In January, US non-farm payrolls grew by 2.7 times estimates to 517,000 and retail sales (excluding autos) surpassed expectations at 2.3% growth. Early market reactions suggest an economy running much hotter than expected, raising the potential for much higher interest rates.1
Both data series use a seasonal adjustment method to offset the large loss of jobs due to an average winter amount of snow, ice and low temperatures preventing work. The January adjustments are very large and add back 3 million jobs, in this case raising payrolls from 2,505,000 jobs lost, up to 517,000 jobs gained.2 The US is midway through its sixth-warmest winter on record, and some states in the northeastern US had the warmest January on record.3 This magnitude of anomalous weather affects economic data. In this case, we expect an average seasonal adjustment to overstate activity versus when winter weather is less severe.
That leaves the macro and interest rate environments unsettled and needing additional data. It is also why we remain focused on the supply side.
In that vein, electric vehicle manufacturing and battery recycling companies last year announced $73 billion worth of projects.4 Of course, just because companies announced the projects does not mean they will be completed. However, the project total is three times the previous record. It might be realistic to see the momentum in projects continue after the Inflation Reduction Act5 passed into law last year and as energy policy expands from climate security to national security.
Yet the increase in energy transition projects places an even sharper focus on the mining industry, raising concerns over metals supply growth.
Bloomberg New Energy Finance6 recently noted almost $10 trillion of metals could be needed between now and 2050 for the energy transition.7
Yet early this year the Biden administration acted to limit mine production in the Pebble Mine8 in Alaska and on 225,000 acres in northern Minnesota. The Pebble Mine was initially surveyed in 1987 and has yet to produce one ounce of copper despite being the largest known reserve. The northern Minnesota region is also important for its large cache of critical minerals, including copper.
And the supply issues extend well beyond the energy transition metals.
Platinum and palladium are precious metals used in automobile pollution control devices called catalytic converters. US auto sales in January came in at an annual rate of 16.205 million vehicles, the highest annualized rate since February 2020.9 South Africa is a concentrated source of platinum and palladium, supplying 40% of palladium and 70% of platinum. Unfortunately, South Africa's utility company, Eskom, has been an unreliable supplier and was forced to cut the power supply for more than 200 days last year. As a result, mining production suffered with the worst platinum group metals (PGM) supply growth in two decades. Moreover, the outlook for unstable electricity supply has not changed for 2023, prompting PGM supply concerns for the year.
Investors in the commodity markets know to dismiss low-confidence data and rely on data that is knowable. Patience may pay off for commodity investors if the foggy macro environment clears while the supply remains constrained.
2 https://www.bls.gov/news.release/empsit.t17.html
3 https://www.noaa.gov/news/january-2023-was-nations-6th-warmest-on-record>
4 https://www.npr.org/2022/12/30/1145844885/2022-ev-battery-plants>
5 The Inflation Reduction Act of 2022 (IRA) is the most significant climate legislation in U.S. history, offering funding, programs, and incentives to accelerate the transition to a clean energy economy.<
6 Bloomberg NEF is a provider of primary research and analysis on the trends driving the transition to a lower-carbon economy.
7 https://about.bnef.com/blog/transition-metals-become-10-trillion-opportunity-as-demand-rises-and-supply- continues-to-lag/
8 https://thehill.com/policy/energy-environment/3831839-biden-administration-announces-restrictions- on-hardrock-mining-in-225000-acres-of-minnesota-wilderness/
9 Total Vehicle Sales (TOTALSA) | FRED | St. Louis Fed (stlouisfed.org)
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ETF002007 2/20/24
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