KEY DATA:  ISM (Manufacturing): +3.9 points; Orders: +3.2 points; Employment: +5.2 points/ Construction: -0.8%; Private: -0.5%/ Layoffs: 30,603/ Claims: +61,000

IN A NUTSHELL: “It’s amazing what massive amounts of government money can do, at least in the short-term.”

WHAT IT MEANS: The money is flowing and that is increasing demand across the economy.  The Institute for Supply Management’s Manufacturing Index jumped again in March and hit a level not seen since 1983.  That was when the economy was recovering from the back-to-back recessions and the Reagan-O’Neill tax cuts and infrastructure spending programs started kicking in. This time, it’s the massive cash infusions into both businesses and households that is propelling growth.  The report was strong across the board.  Demand is soaring, output is being ramped up, order books are filling and hiring is accelerating.  But, of course, no good deed goes unpunished.  Robust increases in economic activity tend to lead to problems and respondents complained that commodity prices are rising, input and worker shortages are growing, transportation issues are persisting and lead-times are increasing.  I suspect the business community would rather have those issues than mediocre or weak growth. 

With the economy picking up steam, you would expect that layoffs would decline and that is exactly what Challenger, Gray and Christmas reported in their March report.  Since these data only have a partial seasonal component to them (they are announcements which are frequently random), it is hard to compare one month to another.  And with the pandemic hitting a year, the year-over-year numbers are largely irrelevant. 

On the other hand, new claims for unemployment insurance jumped last week after having plummeted the week before.  The two-step dance, though, is still creating a declining trend: The four-week moving average, which smooths out those ups and downs, hit its lowest level since the shutdowns began a year ago.   

Construction spending fell in February, but the decline was not particularly large given the weather.  Indeed, much of the reduction was from a major drop in government activity.  The private sector’s decline was fairly modest and concentrated in the nonresidential component.  Residential construction was off minimally.  Watch for a rebound when the March numbers come out as the weather was a lot better.

IMPLICATIONS: Manufacturing, which is rarely a leader in this largely service driven economy, is moving to the head of the class.  With consumers flush with government funds, spending is up and that is leading to improving production and hiring.  With that, though, comes higher costs, backlogs, supply and transportation constraints and ultimately higher prices.  Given where we were a year ago, I think everyone will take those issues.  But the government largesse will only take us through this year.  Going forward, it looks like the Biden administration intends to keep the public sector active in supporting growth.  The infrastructure bill proposes spending of $2.25 trillion over eight years.  Given the way permitting works, that is likely an extremely optimistic view.  It could take two to three years before any significant level of construction gets under way.  Of course, the money for research and development could start flowing sooner.  Regardless, getting a bill passed will not be easy, as I noted yesterday.  Indeed, the complaints are already coming in.  Thus, it could take six to twelve months just to get some kind of bill, or bills, passed, so don’t expect much spending to hit the economy before 2023.  Still, these programs are desperately needed.  It is hard to sustain world economic leadership without investing in everything that makes the business community more efficient and effective.  That includes not just physical capital but human capital as well.  It especially includes investment in research and development.  What always differentiated the U.S. economy were the technological breakthroughs that came out of the laboratories funded by the public and private sector.  When you own the technology, you own the future and to succeed in that endeavor you need lots of money.  It is good to see that R&D is a major element in the proposals. 

KEY DATA:  ADP: +517,000; Manufacturing: +49,000/ Pending Sales: -10.6%; Over-Year: -0.5%

IN A NUTSHELL: “The reopening of the economy is good news for workers, and job gains should be robust for quite some time.”

WHAT IT MEANS:  The combination of warmer weather and the lessening of restrictions on business activity looks like it is the balm the labor markets needed.  On Friday we get the government’s reading of March payroll gains and unemployment and it looks like it could be a really good one.  The private sector likely hired back an awful lot of furloughed workers, if the ADP estimate is anywhere near being correct.  The employment services report points to broad based gains in just about every segment of the economy.  On the goods side, manufacturers and builders rebounded from the February doldrums and hired like crazy.  Only the mining sector was weak.  On the services side, it wasn’t just leisure and hospitality.  Almost every area posted solid gains.  Only information services, which has been soft, continued to shrink. Similarly, the gains were spread evenly across business size.  In other words, the recovery tidal wave is lifting all ships.

