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.