID world. We view them as a workplace, as a school and in some cases, unfortunately, a refuge. So whether individuals were fleeing the cities for safety, whether you were looking for more space to accommodate that home office or a new room for at home schooling or maybe taking advantage of record, low interest rates while they last or we had an entire generation of millennials that had previously delayed a home purchase that are now dipping a toe into the market. So for whatever reason, for a variety of reasons, we saw home sales surge during the pandemic and the immediate aftermath up roughly 20% at the start of the year at a 6.7 million unit pace. Now more recently, of course, rising costs, rising, parts and materials costs, rising interest rates and borrowing costs, negative real income growth, limited access to labor, particularly specialized labor. This is now putting a downward this is now putting downward pressure on the housing market. As some would be home buyers are being priced out of the market and some would be sellers or anxious to jp in to offload in a still hot marketplace while they can.

(30:27)

But I should be careful because I wanna point out that while demand has come down relatively from the peak and supply has increased on a relative basis from those low levels, there still is a sizeable disconnect with demand outpacing supply. So exactly what we are seeing in terms of the labor market as well, demand outpacing supply, still leading to an elevated price profile. And you can see that looking here at the S and P K S Scher national home price index will start with that one, that is the dark blue line. And that is showing that home prices are up about 20%, but now shift to the light blue line. Can you see it all the way to the right? Well, it is right on top of the national level also up about 20%. What's interesting is look at the previous cycles in early two, five in 2011 at 2015.

(31:19)

When we see these bubble like environments in the housing market, notice the blue line, the light blue line outpaces the dark blue line, because much of the price growth in the housing market is concentrated to those traditional downtown urban areas, downtown LA downtown New York city. This time around it was quite different. We saw some of the most significant price growth in what we would consider secondary or even tertiary housing markets. It was not just downtown New York city. It was Rochester, New York. It was not just downtown Boston. It was Peabody Massachusetts. It was not just downtown Denver. It was Fort Collins, Colorado. And so what we see is that unlike in previous cycles, this is less of a bubble like scenario and more of a reflection of a change in structural preferences as populations shifted from one location to the next, but already we are starting to see that turnover from peak levels. We are starting to see price growth, moderate, particularly in some of the bigger cities. As I noted you can see New York and Chicago down from peak levels. Although out here in California, San Francisco, LA, We are still seeing some upward moment in terms of price growth. Again is demand outpaces supply.

(32:47)

Now I wanna shift gears a little bit and move to the policy response because we walked through the economy. We walked through the emerging signs of weakness in many of the key sectors, including the labor market. And so the question is what does this mean from a policy perspective? Well, continued uncertainty continued on evenness in the data. This is the perfect opportunity for those in Washington to continue to push for more fiscal initiatives in the name of job creation, increasing American competitiveness and taming inflation, despite potentially inflationary ramifications. And that is exactly what we have seen after months of negotiation. The Biden administration was very successful in passing a $1.2 trillion infrastructure bill with billions slated for our very antiquated infrastructure in terms of bridges, roads tunnels. And on top of the 1.2 trillion, the administration was successful in passing, a 430 billion, inflation reduction act, a slightly reduced price tag from the original 3.5 trillion has infrastructure, spending bill that the administration put out now, regardless of what side of the aisle you are on.

(34:05)

I, if you are an advocate, you will argue that this package will reduce the deficit by limiting tax fraud and increasing tax revenues from, corporate America. It will also increase spending to combat climate change and allow the government to negotiate some drug prices, some additional drug prices, if you are opposed to it, again two different opinions. If you are opposed to the legislation, you will say this is simply a tax increase on most households, including those making less than 400,000, which does go against one of the campaign promises by the administration. If you are opposed to it, you will also say the legislation would actually fail to bring down inflation and may actually exacerbate inflationary pressures in the near term. Now putting politics aside, let us just take a bipartisan analysis that does concede that the IRA will result in a reduction in the deficit longer run. Although there are ramifications for inflation near term by increasing the amount of fiscal dollars flooding into the marketplace.

(35:10)

So again, whether or not you support the legislation, the legislation's connection, direct connection to inflation reduction really appears to be in name only but I completely get it. I understand legislation that will potentially reduce the deficit 10 years from now and potentially have a very minimal impact on inflation 10 years out while adding to potentially the current level of inflation that was just too long of a title inflation reduction act just rolls off the tongue a little better. So it makes sense why it was packaged that way now from a monetary policy actually, before we get to monetary policy, I do wanna make a few more comments on fiscal even without the IRA. So again, regardless of how you feel about the latest legislation, the us had already spent 6 trillion to combat the effects of earlier policy initiatives aimed at stemming the spread of COVID 6 trillion that is under the Trp and Biden administrations combined.

