Back to a Pre-Covid Normal?

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Back to a Pre-Covid Normal? 

I remember being at a conference at the beginning of March of 2020 and talking to folks about this new disease on the scene called Covid-19. We wondered if it was just another virus scare that would fade or something that would actually affect us. Little did we know that it would be an event that would impact every person on the planet. The economic reverberations from Covid-19 continue over 3 years later, so I want to spend this podcast episode talking about the parts of the economy that have returned to “pre-Covid normal” and the parts that are still in abnormal territory. I want to answer the question, “Will we ever get back to pre-Covid normal?” Along the way I’ll give you an update on the inflation report that came out today and what the Fed is likely to do in their meeting tomorrow.

Let’s talk about the evolution of the price of goods first. Remember at the beginning of Covid when you couldn’t find toilet paper? Of all things we thought we had to have, toilet paper was apparently at the very top. I remember one day not being able to find any at Kroger, Walmart or Target. I finally found some at a gas station, and let’s just say it wasn’t the highest quality TP. But eventually, we settled down, stopped hoarding, and production was able to catch up with demand. The toilet paper anomaly didn’t last too terribly long, but other prices and supplies took much more time to come back to normal – like lumber. For much of the pandemic, lumber was up 200% to 400%. OSB, which is used for the construction of a lot of houses, was up massively from “normal levels.” Prices have come back down but still sit on the higher end of historical averages. But more importantly, supply is plentiful. Whereas in the past many manufacturers were hoarding lumber at one time, they are now using up old inventory confident that when they need to place another order the lumber will be there to buy.

What about supply chain? Remember the backlog at the Port of Los Angeles? There were container ships that just sat and circled because they could not get unloaded. At one time there were more than 100 ships just sitting idle. In November of 2022 the head of the LA Port Authority pronounced the backlog over and said the port was operating at pre-Covid levels again. Another measure that is back down to pre-void levels is the volatility in the stock market. The VIX index is one measure of this volatility and its current readings have historically been indicators of investor complacency. Those have come down to pre-Covid levels.

Let’s talk about something that affects all of us, the cost of eggs. At one time it cost more than $5 to buy a dozen eggs. The USDA recently reported that the wholesale price for a dozen eggs was back down below $1. It will take some time for this to trickle into supermarkets to get the price you and I pay down to pre-Covid levels, but the average price of a dozen eggs in the U.S. is already back down to roughly $2.66 in May according to the Bureau of Labor Statistics. The price of eggs wasn’t just a product of Covid but of a pervasive bird flu that thinned the supply of eggs dramatically. But while some prices have come back down, others have not. Gasoline has come down significantly from its recent high in June of 2022, but it remains well above the pre-Covid price of roughly $2.50 per gallon. What about milk? It is still high at over $4 per gallon vs. $3.25 pre-Covid. What other food goods prices have yet to come down to pre-Covid levels? Bread, chicken, and ground beef to name a few. Electricity per kilowatt hour also remains high. So we are seeing some price relief in some areas of goods while we still have a long way to go in others.

What about services? Let me define what I mean by that: services are businesses that you don’t walk out with anything tangible in your hand. Services are people selling advice or expertise or experiences. Financial services, health care, certain kinds of retail, hospitality, and education are a few examples of the service economy. In this vein, airline tickets, hotel rooms, and restaurants are still on the high side of the price continuum. In the service side of the economy we are far from pre-Covid levels. Now one of the metrics that attempts to capture the aggregate cost of what we are paying for these goods and services is the Consumer Price Index, or CPI. It just came out today for the month of May. The headline number came down just a smidge, but the core number, the one that focuses on less volatile categories like food, was up slightly on a month-to-month basis and has been for the last few months. Needless to say, we are not back to pre-Covid levels on prices overall and we may never get back to those levels in many instances.

Why is this the case. I believe it is two-fold. Reason #1 was Covid itself. Never in the history of the world have we seen the entire world’s productive capabilities shut down in a coordinated fashion – not even during world wars. This shock to the supply chain was truly unprecedented – so inflation was very possible because there were too few goods being produced for a period of time. But reason #2 was the amount of economic stimulus provided and the resulting growth of the money supply. According to the St. Louis Fed, the money supply grew by a whopping 40% from the beginning of the pandemic to April of 2022. We’ve never seen that level of growth in the money supply in the history of our country. If inflation is caused by too few goods, being chased by too much money, this growth in money supply was the lighter fluid that exacerbated this inflation problem. Now the money supply is contracting at its fastest rate since the great depression, and no one knows what will happen. Because there is still so much money in the system, and so many Covid accommodations still lingering (like student loan payments being paused), we’ve not seen purchasing power dry up. Incidentally those student loan payments are currently set to kick back in September 1st of this year. What all this means is that there is still fuel in the tank, purchasing power that is keeping the economy going. The Fed is trying to siphon off this fuel by raising interest rates, cooling down the purchasing power or demand side of the economy to bring these prices back down to earth. But this is proving to be a very difficult task. The Fed meets this week and are expected to skip raising rates this meeting, only to indicate that they are likely to raise rates in the July meeting. We are currently at a Prime rate of 8.25%, and I think it is more likely we will see a Prime rate of 9% before we see a rate of 7%. The Fed is going to find themselves in the difficult spot at some point of raising rates in the face of a slowing economy, maybe even an economy in recession as it seeks to fight inflation and return prices not to pre-Covid levels, but to levels that aren’t growing more than 2% annually.

So the summary of this discussion is that we are not going back to a pre-Covid normal – we are charting a course toward a new normal. The experience of Covid has altered the structure of the world economy, and our adjustment to this new normal is going to take time. We are all in uncharted territory.

What should you do for your family and small businesses finances in light of all of this? You have been given the gift of time, and you have been given the gift of extraordinary monetary resources. Save them for the rainy day that I believe is coming. It may be 6 months, 1 year or even 2 years from now, but if you will be wise to expand your reserves now you will be in much stronger shape should the Fed’s actions eventually push the economy into recession. Another tip, especially for small businesses, look at 2019 as a better comparison for revenue and profits rather than 2020-2022. These were abnormal years in every sense of the word, and even though you will probably do better in profit this year than 2019, it’s a more helpful comparison to keep your feet on the ground and to prevent you from thinking the revenue of the last three years is your new normal. There are certainly exceptions, but that is a good rule of thumb for most businesses. Lastly, don’t get complacent. The market has begun to digest higher mortgage rates, your 401k is probably worth more than it was at the beginning of the year, and companies are still hiring. Things seem relatively calmer on the economic front than they have been in a while. But I continue to contend that there are storm clouds on the horizon. I’m not a doomsdayer, I’m actually an optimist, because I believe that the ones that have a shelter to hide in during the storm will have some amazing opportunities to grab market share and make key purchases and decisions while their competitors will be in survival mode.

At Foundation Bank we want to do more than help the small businesses that work with us survive, we want them to thrive. We are a bank that is in your corner. If you are looking for this kind of partnership, we invite you to start your financial conversation with us today by exploring our website. If you’ve found this podcast helpful, we hope you’ll subscribe to it in your favorite podcast app and share it on social media. And until our next episode, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on June 13, 2023. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.