The housing market has been burning brightly, but the February freeze may have set things back, at least temporarily.  The National Association of Realtors’ Pending Home Sales Index tanked, a result that mirrors most of the February housing numbers.  Every region, including the West, was down sharply, which does create a little doubt in my mind that we just might being seeing a little cooling in sales. Yet from all I have heard, it’s a total lack of inventory, not a deficiency of demand that is at work.  It is hard to buy something that is not being sold.  IMPLICATIONS:  I have put a new record on the turntable, but as usual, it is broken.  So, I will keep repeating that the economy is recovering at a rapid pace and it should continue to do so.  Friday’s jobs number should be huge: The consensus, which I agree with, is for about 600,000 additional workers added to payrolls and an unemployment rate that should decline to 6% from 6.2%.  The issue for investors is not what will happen to earnings – they should be really good.  It is what will happen to inflation, interest rates and taxes.The Biden administration is ready to propose a massive infrastructure program.  Infrastructure is like the weather: Everyone loves to talk about it, usually positively, but no one is willing to do anything about it.That is because we need to spend colossal amounts of money in order to modernize our dilapidated, deteriorating infrastructure.  Republicans like the concept but not the cost.  Democrats don’t care about the cost and are willing to pay for it with taxes, which, of course, Republicans hate. The result is usually grid lock.  This time is no different.  Expect Republicans to object to paying for the programs, which they will claim will cost too much, with taxes, but they will not offer alternatives.  The Democrats will continue to propose spending as much as they possibly can and try to tax the rich and corporations.  Anyone want to bet this works out well this time?  As the saying goes, insanity is doing the same thing over and over and expecting a different outcome.  Come to think of it, insanity is a good word to describe Washington.

KEY DATA:  Disposable Income: -8%; Wages and Salaries: 0%; Consumption: -1.0%; Prices: +0.2%; Ex-Food and Energy: +0.1%/ Sentiment: up 8.1 points

IN A NUTSHELL: “The ebb and flow of government stimulus checks is causing havoc with the economic data, so look at the trends, not the monthly numbers.”

WHAT IT MEANS:  It’s broken record time.  I have written this hundreds of times, but it is important, especially now given the massive intervention in the economy by the federal government, that a single month’s numbers are not given too much importance.  That was noted when the January spending and income numbers were released, and the same is true for the February data.  Consider the income numbers.  In January, when the money from the December stimulus bill started hitting bank accounts, disposable (after-tax) income skyrocketed 10%.  Well, those checks ended in February, so income collapsed.  Net-net, the gain over the two months was still a massive 2.3%.  That shows how much the economy is benefitting from the December stimulus plan.  Unfortunately, wage and salary gains were flat.  Part of that may have been due to the weather closing businesses, so don’t read too much into that yet.  Consumption also fell sharply.  But that was not necessarily the consequence of fewer government checks being cashed.  It was just the surge created by the inflow of funds, especially from unemployment compensation programs, allowed households to catch up in January.  Spending soared by an incredible 3.4% in January, which obviously was not sustainable.  With income declining greater than spending, the savings rate fell.  It is still extremely high.  As for inflation, it remains surprisingly tame, as prices rose moderately in February and minimally if you exclude the more volatile food and energy components. The low pace of inflation could end very soon, as the economy is really ramping up.

Households are getting good news from all directions and that is starting to show up in the confidence data.  The University of Michigan’s Consumer Sentiment Index popped in March, with both the current conditions and expectations indices rising sharply.  Given that money is flowing and the vaccination process is accelerating, that was hardly a surprise.  Look for the confidence reports to look really good for a long time.  IMPLICATIONS:They yo-yo impact of government policy on the economic data will continue and even get worse over the next few months.  The stimulus checks are being mailed out, so look for income to skyrocket once again in March, fall in April and, given that it is taking time to distribute the money, probably even decline again in May.  That means we have to wait until at least June before we get a handle on what is happening to the ability of households to continue spending at the breakneck pace they are doing.  That is when the wage and salary numbers will start to dominate the income reports.  After two months, consumption, adjusted for inflation, is expanding at a massive 6.3% annualized pace this quarter.  That could accelerate, given that February’s spending may have been constrained by the weather and the warmer weather and the stimulus money will undoubtedly lead to better consumption in March.  This is setting us up for a pretty strong first quarter growth rate.  And that will be only the start of things.  The extra unemployment benefits will run into the fall and the entire checks will not be spent right away.  When you consider the reopening of the economy in the late spring and summer, and all the additional jobs and spending that will create, the second and third quarter growth rates could be really robust.  I am coming around to the belief that the 6% or more growth estimates for this year could be on point.  That would make it the strongest increase since the 7.2% rise in 1984.

