KEY DATA:  Confidence: -0.3 pts, Present Conditions: +13.4 pts, Expectations: -8.8 pts/ Home Sales: -5.9%; Prices (Over-Year): +20.1%/ Case-Shiller (Over-Year): +13.2%; FHFA (Over-Year): +13.9%

IN A NUTSHELL: “Some concern about the future is creeping into the minds of consumers.”

WHAT IT MEANS:  Eventually, the massive growth rate will have to moderate, and it looks like households are expecting that to happen during the next six months.  The Conference Board reported that its Consumer Confidence Index was largely flat in May.  However, the details were surprising.  The Present Situation component soared, as respondents were quite happy about what is happening right now.  But they were not quite as sanguine about the future.  Households are concerned that both business activity and the labor market could cool going forward.  That is quite likely, but the resultant growth rate should still be solid.

Home sales may already be moderating.  Like the existing home report, new home sales backed off in April.  Of the four regions, demand was up only in the West.  But prices continue to soar, even with inventory starting to build.  As is the case with existing homes, the supply remains about two-thirds of what it needs to be, given the sales pace. 

Speaking of housing costs, two indices were released today and they both said the same thing: Prices are still soaring.  Both the Case-Shiller and Federal Housing Finance Agency’s (FHFA) national indices jumped in March and the year-over-year price gains continued to accelerate.  Every region in the FHFA index was up double-digits since March 2020.  Of the 20 major cities in the Case-Shiller measure, only Chicago posted a single-digit increase (9%).  The home price inflation is accelerating across the nation.   IMPLICATIONS:The housing price increases are showing no signs of easing up and if you talk to realtors, they don’t think it will for quite a while.  It’s unclear how long “quite a while” is, but it looks like conditions will stay strong into the fall.  What may be at risk is sales.  The rapidly rising prices are starting to impinge on affordability and if mortgage rates rise as inflation accelerates, then some buyers, especially first-time home buyers, could be forced out of the market.  Continued double-digit, or even high single-digit home price increases are not healthy, and we need to start considering what it will take to start calling this a bubble.  I am not prepared to do so quite yet.  This is not a speculators housing market, as most purchasers are homebuyers, not investors.  And most of the homebuyers have the incomes to afford their purchases.  It looks like both the lenders and regulators learned their lesson from the housing bubble and are not stretching things to the limit.  The market is likely to decelerate, not burst, and if that happens, the impact on the economy will not be major.  (Yes, Mr. Bernanke said the same thing fifteen years ago, but conditions are somewhat different right now.)  What is disconcerting is seeing consumer confidence slowing its rise.  Let’s see now, economic activity is getting back to where it was before the pandemic hit, the vaccines have allowed the economy to largely reopen, and job growth is really strong.  So why aren’t people more exuberant?I am not sure, but we might want to start blaming inflation. It is spreading and both consumers and business owners are seeing it up close and personally.  The Philadelphia Fed published a report today that showed that inflation expectations are jumping.  Respondents thought inflation would rise at a 4% pace not just in the next year, but also over the next ten years.  This mirrors, to some extent, the finding of the Atlanta Fed, which saw its business inflation expectations measure hit its highest level since it was created nine years ago.  Inflation expectations may be starting to lose its anchor, which is the Fed’s greatest nightmare.  Since both of those measures come from Fed-based research, Chair Powell is likely taking note.

KEY DATA:  Sales: -2.7%; Inventory: +10.5%; Median Prices (Over-Year): +19.1%

IN A NUTSHELL: “Low inventory continues to plague the housing market.”

