Weekly Unemployment Claims

KEY DATA:  Claims: 1.31 million (-99,000); Continuing Claims: 18.06 million (-698,000)

IN A NUTSHELL:  “The labor market has been improving, but the impacts from the virus resurgence could slow that progress.”

WHAT IT MEANS:  With the virus resurging across the nation, the focus of attention is turning toward determining how much of an impact it is having on the labor market.  Today’s unemployment claims report is not likely to contain very much information about that.  What it does is provide a baseline to compare to the next few weeks, when the effects of the shutdowns and slowing of the reopening will start to appear.  Whether the latest report is representative of that baseline is also in question as the July 4th holiday may have skewed the data somewhat

So much for the caveats.   Last week, the number of people filing new unemployment claims dropped solidly.  But as I remind everyone every week, the level is still incredibly high.  It is hard to say that 1.3 million newly unemployed people are a good number.  It is not.  Worse, it is high compared to the progress being made on the continuing claims front.  The number of people receiving unemployment checks dropped sharply last week.  However, the level was only half that the number that filed for unemployment.  It will be hard to sustain the solid declines in the unemployment rate and the strong job gains if that gap continues.  Since it takes time to go from claimant to recipient, the continuing claims numbers lag the new claims data, so don’t be surprised if the recent improvement slows.     

IMPLICATIONS:   Yes, the labor market is indeed getting better, but with states slowing and/or reversing their reopenings, the data could be nothing more than yesterday’s news.  I would be surprised if we don’t see new claims start to rise over the next few weeks.  More and more firms are warning of impending layoffs and that means many other firms are either ramping up more slowly or simply not filling open positions.  We have entered a period of rising uncertainty about the state of the recovery and companies are not stupid: Facing an inability to forecast future demand, the best thing to do is hire cautiously, if at all, or allow payrolls to decline organically.  Today’s data were good, but the see-no-evil markets need to look past those numbers and start asking the right question, which is: Where do we go from here?  Since the approaches to dealing with the virus are being made without central government guidance, the randomness of the approaches and the political undercurrents in which they are being made raise real concerns about their effectiveness.  Given the massive resurgence in the virus, it is hard to conclude otherwise.    

June NonManufacturing Activity and Employment Trends

KEY DATA:  ISM (NonMan.): +11.7 points; Orders: +19.7; Employment: +11.3 points/ ETI: +3.8 points

IN A NUTSHELL:  “Economic activity is coming back, but the jobs situation may not be as rosy as the employment report suggested.”

WHAT IT MEANS:  The reopening is picking up steam and spreading across many sectors of the economy (the impacts, if any, of the surge in the virus are not in most of the current data).  The latest report to show a huge gain was the Institute for Supply Management’s June Nonmanufacturing Index.   Orders surged, backlogs finally began to build again and overall activity skyrocketed.  But let’s remember, this is another diffusion index and that means we are getting direction not magnitude.  Still, in this case, up is always better than down.  But the employment index showed how changes in the indices could be misleading.  The measure jumped in June but is still showing that firms are cutting their workforces fairly sharply.  A quarter of the firms laid off workers while only sixteen percent added to their payrolls.  That is not good news for future employment reports.

Indeed, the Conference Board’s Employment Trends Index, while rising, remained extremely depressed in June.  The level was still down over fifty-five percent from the February reading.  The report included this warning, which I agree with: “In response to (the virus) resurgence, many governments have delayed or reversed their re-opening plans, which could lead to lower hiring. Given the possibility of less recruiting and the fact that layoff rates remain high (emphasis added), the upward trend in the number of jobs may not continue. The unemployment rate may plateau or even increase in the coming months.”

IMPLICATIONS:  Things are looking up when it comes to overall economic activity.  That is not surprising given that we really didn’t start reopening the economy until early to mid-May.  Investors are eating up every one of these good economic numbers, even if they don’t necessarily say the economy is in good shape.  Actually, none of them say that.  But they point to better times ahead.  The only thing that could slow that progress is a resurgence in the virus.  Oh, right, that is actually occurring.  So, how are the markets reacting?  Virus? What virus?  Investors are running around, hugging each other and partying, all without masks.  Will that lead to a further market sickness?  Only if you believe markets are rational.  The recent Congressional Budget Office update on the economy forecasted that GDP would not return to the fourth quarter 2019 level until spring 2022.  That is in line with what I suggested three months ago.  It will not get back to maximum sustainable GDP, which is the trend level of full employment activity, for nearly a decade.  At the end of 2019, the economy was running above that level.  As for the unemployment rate, the CBO expects it will not fall below 6% until the very end of 2024.  It was 3.5% in February.  In other words, for a lot of workers, happy days will not be here again for a very long time.  There are significant challenges ahead, even abstracting any additional virus-induced problems.