KEY DATA:  Durable Orders: -1.1%; Civilian Aircraft: +103.3%; Ex-Aircraft: -3.1%; Motor Vehicles: -8.7%; Private Investment: -0.8%

IN A NUTSHELL: “After nine consecutive solid gains, we shouldn’t be surprised to see a decline in orders for big-ticket items.”

WHAT IT MEANS:  A number of economic indicators bounce around, but demand for big-ticket goods tend to be extremely volatile.  That is why little should be read into the drop in durable goods orders in February.  Still, this was a very weak report as the only major category to show a significant sign of life was civilian aircraft.  Boeing is recovering and when their orders rise, it usually means the economies in the U.S. and the world are moving forward.  In this case, it has more to do with the 737 Max issue than fundamental economics.  If you remove the aircraft numbers, including defense, then there was a massive decline in orders.  Much of that came from the problems the vehicle sector is having with its supply chain – computer chips in particular.  This is slowing production.  The only other sector to post a rise, though it was nominal, was electric equipment and appliances.  Also, the proxy for private investment spending, nondefense, nonaircraft capital goods orders, also declined.  But it too had been up for nine months, so there is really not much to be concerned about, at least at this point.

IMPLICATIONS:Sometimes economic reports have to be simply looked at and put aside.  While today’s durable goods orders numbers were weak, one month does not make a trend.  That is true given the weather situation, though it is not clear why that would have played a major role in the decline.  The bad weather had a more direct impact on the housing sector and probably vehicle sales.  The simple reality is that the economy is in good shape and almost everything is moving in the right direction: The stimulus is hitting consumer bank accounts, vaccinations are ramping up and at least until recently, virus cases and especially deaths were trending downward.  Even with the beginnings of a resurgence in cases, governors seem committed to reopening regardless of the potential health consequences.  Thus, we should start seeing even greater job gains in those sectors that have been restricted in their operations.  And as the rate of vaccinations keeps accelerating, household, business and investor confidence should improve, possibly sharply.  We are not out of this yet, but there is a growing perception that the end is in sight and that can only lead to strong growth in the quarters to come. 

KEY DATA:  Sales: -18.2%; Over-Year: +8.2%; Prices: +5.3%/ Phil. Fed (NonMan.): +34.7 points: Orders: +15.9 points; Hiring: +6.2 points; Expectations: +9 points/

IN A NUTSHELL: “People may be starting to buy all types of things once again and demand will pick up even further once the housing markets thaws out.”

WHAT IT MEANS: The March winds may blow chilly and cold (only paraphrasing S&G today), but they are still warming the economy back up.  Indeed, the first set of March data are looking really good, which is absolutely no surprise.  The Philadelphia Fed’s NonManufacturing Index surged in early March and the details were really good.  Demand for nondurable goods and services rose sharply, though the percentage of firms still seeing orders fall remained relatively stagnant.  The big change was that firms who were seeing no change moved into the growing category.  Hiring accelerated for full-time workers but not for part-timers.  That shows growing confidence in the future.  But there were clear signs of building cost and price pressures.  Wage and benefits expenses are rising faster, as are prices of inputs and prices the firms are receiving.  Everyone seems to be able to raise their prices now.  Looking forward, optimism is high and building even further. 

