Fall Market Outlook: Growing Pains
Matthew Naeyaert, GreenStone Capital Markets Senior Credit Analyst
Fall Market Outlook Growing Pains


The U.S. economy experienced a rapid recovery during the first half of 2021. In fact, second quarter GDP output represented a quarterly record, surpassing the previous peak reached in Q4 2019.


While we aren’t lacking for GDP growth, a supercharged rebound in consumer demand combined with labor scarcity and raw material sourcing challenges has resulted in supply-chain bottlenecks and rising prices for both producers and consumers. These challenges, combined with uncertainty around new COVID variants and how they might affect consumer demand, are top of mind for producers, processors, and manufacturers across the country.


To put the post-COVID economic rebound in perspective, U.S. GDP increased at an impressive, annualized rate of 6.6% in the second quarter of 2021, which tops the 6.3% annualized growth rate reported in the first quarter. However, due to uncertainty around the Delta variant and a general regression to the mean, most economists are projecting more moderate growth rates for the final two quarters of 2021 (consensus forecast of 4-6% annualized). The increasing COVID case numbers seen in the late summer/early fall resulted in reduced consumer confidence and spending, with the restaurant and travel sectors unsurprisingly seeing the biggest pullbacks in activity during that period. While consumer activity has been dampened somewhat in the short run, the fact that a majority of states (including Michigan) are seemingly unwilling to re-impose the type of strict mobility restrictions seen in 2020 supports the consensus view that economic output will continue on a generally positive, albeit more moderate, trajectory in the medium term. 


Labor availability is top of mind for virtually every business it seems, and the data on U.S. employment continues to tell the story of a steady but uneven recovery in the job market. According to the Bureau of Labor Statistics, the U.S. added 235,000 jobs in August, with the official unemployment rate declining to 5.2%. This level of payroll additions represents a sharp drop off from the 962,000 and 1.1 million and jobs added in June and July, respectively. The reduction wasn’t totally unexpected given the fact that the steep pace of job gains reported in recent months represented a rebound following an unprecedented spike in joblessness during the initial days of the pandemic, especially in the hospitality and retail sectors. 


While enhanced unemployment benefits have been a factor in causing potential job seekers to delay re-entering the labor market, other factors limiting the supply of labor include the inability to find adequate and affordable childcare, as well as continued voluntary exits from the labor market due to virus related concerns or personal choice. Many employers are increasing wages in an attempt to retain key talent and attract new employees, however that strategy has come with mixed results for many operations. With the expiration of enhanced federal unemployment benefits in September, as well as the fact that we seem to have crested the “Delta” wave of COVID, we remain optimistic that the labor market will continue to stabilize throughout the remainder of the year. 


As has been the case for several quarters now, rising prices deserve mention in this space. The U.S. has experienced levels of inflation this year that have not been seen since at least 2008, with sharp price increases reverberating through many key sectors due to a combination of strong consumer spending coming out of 2020 and the ensuing supply chain log jams that have become common as businesses scramble to meet increasing demand while also managing through COVID related concerns and restrictions.  The most recent inflation data suggests that the pace of price increases has begun to moderate in the third quarter, with the Bureau of Labor Statistics reporting that the CPI increased by 0.3% in August. This represents a declining trend compared to the 0.9% and 0.5% monthly price increases reported in June and July, respectively. For context, the August data suggests year-over-year inflation is running at 5.3%, significantly above the FED’s stated long-term 2% inflation target. 


Transportation and logistics challenges have been particularly acute as of late, with delays and cost increases in maritime container shipping causing reverberations throughout the economy. As of the writing of this article there are approximately 40 mega-container ships anchored off the adjacent ports of Los Angeles and Long Beach, according to a recent report from the Marine Exchange of Southern California. Ordinarily there are 1 or 2 such ships (if any) at anchor at any given time according to the Marine Exchange. These delays have unsurprisingly driven the cost to ship products internationally to record highs, with the average composite cost of shipping a 40-foot container on eight major East-West routes hitting $9,613 during August, up 360% from a year ago. Further, a large terminal at the Ningbo-Zhoushan Port south of Shanghai has been at least partially closed since August 11 due to COVID concerns, which has further exacerbated the global shipping backlog and limited the availability of many products, specifically those that require raw materials produced only in specific regions of the world. The sweeping downstream ramifications of these logistical challenges has highlighted the ever-increasing complexity and interconnectedness of global supply chains and portends potential vulnerabilities with regards to raw material sourcing.


Turning our focus to the agricultural economy more specifically, the USDA’s latest WASDE report projects tighter supplies and lower ending stocks for U.S. corn as compared to initial forecasts from earlier in the year. The most recent NASS projection for the national corn yield is 176.3 bushels per acre, a 3.3-bushel reduction from the prior estimates but still above last year’s crop yield of 172.0 bushels per acre. Record high yields are forecasted throughout much of California, Illinois, Indiana, Kentucky, Michigan, New York, North Carolina, Ohio, Oklahoma, and Pennsylvania. However, the impact of the ongoing drought in the northern states of North Dakota, South Dakota, and Minnesota has significantly reduced expected yields in those regions. Total U.S. corn production is projected to total 374.7 million tons this harvest season, which would equate to a 14.4-million-ton (or 3.9%) year-over-year increase. It should be noted that the latest USDA report included a 15.0-million-ton year-over-year reduction in forecasted Brazilian corn production due to drought during the growing season, as well as late frosts that negatively impacted the country’s second-crop corn. This development has further tightened global grain supplies, which should help to support commodity prices in the short/medium term.


The outlook for U.S. soybean production is following the same trend as corn, with the latest NASS survey results projecting soybean yields to average 50.6 bushels per acre, which would be largely in line with last year. Like corn, record high yields are projected for a number of states, including Illinois, Indiana, Kentucky, Maryland, Mississippi, Missouri, New York, Ohio, Pennsylvania, and Virginia. But, once again, the unfavorable weather conditions of higher temperatures and lower levels of rainfall for Minnesota, North Dakota, and South Dakota are dragging down the national soybean yield forecasts. For reference, Minnesota and the Dakota’s account for 23% of the total U.S. soybean planted acreage and their yield estimates are down between 6 and 9.5 bushels per acre when compared to 2020. In spite of the lower yields across these states, the USDA forecasts total U.S. soybean production to equal 4.34 billion bushels, which represents a 4.9% increase compared to the prior year.


To view the article in the online 2021 Fall Partners Magazine, click here.


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