WHAT IT MEANS:  Ask any realtor and they will say that the housing market is booming.  Yet the National Association of Realtors reported that existing home sales fell in April for the third consecutive month. Only the Midwest posted a gain.  Purchases dropped in the other three regions.  Weakness in the single-family segment accounted for the drop, as condo sales improved slightly. So, is the market weakening?  Hardly.  The problem seems to be inventory, even if it did improve sharply.  Given the sales pace, the number of homes on the market would have to expand by at least fifty percent to ease the problem and that is not likely to happen anytime soon.  As a result, prices continue to surge, especially in the single-family component, which was up over twenty percent from April 2020.  We must be careful comparing the early pandemic months with current numbers, but prices bottomed last May and have soared since then.  At the same time, the number of homes on the market consistently dropped until they bottomed in January.  Essentially, demand is so strong that it will take a major rise in listings to change the condition of the market significantly.    IMPLICATIONS:Is this a housing bubble?  In one sense, yes.  Demand is surging and the major factor driving it, a change in locational preference, is not likely to be able to sustain the current level of activity.  It is unclear how long the desire to escape to lower density locations will be sustained.  When workers start returning to offices, will that depress demand, and if so, by what magnitude?  The proportion of the workforce that will continue to work full-time or part-time remotely is simply unknown.  But to some extent, this locational shift will continue, as preferences are being re-evaluated.  So, demand should be sustained at a higher level than it would have been had the pandemic not hit.  That bodes well for sales and prices.  And it also implies that there will not be an implosion of the market.  The sales pace would have to fall sharply to bring supply and demand more closely together.  In addition, the sales surge is not being driven by financial sector excesses, such as no-down payments, 110% mortgages, no credit checks, ridiculously low teaser rates and make-believe appraisals.The people buying homes have the income and down paymentsas they are often trading one home for another.  And economic growth should remain strong through this year and while next year it may moderate, it is not expected to falter significantly.  So, while the market may be bubbling, it doesn’t appear to be in a bubble that is about to burst.  That doesn’t mean we will not see sales and prices fall.  They might, given how much they have risen.  But the slowdown, whenever it comes, is likely to be more controlled than panicky, which was the case when the last housing bubble exploded.

KEY DATA:  Starts: -9.5%; 1-Family: -13.4%; Multi-Family: -0.8%; Permits: +0.3%; 1-Family: -3.8%; Multi-Family: +8.9%

IN A NUTSHELL: “Home construction may have moderated in April, but with permit requests well above starts, the slowdown should turnaround quickly.”

WHAT IT MEANS:  The housing market is on fire, at least as far as prices are concerned.  As for home construction, that is a puzzle.  It was expected that housing starts would rise in April, even though the March level was already extremely high.  Instead, it dropped sharply, as single-family construction cratered.  Multi-family activity was down only modestly.  But the data were bizarre.  Starts were up in the Northeast and the West, but there was a massive 34.8% falloff in the Midwest and a large 11.5% drop in the South.  Why the declines were so large in the South and Midwest, I have no idea, other than to say we should wait to see what the May numbers look like.  And my guess is that construction will rebound sharply.  Permit requests remained robust in April and for the past three months, they have run, on average, about ten percent above starts.  Builders don’t pay for permits so they can sit around, so look for a construction to jump in the next few months.  Much of that, though, will likely be in multi-family units, as single-family permit requests are running just over two percent more than starts. 

Yesterday, the National Association of Home Builders released its May Housing Market Index and confidence remained at an extraordinarily high level.  It may have come down from the all-time high of 90 (out of 100) set last November, but that is misleading.  The May reading of 83 is eleven points above the high seen during the housing bubble.  The housing market is just fine.IMPLICATIONS:The issues facing housing is supply, or a lack thereof, and as a result, prices.  The number of homes under construction is rising minimally and the number of homes completed fell in April, so buyers will still have a tough time of it, especially since prices will likely continue to rise.  That is true for both the new and existing market.  In the new home segment, there is not only a shortfall of homes available to be purchased, but construction costs are surging.  A lack of labor and rising materials costs, when coupled with higher demand and rising mortgage rates is not good news for buyers.  This sector is an example of the problems with the global supply chain that have erupted since the pandemic hit.  The interdependence of suppliers across the world was put under tremendous pressure by the pandemic, which hit countries at different times and magnitudes.  A breakdown in multiple areas, coupled with the limited number of suppliers, has led to a massive shortage of a wide range of products.  On top of that there were trade barriers constructed and trade wars that further hurt the free flow of goods.  How long it will take to get the supply chain back to normal is anyone’s guess.  That is really troublesome as countries reopen and demand surges.  We are not talking about a normal rise in consumption and production, but a sudden acceleration.  Without the ability to ramp up supply, demand will continue to outstrip supplyand as every economics 101 professor will tell you, that means prices will rise.  That will likely continue until the supply chain is operating efficiently.  Since that is dependent on how long it takes for the pandemic to fade, it is impossible to put a time frame on it.  Investors need to start getting used to higher inflation, and while the Fed may not move anytime soon, market rates almost certainly will.