The final set of major housing numbers are coming in and it will be nice when we see the last of the February reports.  This time, new home sales numbers took a major tumble, and every region posted double-digit declines.  The Midwest was hit the hardest, dropping 37.5% over the month.  Nevertheless, purchases were still higher this year compared to February 2020, so you can see how far the market has come.  Even with the February pull-back, total sales for the first two months of 2021 are over twelve percent higher than in the same period of 2020.  Builders are trying to keep up with demand and the number of homes under construction continues to rise.  Price gains are moderate, which is good news for buyers.IMPLICATIONS:  The weather is warming, the money is flowing and confidence is rising.  Those are indicators of better times to come.  When you put upwards of six billion dollars into a roughly twenty-one billion dollar economy, you know things are going to pop.  So, the good times should be flowing for most of the remainder of the year.  How fast depends upon how much households save or pay down debt.  They have been pretty responsible with the previous government checks and there is every reason to think that the savings rate will remain high.  The difference now, though, is that the end of the pandemic is no longer a wish but something we can expect.  Thus, I expect consumption over the next six months to be huge.  But that also means there will be a lot less at the end of this year, when the spigot has been turned off, to carry growth forward through next year.  Wage and salary gains will eventually have to replace government welfare and earnings will have to replace federal grants and loans, which are also welfare.  So, here’s an early warning to businesses:  This year, expect a great economy, but when the 2022 planning season comes around, start building in a lot slower economy. 

KEY DATA:  Sales: -6.6%; Over-Year: +9.1%; Prices: +15.8%/ CFNAI: -1.84 points

IN A NUTSHELL: “Oh, well, just another set of ugly, weather-driven economic numbers.”

WHAT IT MEANS:  The scratched record keeps skipping and so, once again, I have to report that the economy faltered in February.  Existing home sales tanked falling sharply in three of the four regions.  Only the West, which really didn’t suffer that much from bad weather, managed to post an increase in demand.  Yet as bad as things were, home demand was still up sharply from February 2020, which was the last number before the pandemic crushed the economy. That shows how truly good conditions are.  There is a cautionary sign in the report.  Inventory remains almost nonexistent, having declined by almost thirty percent since the previous February. At the current sales pace, there is only two months of supply, about one-third what it should be in a healthy market.  As a consequence, prices continue to soar.  

The Chicago Fed’s National Activity Index, an all-encompassing, 85-indicator monthly measure, fell massively in February.  It went from strong growth to strong contraction.  Fifty-one of the indicators subtracted from the overall index.  Better weather should lead to a large rebound in this index in March.   

IMPLICATIONS:  February may be gone, but it is hardly forgotten.  The economic data are flowing in and the latest reports were as ugly as most of the previous ones.  And there will be more to come.  But April, come she will (thank you, Simon & Garfunkel, for that) and when the March numbers start appearing, they should look really, really good.  Still, it may not be until the April reports are released before we really start seeing the major impacts of the stimulus funds on economic activity.  Households have been acting fairly responsibly, paying bills, reducing debt and saving, rather than shopping like crazy.  But stronger spending is coming, and the spring numbers will tell us how quickly the money is being put to use.  So, do as I suspect investors are doing when they see a bad February report: Look at the headline and move on. 

KEY DATA:  Phila. Fed: +28.7 points; Orders: +27.5 points; Expectations: +22.1 points/ LEI: +0.2%/ Claims: +45,000

IN A NUTSHELL: “The future is not what it used to be.”

WHAT IT MEANS:  My, how things can change quickly.  We saw that on the downside a year ago and now with state and local governments easing if not eliminating restrictions, it is happening on the upside.  The latest sign of how much the economy is coming back is the March Philadelphia Fed’s Business Outlook Survey of manufacturers.  The index skyrocketed to levels not seen since spring 1973.  I am trying to remember what was going on then, but it eludes me.  The details were just as robust.  Fewer than ten percent of the respondents said that economic activity, orders and hiring declined.  That is amazingly low.  Demand soared and firms had to hire more workers.  But it is difficult to do that as respondents are finding that there is a growing labor and skills shortage.  That is forcing them to raise wages, which nearly fifty-four percent of the firms said they had to do to overcome the lack of workers.  That is just one sign that inflation may be accelerating.   Over seventy-seven percent said they paid more for their inputs while nearly thirty-five percent indicated they were able to raise prices.  These are signs that inflation just may hit levels higher than the Fed is expecting.  As for the future, optimism is on the rise as well, as nearly seventy percent of the respondents expect activity to pick up in the next six months.  The index hit its highest level in nearly twenty-eight years.

