Breaking news: "In February 2023, Canada created 35,000 new jobs, about 9,000 more than the expert predicted".
So, usually, when interest rates rise as quickly as they have in the past two years, a recession is the guaranteed outcome, Why is it taking so long, for the recession to happen?
In my work, I talk to many finance directors and CFO, and their overall view of their financing cost is that it's a minor irritant and actually represents a smaller percentage of their costs than in the past since all other costs have risen by more. A friend in the construction industry told me that the cost of "wet rental", driver, fuel, and truck has nearly tripled in price, from around 65$/$85 to nearly $175/$200 per hour. his total financing interest rate has risen from 8% to 12% but as a percentage of total expenses it has fallen by 25% -- so much that he included an explanation for the reduction in his annual report. So much for the push by the Bank of Canada.
There are many possible answers to that question; several friends are active commercial farmers and over the past three years they have noticed a substantial increase in the cost of inputs, one, in particular, told me that feed costs have risen threefold over the past 48 months, and chemical prices have increased by more than that. There is a massive labor shortage in America -- walk into any city center and you will find shop signs for workers, and its going to get worse for the next few years. Maybe not the most scientific but my nephew who just graduated from university has more than five job offers -- he graduated in Political Science... not medicine, there is such labor demand that he can pick and choose, granted he's been working part-time for the past four years, he has a very attractive work-related resume.
The market has long expected the cost of money to rise, but compared to the costs of other inputs the rise in the cost of finance is almost insignificant, this is the real problem for central banks --- money costs are still surprisingly low, when compared to almost everything else, moreover, the rise and fall of the cost of money is far easier to predict. My farmer friends have already doubled the staff salaries and are having a hard time finding additional labor. He told me that financing costs when from 2% of operating expenses to less than 1% because everything else has risen by far more. Another friend who owns a bakery has had to shut down two of his outlets because of staff shortage, there is simply not enough labor to go around -- and he also increased wages (and more than doubled the price of his product) with demand continuing to outstrip supply.
The increase in the price of corn will soon make ethanol too expensive to add to fuel, ethanol will actually increase the price of gasoline. There is a massive production shift in progress, although China never accounted for more than 2% of the US GDP, it held a disproportionate sway on the pricing in the economy, which no longer applies as labor costs in China have risen dramatically over the past decade (14x increase).
The inflation that the Bank of Canada and the Federal Reserve are fighting is different than in the past, of course, there are those places that are still able to pay minimum wages...but they are getting fewer and fewer and usually involve jobs that could be done by a robot. The reality is that most employers are not only having issues with gaining new staff but are facing retention issues. The Ghosting of employers, where employees simply don't show up anymore is a consequence of a labor market that treated labor as a commodity and broke the bond between labor and employer.
The central banks' often-used economic control tool is falling short because today the cost of money became a less important issue than it was in the past. Now if the Feds want to do something they could reduce the amount of capital...that would kill economic growth!
Strange: A friend of a friend, owns a Tesla Y and has had his fill of electric cars...granted he does a lot of millage. So he contacts a dealer to sell the car, no trade-in nothing, this dealer is always looking for vehicles. Over the next few weeks, the conversation continues, but suddenly the dealer changes his tune and now will only take the Tesla if he buys a specific vehicle in their fleet which they are selling for $50,000 over the MRSP (the price you see in the window of a vehicle when you go to the dealer). My friend has zero interest in the truck, and will certainly not pay 50,000 over MRSP. He's keeping the Tesla
Question: What happened? The most likely is that since there is almost no waiting time to obtain a new Telsa Y (or 3), there is no premium to buy the car to get it "right now", The second possibility is that car dealers are now very used to the sales premium (they keep 100% of that), but the market is getting increasingly saturated with excess inventory, so the premium will have to go, but the dealers don't want these to go so they are trying all the tricks in the book.
Comments