KEY DATA: Sales: 0%; Ex-Vehicles: -0.8%/ IP: +0.7%; Manufacturing: +0.4%/ Import Prices: +0.7%; NonFuel: +0.7%; Export Prices: +0.8%; Farm: +0.6%

IN A NUTSHELL: “Spending and production remain so strong that second quarter growth looks like it will be a lot stronger than the robust first quarter gain.”

WHAT IT MEANS:  Funny thing about having money to burn, if you got it, you spend it.  Yes, retail sales were flat in April and when you exclude the huge jump in vehicle purchases, they were down sharply.  But the total level of retail demand was as high as we have ever seen it.  It is just hard sometimes to keep spending more.  The details of the report were crazier than normal.  For example, apparel purchases dropped 5.1% and sales at general merchandise stores were off 4.9%.  Those are huge changes that are hard to explain.  Internet demand fell – really?  We did eat out and eat in, purchase more health products and appliances and electronics, but we cut back on furniture, sporting goods, and building materials.  Lower gasoline prices led to lower sales, but that gets wiped out when adjusted for costs. 

Industrial production was up solidly again in April.  Manufacturing activity increased moderately, but it would have been much better if the vehicle sector was not restrained by input supply issues.  Assemblies declined by nearly five percent even as demand jumped.  That caused durable goods output to fall.  Excluding vehicles, which is valid since the reduction was not due to demand, manufacturing would have increased by a strong 0.6%.  Nondurable goods production rose solidly.  If manufacturing stays flat from here, second quarter output would rise by 4.4%.  That is not likely to be the case, especially if assembly rates rebound.  Strong production gains going forward should power growth this quarter.

It’s broken record time.  Another price report, another set of rising prices.  Import prices surged in April even when you remove energy costs.  But the details are not quite as worrisome as the headline number.  Imported consumer product prices were flat and vehicle prices rose moderately.  But food costs surged again, as did the prices of industrial supplies and materials.  Producer prices should continue posted strong gains which undoubtedly, firms will try to pass along.  On the export side, U.S. firms, both farm and non-farm, were able to hike prices sharply.  IMPLICATIONS:The economy is growing strongly and there are no reasons to expect a major slowdown anytime soon.  Consumers and businesses are still being subsidized by the government and that will not change for a few more months.  So, there is little reason to worry about growth.  Indeed, estimates for second quarter GDP are being revised upward.  But that could be the high point, as the funds begin to run out in the third quarter.  Unless a new bill is passed, they will largely disappear in the fourth quarter.  That doesn’t mean we are headed for a downturn.  We still have a lot of reopening to go through and that will keep activity rising strongly, at least through the summer.  But for investors, it does raise the warning flag that the strong periods of growth may be coming to an end and the economy will start easing back toward trend growth.  What that means for the equity markets is unclear, as there appears to be little forward looking in the markets.  For the Fed, the hopes that the surge in inflation is transitory stems from the belief that trend growth will return soon, whatever soon means.But trend growth on top of robust growth could embed greater pricing power in the economy and that should concern the members.  Don’t be surprised if in the fall, the Fed’s inflation hawks, who have been hibernating, start shrieking again.  And they might have good reason to do so.

KEY DATA:  Productivity: +5.4%; Hourly Compensation: +5.1%; Labor Costs: -0.3%/ Claims: -92,000/ Layoffs: 22,913

IN A NUTSHELL: “Businesses will have to keep improving productivity as the labor market is tightening faster as well.”

WHAT IT MEANS:  Tomorrow we get the government’s report on April job gains and it should be massive.  Despite hiring lots of workers, businesses managed to find a way to make them a lot more productive.  Productivity surged in the first quarter at the second fastest rate in eleven years.  The only time it increased faster was in the second quarter of last year, when the economy started opening up. But a year ago, hiring was muted.  Now, payrolls are booming, but so is productivity.  Businesses are getting a lot more out of their new workers, which they need to since compensation is also surging.  That has kept labor costs under control.  Hiring should remain strong through the summer, but don’t look for productivity to keep pace, so there is a risk that firms see their labor costs rise, further pressuring prices.