The Conference Board’s Leading Economic Index rose a bit more slowly than expected in February.  However, it was February and the weather was a real problem, so don’t read too much into that.  The increase in the measure over the last few months still point to solid growth going forward.  As the report noted, “The Conference Board now expects the pace of growth to improve even further this year, with the U.S. economy expanding by 5.5 percent in 2021.”

On the labor market front, firms in the Mid-Atlantic region may be suffering from labor shortages, but layoffs around the country remain way too high.  New unemployment claims shot up last week.  That may be a delayed effect of the February weather or, more likely, it is just a continuation of the two-steps forward, one and half steps back we have seen for the last five months.  The number of people receiving assistance fell sharply, but it is still over eighteen million.  That number has bounced around like crazy but the level remains nine times what it was just before the pandemic hit.  That is another indicator of the extent to which the government is supporting demand in this country. 

IMPLICATIONS:  The Fed Chair channeled his best Alfred E. Neuman pose yesterday, making it clear that inflation would rise but it would be due to temporary factors that would dissipate over time.  The key is not simply the rate of inflation, but as Mr. Powell, it is inflation expectations.  As long as they are anchored around 2%, he really doesn’t have to worry.  But the 6.5% growth this year that the Fed is looking for is well beyond any we have seen since 1984.  The economy was rebounding from the back-to-back recessions and surged by 7.2% that year.  The highest growth rate since then was 4.7% in 1999, the peak in the dot.com and Y2K investment boom era.  Firms are going to have pricing power unlike anything they have seen in decades and I would be surprised if they didn’t take advantage of it.  With wage and goods prices likely on the rise as well, businesses will have the ability to offset those rising costs and increase margins.  That doesn’t mean we are in for a long period of high inflation.  But it calls into question the ability of the Fed to moor inflation to 2%, especially since it is also indicating it is not going to raise rates for at least the next two years.  It looks like the Fed will get its wish that inflation averages 2%.  That means an extended period of 2.5% to 3% inflation in order to make up for the two years of below 2% inflation.  The outlook for inflation is already showing up in mid- and longer-term rates.  The 10-year note is back above 1.70%, which it hasn’t seen since January 2020.  That makes sense.  There should be a premium above inflation, but that wasn’t the case in 2020.  If the 10-year returns a reasonable real rate of 100 to 125 basis points, then it should average 3.00% to 3.25%, which means there is a long way to go. Investors are likely to start factoring in the possibility of rates rising significantly further over the next year.   

KEY DATA:  Sales: -3%; Ex-vehicles and gasoline: -3.3%/ IP: -2.2%; Manufacturing: -3.1%/ Import Prices: +1.3%; Nonfuel: +0.4%; Exports: +1.6%; Farm: +2.9%/ NAHB: -2 points

IN A NUTSHELL: “The polar vortex froze the economy in February.”

WHAT IT MEANS:  We knew the economy took a major hit in February due to the brutally cold weather and a lot of snow.  All you had to do was look at the mess in Texas to know that the data would be ugly.  But it was even worse than expected.  Let’s start with retail sales, which cratered over the month.  About the only component that showed any gain was gasoline stations, and that was likely due to a sharp rise in prices.  Grocery store purchases edged up minimally. Lots of hot chocolate sales (or in my case, Entenmann’s chocolate covered donuts).  Otherwise, the numbers were not only bad but truly awful.  We didn’t even shop online as nonstore sales plummeted over 5%.  It is easy to explain the lack of sales for any store that you actually had to visit, but it is lot harder to understand why people didn’t just get their shopping done at the computer.  Despite the massive pull back, the level of sales was the second highest on record, exceeded only by the record-setting January total.   

February also saw a major drop in industrial production, especially in the manufacturing sector.  Both durable and nondurable goods production took a big hit.  Nine of the eleven durable goods sectors and seven of the eight nondurable components posted negative numbers. The greatest decline was in the vehicle sector, which cut output by 8.3%.  Lots of issues going on there.  But the frigid weather did lead to rise in utility production – at least outside Texas. 