(36:21)

Now to be fair much of the developed world also went down the rabbit hole O of very large fiscal initiatives. Although you can see the us relative to the next highest spender. Well, we spent more than double and most of the expenditures that we saw are at least a good portion of them were in the form of direct payments, adding to the inflationary implications that We are feeling now today in the us, because keep in mind that while much of the world is reeling from price pressures as a result of supply side constraints in the aftermath of COVID as well as more recent international conflicts, you can see that inflation is higher here in the us than in any most, anywhere else in the developed world, because not only do we have the supply side pressures of inflation, but we also added in the demand side inflationary pressures, as well as a result of those fiscal initiatives. Now, again regardless of whether or not they were necessary at the time, we have to have an honest conversation about the consequences that we are now trying to deal with from an economic standpoint.

(37:32)

Now let us shift a monetary policy. And the big question is what does this mean for the outlook of the fed? Where do we go from here? Well, just like the federal government uncertainty on evenness in the data question marks about the recovery, the impact of COVID, this was very clear justification for the fed to remain on the sideline for the better part of of two years only in March more recently, shifting that tone dramatically with the first interest rate increase of 25 basis points. Now, since then, the fed has rapidly accelerated that increase 50 in may, another 75 in June, in July. And you can see here how the expectations for the pathway of fed policy has noticeably jped. The blue line is the expectation as of March, the green line is as of June. And I know we are all on the edge of our seats waiting for the September FOMC meeting in the latest edition of the SEP or the smary of economic projections.

(38:36)

And I would suspect that we see even further, an even heightened expectation in terms of rates going forward as inflation has remained stubbornly elevated. But that being said, we have heard from a plethora of fed officials over the past. Well we hear from them nearly on a daily basis, and it is important to recognize that there are a variety of opinions still out there. Sometimes we tend to be swayed by the loudest fed speakers that out that out vole, some of the more dovish members, but it is important to remember that there is still a number of fed officials that are not yet convinced. We will see the terminal rate at four or even above 4% that has been presented as of, has been presented by several fed officials as a potential pathway. But I would say that while fed officials may not be of one mind in terms of the longer run trajectory of fed funds, they are of one mind when it comes to the driver of policy.

(39:38)

And that is still too high inflation. The labor market wages, the fed says is solid but inflation is extremely elevated. And I think everyone in this room could agree with that. And whether your preferred inflation metric is the PPI up near 10% or the CPI up near 8%, or maybe we have some PCE fans out there up near 6%, regardless of your inflation metric prices are elevated. And we feel that every day filling up the family car, going to the grocery store, we feel that as business owners, as investors, as consers and in many cases, prices are at a multi decade high. Yes, we saw some reprieve at the pp, but other key categories continued this heightened trajectory, heating equipment, 17% lber, 5% asphalt, 74% energy. Even with that welcomed reprieve over the past month, still up 44% fee animal feed, pork eggs, these grains and consables, anywhere between seven and 50% over the past year.

(40:46)

And of course the risk remains to the upside. As we continue to see these international policy measures exacerbating or at least continuing supply chain constraints and international conflict continues. Remember, keep in mind that Russia is still the world's third largest producer O of energy. And while it accounts for very little component of our imports even with sanctions imposed Russia, still accounts for about a quarter of the European union's, oil imports, about 40% of its natural gas, even higher about 50% of its coal imports. So it still remains a very vital component and even more vital as we look out to eventually cooler weather coming down the pipeline. I know it is difficult to imagine. Winter is on the horizon being it is beautiful weather out here, but eventually those colder temperatures will come particularly throughout Europe. And also remember that Ukraine is the bread basket of Europe.

(41:49)

Now it is sort of fallen out of headlines as of late but Ukraine is still a vital component to global food production, the fifth largest producer of everything from maze to barley, to, to sunflower seeds and oil. And it is not just about conserable cereals either. When we talk about Ukraine, Belarus and Russia combined that accounts for over 45% of the world's fertilizers or fertilizer inputs needed to grow food around the country. So while prices certainly received a boost in the aftermath of COVID 19 international conflict exacerbated that upward pressure. Now you look here to the right hand side of the chart and you can see more recently, we have seen prices cool, but we are still up on an annual basis. Energy up about 11% wheat costs up about 5% and much of the damage has already been done. When we talk about staples, bread, flour, pasta, these are up somewhere between 10 and 20%, depending on where you are globally.