Indeed, the risk to businesses is that they cannot find enough workers and are forced to bid for them.  New unemployment claims dropped sharply last week.  With most states either already fully reopening or announcing plans to do so by summer, the improvement in the unemployment situation should continue unabated. 

Supporting the view of an ever-tightening labor market was the April Challenger, Gray and Christmas layoff announcement report.  The number fell and is now where it would likely be in a strong economy.  Firms are holding onto their workers tightly as they are having real problems replacing them if they leave.

IMPLICATIONS:  The good news is that job growth is strong and layoffs are falling significantly.  The bad news, for businesses but not for workers, is that the labor market is getting really tight.  A big problem is that over sixteen million workers are still receiving unemployment assistance.  With demand for workers skyrocketing but so many people finding it more beneficial to get a government check than a business paystub, the labor market tightening is not going away anytime soon.  The “shortage” of workers will likely remain extreme until the enhanced unemployment benefits run out in September.  But the high number of workers on special unemployment programs points out the problem that wages in a wide variety of sectors and professions are extremely low.  For many small business owners, the ability to raise wages is limited.  But they will have to.  For those who can, by raising starting salaries or wages, they are making the point that a higher worker minimum wage is affordable.  Actually, many have already put the minimum wage in the rear-view mirror.  The political debate over raising the minimum wage comes down to weighing the costs to those firms who cannot afford significantly higher labor costs against the reality that workers cannot live on the minimum wage or close to it.  The administration is on one side, the business sector is largely on the other.  With so many firms already starting workers well above the minimum, and many more being forced to due to market conditions, $7.25/hour seems like a strange number to be defending.  There should be a compromise that changes the status quo, but in this political environment, even logical actions become nonstarters.     

KEY DATA:  ADP: +742,000; Manufacturing: +55,000/ ISM (NonManufacturing): -1 point; Orders: -4 points; Employment: +1.6 points

IN A NUTSHELL: “The Friday jobs report should be another really big one.”

WHAT IT MEANS:  Firms, especially those in the hospitality sector, may be complaining that they cannot find workers, but hiring is not going to slow down anytime soon.  That should become clear on Friday, if ADP’s big private sector April estimate of job gains holds any water – and I think it does.  Private sector job gains should be robust, with increases across the board, both in terms of sectors and firm size.  Yes, leisure and hospitality are bringing back workers rapidly, but what was amazing to see is that manufacturing may be adding workers at the strongest pace in decades.  That is happening despite the shortage of computer chips.  The surge in home building is driving up construction payrolls and health care is hiring like crazy as well.  Basically, the job market is on fire.

We saw on Monday that the manufacturing sector is booming along and today the numbers indicate that the services component of the economy may be expanding even faster.  The Institute for Supply Management’s NonManufacturing index eased in April, but the level is still near the record high set in March.  Demand may be only booming instead of skyrocketing, but hiring is accelerating.  With backlogs rising and inventories shrinking, payrolls will have to increase even faster if firms are to meet their growing needs.  As we saw in the ISM manufacturing survey, input costs are jumping in the services and construction segment of the economy as well.  Nearly sixty percent of the respondents reported that the prices they pay for goods went up.  Those cost increases may get passed along if demand remains robust.     IMPLICATIONS:Almost every state has either fully reopened or announced when they would do so.  Over the next few months, most people who want a job should have a chance to get one.  The only thing that would limit the increase in payrolls is the that the government is paying more to be on the unemployment rolls than the private sector is paying to work at their businesses.  The choice is clear, at least until the enhanced benefits run out.  Nevertheless, employment should growth massively well into the summer and that would generate large gains in wages and salaries.  So, look for retail sales to be robust into the fall, as people celebrate the return to some measure of normalcy.  We are already seeing that as April vehicle sales increased sharply. As for investors, their exuberance should be sustained.  Second quarter growth could match or even exceed the robust 6.4% pace posted in the first quarter, meaning earnings should be strong as well.  And the government will continue pumping money into the economy.  While some sectors and individual stocks may be priced quite high, there appears to be no economic reason for a major pull back in the general market.  But don’t be surprised if there are some price adjustments, as this market has been out of control for a while now. 

KEY DATA:  ISM (Manufacturing): -4 points; Orders: -3.7 points; Employment: -4.5 points/ Construction: +0.2%; Private Residential: +1.7%; Private Nonresidential: -0.9%; Public: -1.5%

IN A NUTSHELL: “While manufacturing activity remained solid, it eased up a touch in April.”

