“We are here, but we are not here, are we?” A thought likely drifting through Alice’s sore head after tumbling down the rabbit hole. And so today we find ourselves here, or not here, in a state of economic recession.

“We’ve just had two quarters of negative GDP.”

“But, we have never had a recession with unemployment at 3.5%!”

“But, interest rates are going up!”

“But, July was the best month the S&P has had in years!”

And so on … one thing we readily find common agreement on is that we are in a bit of a weird place. But before you start scanning tree limbs for Cheshire cats, know that, despite the things that brought us here: (a global pandemic, resultant supply chain issues, an overheated economy, and whatever else…) economic fundamentals, like the laws of physics, continue to reign supreme. That simplifies things a bit.

All eyes are now on the Fed’s grappling with an imbalance between supply and demand. Oil and excess liquidity are key players in this imbalance, and they are the primary drivers for inflation lately. Most of us have adjusted our driving habits and are more discriminating buyers at the grocery store, but crude production, per the EIA, fell from 13.1 million barrels per day in February 2020 to 11.6 million barrels per day by February of this year, and, while production is said to have increased in recent months, the U.S. still uses 20 million barrels per day. More people are starting to commute to the office, and we are in that peak ‘summer vacation’ usage of gas. These vacations have been postponed, more than once, and while you would expect some pent-up demand to go with this driving season, it appears to be less than anticipated so far. Additional supply has also been added via an approximate average of 1 million barrels/day release of our strategic oil reserve. We have seen a gradual and steady softening of prices in recent weeks. But is it real? There is another, less mentioned component of oil pricing — the futures market, which, according to a 2009 congressional study, accounts for up to 20% of crude oil prices. Light crude oil futures retreated 28% to $88 per barrel on August 8 from a June 8 price of $122 per barrel — likely in anticipation of further economic downturn. But, if this market’s expectation changes, so goes this price component of a barrel of oil. It could turn around quickly, helping to drive prices right back up. All things considered, my sense is that the underlying fundamentals driving inflation have not changed much, despite a general reduction in prices.

These are some economic highlights that I find interesting, but the challenge presented to the Fed has many more dimensions to it.

The Fed has a tough job finding that delicate balance between supply and demand while avoiding recession, and it is moving with all due care and consideration. But being cautious can be akin to pulling off a Band-Aid slowly. If the data supports my assumptions on fundamentals in the coming month, we may see the completion of a trifecta of 75 basis point rate hikes on September 21. My preference would be for the pivot fifty-basis point hike, or less, currently expected, but time, and the data, will tell.

And speaking of time, please forgive my haste. You see … I am late … for a very important date!

Regards,

Mike Green

SVP, Commercial Relationship Manager