June Private Sector Jobs, Manufacturing Activity and Layoffs and May Construction Spending

KEY DATA:  ADP: +2.37 million/ ISM (Manufacturing): +9.5 points; Orders: +24.6 points/ Layoffs: 170,219/ Construction: -2.1%; Private: -3.3%

IN A NUTSHELL:  “Tomorrow’s employment report should be good, though there are some real questions about the May one that creates confusion about how strong it will be.”

WHAT IT MEANS:  Our first reading of the pace that the reopenings are bringing back jobs comes tomorrow when BLS releases the June employment report.  Today, the employment services firm ADP released its estimate of June private sector payroll changes and it was pretty much as expected.  Large gains were recorded across all sizes of firms, while most industries added to their workforces.  The only weak areas were information services, mining and management companies.  But the confusion about tomorrow comes from ADP’s May numbers, which showed that the job losses, not gains, were even greater than expected.  In essence, they doubled-down on their estimate that the economy did not add jobs, as BLS reported, but actually lost over three million workers.  As I noted last month, the ADP and BLS numbers sometimes vary greatly, but it is not normal that they have a different sign.  Thus, it is unclear if the government’s May numbers will be revised significantly and if that is the case, what that means for the June data.  So, stay tuned.

In line with so many other reports, the Institute for Supply Management’s Manufacturing activity index popped in June.  Orders and production surged, which hardly was a surprise.  But also consistent with previous reports, employment and backlogs continued to decline, though at a slower pace.  That does not bode well for employment or production. 

Disappointingly, construction spending continued to decline in May.  The government did its part in trying to get the economy going, but private sector housing and most components of nonresidential construction were off. 

Layoffs continue at a huge pace, but at least the number of announced cutbacks slowed in June.  Challenger, Gray and Christmas reported that June’s number was down 57% from the May total.  Still, the second quarter total was twice as large as the previous record that occurred during the dot.com crash in 2001. 

IMPLICATIONS: Tomorrow is a big day as we get both the employment report and the unemployment claims data.  It looks like we could have another multi-million job gain, though who knows what the revisions to May will look like.  Regardless of what comes out, the claims numbers cannot be an afterthought.  They indicate the extent to which companies and governments continue to shed workers.  We need to get those number down dramatically as it is clear the reopening is not going as planned – or at least as planned by the early-openers.  That has forced the more cautious governors and mayors to slow the process down.  By the way, how come no one is talking about how the hot weather will slow the spread of the virus?  The sharpest increases in cases have largely been in the hot weather states of Florida, Texas, Arizona, and California.  But with investors, bad news on the virus front is viewed as good news and anything that points to some progress on the vaccine front is considered to be fantastic news.  As one investment advisor mentioned to me, the strategy is simple: Invest.  With the Fed backstopping the markets, that worked quite well in the second quarter. 

May Spending and Income and June Consumer Sentiment

KEY DATA:  Consumption: +8.2%; Disposable Income: -4.9%; Prices: +0.1%; Over-Year: +0.5%; Ex-Food and Energy: +0.1%; Over-Year: +1%/ Sentiment: +5.8 points

IN A NUTSHELL:  “Households are spending again, but there is still a long way to go to get back to where we were.”

WHAT IT MEANS:  We are starting to see the impact of the economy reopening and the early signs are positive.  Consumption soared in May, led by a huge rise in durable goods i.e., vehicle sales.  Still, spending was up sharply in every category, a clear indication that people are ready and willing to keep spending more.  They have a long way to get back to where they were.  The number to compare is February spending and the May level is still off by over eleven percent.  In addition, the prospects for spending are somewhat cloudy.  It is all up to the federal government.  Disposable personal income fell sharply, but that was expected and that highlights the issue facing the economy.  Income gains and losses are being driven by massive changes in government social benefit payments.  They skyrocketed in April as the unemployment rolls soared.  As people are rehired, those income transfers will decline.  To put this in perspective, in April, government payments rose by $3 trillion, offsetting the $700 billion decline in wages and salaries.  In May, government benefits dropped by $1.1 trillion, but wages and salaries increased only $233 billion.  It is the government that is keeping spending going, not the private sector and that exposes the economy to the whims of Congress and the administration.  With incomes falling, the savings rate declined, but the 23.2% rate is still enormous.  As for inflation, prices stopped falling, but they are hardly rising. 