WHAT IT MEANS: The manufacturing sector continues to ramp up, as demand is strong.  But there was somewhat of an easing in the rate of activity in April.  The Institute or Supply Management’s Manufacturing index fell, and the details mirrored the topline number.  Orders, production, and employment, though extremely solid, expanded at a slower pace than in March.  Nevertheless, backlogs grew at an even faster pace than their already rapid rise, and inventories fell, implying that production should accelerate in the months to come.

Construction spending picked up in March, especially in the private sector.  Government activity was down for the third consecutive month.  Infrastructure, what’s that? The driver of private activity was residential building, which continues to boom along.  However, private, nonresidential construction spending declined, as most components were off from their February levels.  

IMPLICATIONS: The first quarter GDP number points out how much the economy soared early this year.  The ISM index is a diffusion index and sometimes a drop in the number doesn’t reflect a real slowdown.  If you are running nearly full out, it is hard to increase output and that is likely what is going on.  In addition, chip issues and supply chain backlogs may be more of an issue than demand.  There was one thing that is of concern in the manufacturing numbers: The cost of inputs is skyrocketing. Eighty percent of the respondents indicated they had to pay more for materials.  With demand high and rising, firms have some pricing power, so inflation is likely to accelerate for manufactured goods.  When it comes to the state of the manufacturing sector, there is little reason to think conditions are softening.  Similarly, the modest rise in overall construction spending was driven by weak government spending and one thing we know, the government has not withdrawn its support of the economy.  Instead, it continues to be the chief source of funding for businesses and households.  Thus, investors will likely look past today’s numbers.

KEY DATA:  GDP: +6.4%; Consumption: +10.7%; Federal Government: +13.9%; Consumer Prices: +3.4%/ Pending Sales: +1.9%/ Claims: -13,000

IN A NUTSHELL: “The economy expanded robustly in the first quarter and the details are even better than the headline number.”

WHAT IT MEANS:  Nation, we have liftoff.  Economic growth soared in the first quarter, as almost every segment of the economy posted sharp increases in activity.  The pace of growth was the second largest in eight years, bested only by the reopening of the economy last summer. Since I like to say the information is in the details, not the headline number, let’s got to the details.  And they were simply fabulous.  Consumers took the money the government was giving them and shopped like maniacs on everything.  While durable goods demand skyrocketed, it was just for vehicles.  Purchases of furnishings and durable household equipment increased almost as rapidly.  Spending on services, the largest portion of demand, was decent but a bit muted.  Businesses, apparently believing the future is bright, investing in everything but new structures.  That commitment may take a little more time, but signs are that it is coming.  Of course, the federal government spent like there was no tomorrow, which indeed there might have been had that not happened.  Even the components that restrained growth bode well for future activity.  Inventories were drawn down dramatically, but with government money flowing freely, warehouses will have to be restocked.  That will add to growth.  Also, the trade deficit widened, though a little less than expected.  But that was due to the simple fact that the U.S. has the strongest economy in the world right now, so imports are rising a lot faster than exports, which fell.  The widening in the trade deficit is likely to continue for a long time.  As for inflation, it accelerated sharply.  Again, since Spring 2011, the only time the quarterly consumer costs rose faster was when the economy reopened last summer. 

The National Association of Realtors reported that pending home sales rebounded in March from the weather driven February collapse.  The recovery, though, was a lot less robust than expected.  Supply is largely nonexistent, so sales may be more constrained by the availability of homes than the demand for houses. 

New claims for unemployment insurance fell last month, but this report was disappointing.  First, the previous week’s level was revised upward by even more than the number of claims declined, so that leaves us above last week’s level.  New claims are trending downward, but they remain above 550,000, which is nothing to be happy about.  Also, over 16.5 million workers continue to collect assistance, which is where it was last April.  The labor is getting better, and with growth strong it should continue to improve, but it would be nice if it did so at a faster pace.   

KEY DATA:  Orders: +0.5%; Ex-Aircraft: +2.8%; Aircraft: -38.2%; Business Investment: +0.9%: Backlogs: +0.4%

IN A NUTSHELL: “Demand for big-ticket items continues to be strong and with order books growing, production will have to pick up.”