(42:59)

And these are staples that many countries rely on to feed their populace. Now, here in the us our focus is on gas prices or it tends to be which has come down precipitously over $5 on a national average to down below $4. So we are thankful for that reprieve, but when we compare this to what we were paying prior to the COVID crisis, well the average American family is still spending hundreds more a month just to fill up the family car. So again, it is understandable when we talk about this from a price standpoint, that the fastest way to derail the American conser is sustained heightened energy costs. And so there is this heightened focus on reducing prices at the pp, but I would argue that the bigger crisis, at least from a global standpoint, stems from the agriculture market while developed countries sit around and try to find alternatives to Russian energy, Russian crude, there is no OPEC for global food supply.

(44:01)

When supply falls short people go hungry. So with that is a backdrop. The fed has vowed to root out inflation, but the question is, will it work? Well? It is a difficult question to answer because typically the fed is raising rates. When the economy is overheating, the fed raises borrowing costs, tap down, consption, taps down investment. The economy slows and inflation slows check this time around the economy is not overheating. This time around the economy is already in negative territory. And to complicate the process for the fed, as I mentioned, a good portion of those inflationary pressures are stemming from the supply side. So how does raising borrowing costs change China's COVID policy or print more ships? The fed can not impact those factors driving supply side constraints, driving price pressures from the supply side. So as the fed continues along this very aggressive pathway arguably needed or not depending on your position on policy, this will result in likely further negative growth and potentially in outright technical recession.

(45:11)

Now there is a lot of discussion about whether or not we are in a technical recession. The conversation is inconsequential for consers because whether or not you call it a recession, a downturn or I believe it was Greenspan that once said, no, it is not a recession. It is a culative unwinding of economic activity. Well, regardless of what you call it, hardship is hardship for the average American. And what is clear is that moment is slowing. And again, as we walked through, I think it is pretty clear we can check at or in recessionary boxes of nearly every sector of the economy, except for the labor market, looking at a jobless rate of 3.7% that has not and does not indicate that the labor market is in recession. And historically we have not seen at least post world war II, the N B E R, which is the determinant, the official determinant of recession indicate, recessionary conditions without a significant reduction in employment.

(46:15)

So the bigger question is, does the fed have the resolve to raise rates, fed officials say, yes, they continue to tell us they will raise rates no matter the cost, the market, meanwhile is not quite so sure. The market continues to violently ping pong between one data point, the better than expected employment reports have been moving market expectations to 75 basis points. The cooler than expected inflation reports have been moving the market back to 50 basis points. And so right now We are sitting at about an 80% probability. The fed goes, 75 comes September 21. This week, we see the all important August inflation nbers. And if they come in weaker than expected, that may be enough to move the needle back towards a more benign 50 basis point increase. But again, from a broader perspective it is not about one month's increase.

(47:12)

It is about the Fed's commitment to a longer term directory to higher rates and the negative impact that is going to have on the us economy. In fact, according to chair Powell, We are not only likely to see negative growth, but we need to see an extended period of pain for consers and businesses in order to get inflation under control. The fed has clearly acknowledged the need for a slowdown, a significant slowdown in the economy in order to get inflation under control. Now, from a forecasting standpoint, as I mentioned, we have seen wild volatility as the fed moves, the short end we will presably move along with the fed. The long end, however, is going to struggle to keep up with the fed as the fed intentionally drives the market lower drives the economy lower. So it is going to come down to the realized pathway of inflation, as well as the perceived directional moment of fed policy.

(48:11)

We also have the balance sheet, which could not necessarily add additional upward pressure to rates, but it is likely to provide at least somewhat of a floor on the longer end, a secondary tool that I do not feel has gotten a lot of focus in the media. As of late, we are still very much, hyper-focused on interest rate increases, but with a balance sheet up near 10 trillion, I would imagine that this eventually is going to catch investors focus as the fed continues to unwind at least as much as they can. So overall, rapidly running out of time here. I think the biggest certainty for the market at this point is uncertainty. We do expect a tremendous amount of volatility to continue. We do expect a tremendous amount of uncertainty from a policy standpoint, as the chairman said the other day, trying to forecast the market in the best of times is difficult trying to forecast the market in today's environment is virtually impossible. So again, trying to pinpoint the exact level of rates, the exact level of economic activity seems, almost moot at this point, but understanding the factors and the directional moment of the market will really help us understand where We are headed in terms of a longer term potential pathway. And with that, I would like to thank you very much for your time this morning and enjoy the rest of the conference.