The Fed started its two-day meeting, and it will be interesting to see what the members say about inflation.  We have seen consumer prices consistently accelerate, supported by sharp prices increases in the underlying goods costs.  Today’s ugly inflation price numbers were in the imports of most products, not just energy.  Much of the increase was in nonfuel industrial supplies and materials as well as foods.  On a positive note, the rises in capital and consumer goods and vehicle prices were more moderate.  Over the year, nonfuel import costs increased nearly three percent and some of that has to bleed into consumer prices.  As for exports, farmers much be celebrating.  The prices of products they are selling to the rest of the world is skyrocketing.  The housing market is starting to come back to earth, after having shot into near-earth orbit in December.  The National Association of Home Builders’ Index eased back in February, but the level is still extraordinarily high.  It’s just that conditions starting in July were otherworldly and right now, they are just robust.  Hard to complain about that.  Looking forward, traffic is just below its record high and that points to continued strength in the housing market.

KEY DATA:  PPI: +0.5%; Goods: 1.4%; Services: 0.1%/ Sentiment: +6.2 points; Current Conditions: +5.3 points; Expectations: +6.8 points

IN A NUTSHELL: “With $2.8 trillion of government stimulus flooding the economy this year, growth is no longer the issue, inflation is.”WHAT IT MEANS:  The economy is coming back and the stimulus will insure that continues.  So, what is happening with inflation?  Well, it looks to be on the rise.  The Producer Price Index surged in February, led by a jump in energy and food costs. Excluding those categories, wholesale goods costs increased moderately.  But you cannot dismiss those increases, as the improving economy is likely to sustain the gains.  The index for finished consumer goods is rising sharply and that is one special category that needs to be watched carefully.  On the other hand, services costs are not going up very quickly at all.  As I have noted frequently, a rise in producer costs doesn’t necessarily lead to a rise in consumer prices.  But if the economy does pick up steam, firms may try to pass those costs along.

Households are really warming to the idea that they might be getting lots of money from the government.  The University of Michigan’s Consumer Sentiment Index jumped in the first half of March, with both current conditions and expectations up solidly.  The expectations index is somewhat depressed, but after the signing of the latest stimulus bill, and with checks possibly going out as soon as this weekend, look for that measure start to surge. 

IMPLICATIONS:President Biden signed the “Get us back to where we would have been without the pandemic” stimulus bill this week and massive growth is getting baked-in-the-cake.  Indeed, the latest Wall Street Journal and Blue Chip polls of economists (I am part of both) has the economy expanding between 5.75% and 6%.  If you put that into your spreadsheet and compare projected fourth quarter 2021 GDP with the level of GDP that would have occurred if the pandemic never happened and the economy grew at the same 2.2% rate it did in 2019, most of the negative economic effects of the virus could be largely wiped by year’s end.Of course, there is no such thing as a free stimulus package, especially when it contains so many free lunches for households, businesses and governments, so we need to switch our focus from worrying about recovery and start looking at what this massive growth rate might mean for inflation and interest rates. Yes, inflation is going up.  We see that in today’s producer price measure and we will likely start seeing it in the consumer price reports.  Given how fast the economy is likely to grow this year, demand should be strong enough to provide firms with a level of pricing power they haven’t seen in quite a few years.  And they will likely take advantage of that.  Expect inflation to exceed 2% by summer and keep going from there.  With rising inflation comes increases in mid- to long-term rates.  But the current levels are well below where they should be when the economy sheds the pandemic.  Since that will likely be in the next year, the markets should be starting to price in more normal (i.e., higher) inflation and rates should be moving back toward long-term trend levels.As for the Fed, higher inflation is likely to be received with open arms.  The change in the Fed’s guidance to average inflation of 2%, not 2%, means that given how long inflation has run below 2%, above 2% or even 3% inflation will be acceptable for an extended period.  In addition, the stimulus runs out by the last quarter of this year, and the economy will have to start standing on its own.  Growth could slow sharply in 2022 and the Fed doesn’t want to be caught raising rates into a moderating economy.  So, I still don’t expect any action from the Fed before the end of 2022, even if inflation runs hot this year.

KEY DATA:  PPI: +0.5%; Goods: 1.4%; Services: 0.1%/ Sentiment: +6.2 points; Current Conditions: +5.3 points; Expectations: +6.8 points

IN A NUTSHELL: “With $2.8 trillion of government stimulus flooding the economy this year, growth is no longer the issue, inflation is.”