WHAT IT MEANS: The expansion is deepening, and the manufacturing sector is helping lead the way.  Demand for durable goods rose moderately in March, but that was due largely to a sharp drop in aircraft orders.  I am not sure exactly what the government was seeing, but Boeing’s orders rose by almost 140% that month.  I suspect we will see that difference whittled down over the next couple of months.  Looking at the other major categories, the results were somewhat mixed.  Solid gains were posted for communications equipment, machinery, and metals, but orders for computers and electrical equipment eased.  But most importantly, the proxy for business investment spending, which is nondefense capital goods excluding transportation, rose strongly.  Companies are putting their money to good use and that bodes well for future economic activity.

Another sign that the manufacturing sector is improving came from the Dallas Fed’s Texas Manufacturing Outlook Survey.  While the overall index fell, the level is high and the details were pretty good.  Order demand is accelerating as is hiring. But so are costs and prices, confirming the worries about inflation increasing in the short-term.    

IMPLICATIONS:  The economic data continue to confirm that if the government spends like crazy, the economy is going to do well.  There is so much money being pumped into the economy that the only question is how fast the economy will expand.  The numbers are coming in higher than expected and that is pushing up estimates for most of this year.  And as I noted last week, the president is proposing a ton of additional spending that could take us through the rest of his first term.  These are proposals that will fundamentally change the way government has interfered in the economy since President Reagan began altering spending priorities from households, social programs and the environment toward business activities and wealth generation through reduced taxes, forty years ago.  The only way that budget restructuring can be sustained is if the business and income tax cuts that drove those changed priorities are modified significantly. The 2022 election is setting up to be possibly the most consequential one in since 1980. 

KEY DATA:  Payrolls: +916,000; Private: 780,000; Restaurants: +176,000; Construction: +110.000; Unemployment Rate: 6% (down 0.2 percentage point)

IN A NUTSHELL: “This is just the start of some really great job numbers.”

WHAT IT MEANS:  The economy is on the mend and the rehiring of workers is following the reopening of firms. In March, the rise in payrolls was massive.  The gains were across the board as 71% of the industries reported an increase in employment.  That is huge. The biggest increases were in those industries expected to lead the way: restaurants, hotels and health care in particular. But there were large numbers of workers added in education, as schools are reopening and manufacturing, as demand for goods keeps rising.  The construction sector also hired an enormous number of workers, but the February freeze, which led to a temporary decline in employment, played a role in that.

On the unemployment front, the numbers were just as good.  The rate declined despite a solid rise in the labor force.  As the job market continues to firm, more workers will come back into the market and that might slow the fall in the unemployment rate.  That is already happening, as the participation rate increased, though not nearly as rapidly as it will likely do in the months to come.  In another positive sign, the number of people who could only find part-time work declined.  That shows that firms are more confident about the future and are willing to hire people full time.    IMPLICATIONS:  The economy was in good shape before the pandemic hit and the government had to shut things down.  But instead of watching as the economy burned, the government stepped in to keep businesses going and support households with massive amounts of stimulus.  The result is once the pandemic started to ease and the economy started opening up again, firms that would have gone bankrupt were still “operating” and ready to hire back workers that had been moved from the private sector payrolls to the government assistance programs.  The “zombie” businesses are helping generate the huge job gains we are seeing, and which we will likely continue to see, since the latest stimulus bill provides funds through September.  The question we are facing going forward is not will the employment numbers be strong, but how many of the lost positions will ultimately return.  There are still about nine million fewer positions in the private sector than we had in February 2020, so there is still a long way to go to get back to where we were.  We can expect additional massive monthly hiring numbers as the vaccination process proceeds, allowing more firms to reopen completely.  Thus, what we saw today is not the last time job gains in the half to one million range will be posted.  That raises the question about inflation.  With growth accelerating, costs are likely to rise more rapidly as well.  Actually, they are already doing so.  There may be some wage pressures as well, since we are starting to dig into the reserve army of the unemployed.  Expect inflation to get above the Fed’s average long run target of 2% soon and stay there for an extended period.  But while the markets may price in higher inflation and interest rates will rise, the Fed is still expected to stay on hold until the stimulus ends and the economy shows it can stand on its own.  That is not likely to be the case until well into 2022.