With the economy reopening, you would expect confidence to surge.  It is rising, but not once again, at a somewhat disappointing pace.  The University of Michigan’s Consumer Sentiment index was up solidly in June, but the level is still up only about ten percent from its April low, while it remains nearly twenty-three percent below the February high.  We are looking at 2014 numbers.  Both current conditions and expectations increased a similar amount.  One troubling element in the report was the final index being lower than the mid-month level.  The virus looks like it was the reason for that downturn.  The gains in the South and West, where the virus is surging, were significantly lower than in those areas where progress against the virus continues to be made. 

IMPLICATIONS:  The economy faces a dual threat: The resurgence of the virus and the vagaries of politics.  While the states suffering major jumps in new cases have not pulled back, some have slowed the reopening process.  That could be enough to cause people to become less willing to go out and spend at stores and restaurants or return to high-density work locations.  It is clear that large-group gatherings are not going to happen for quite some time.  That raises questions about the ability to repopulate office building and as a consequence, the ability of those firms that depend upon those workers to survive.  The summer should have been a time of reviving hope, but the virus operates on its own timetable.  And then there is Congress and the administration.  From the income numbers, it is clear that the major force in keeping things from falling apart is the enhanced unemployment compensation and to a lesser extent, the PPP.  Like it or not, the extra $600 per week is pumping massive amounts of money into the economy.  It is currently slated to end July 31st.   The PPP is not going to grow.  Put that together and the prospects are that without action, income could crater in August and spending will follow.  Consequently, something will have to get done, but the more the government is the income provider of last resort, the higher the budget deficit and the greater the issues will be on the other side.  The Committee for a Responsible Federal Budget forecasts this year’s deficit at $3.7 trillion using just current law, not any expected additional assistance.  Don’t be surprised if the deficit is well north of $4 trillion.  That is incomprehensible, but no one is giving it even a first thought. It is nice to look at the monthly data and think everything is beautiful and happy days are here again.  While the focus of attention must be on keeping the economy going, we also have to start thinking about what the economy may look like when we get through this.  That is what will ultimately determine the direction of the markets in the medium term.  Right now, few seem to be doing that.  

Weekly Jobless Claims, May Durable Goods Orders, Revised First Quarter GDP

KEY DATA:  Claims: 1.48 million (-60,000); Continuing Claims: 19.52 million (-767,000)/ Orders: +15.8%; Ex-Transportation: +4.0%; Capital Spending: +2.3%/ GDP: 5% (Unchanged)

IN A NUTSHELL:  “The labor market is getting better at a disappointingly slow pace.”

WHAT IT MEANS:  The economy is reopening and people are being called back to work, but the improvement in the labor market remains a lot slower than expected.  Yes, new claims for unemployment insurance fell again, but the level remains near 1.5 million.  That is simply way too high.  The rate of decline largely flattened out in June, which is not a good sign given the acceleration in the reopenings.  The number of people receiving checks slipped below twenty million, but barely.  The decline over the week was reasonably high, but given the huge number of people receiving assistance, it was not as large as we should be seeing. 

Durable goods orders surged in May, but that came after two months of massive declines.  The number to compare is February’s and orders are still off 21% from that month’s level.  The biggest increase came in transportation.  The vehicle industry reopened and aircraft orders actually rose rather than declined due to cancellations.  Every major sector posted a gain, but given the previous declines, the increases were nothing to write home about.   Nondefense, nonaircraft orders, a proxy for capital spending, did improve solidly, but again, compared to February’s level, they are still off 5.6%.  In addition, order books were largely flat, not a good sign for future production.

First quarter GDP growth was unrevised from the previous estimate.  There were some changes in inventories, government spending and fixed investment, but the differences were nothing special.

IMPLICATIONS:I guess the best way to describe the unemployment numbers is disappointing.  The economy is reopening across the country yet layoffs remain at an unimaginably high pace.  If BLS finally figures out how to correctly categorize the unemployment data, it is possible that the unemployment rate will rise in June from the underestimated May level.  The number to compare is about 16.3%, though we cannot be sure since the misclassification adjustment was only estimated.  My rough estimate for the June unemployment rate is 15%.  That would be down from the number to compare but up from the 13.3% which was published.   The problem is that cut backs in companies and governments are offsetting some of the rehirings.  It looks like we will have about six million layoffs in June.  That means the reopening/expanding firms will have to hire back more than six million just to get back to even.  That is a tall order and it means June job gains will likely disappoint.  With the virus starting to run rampant in some early-opening states, it is becoming clear that the recovery will take longer than those who have the V-shaped economic growth pattern expect.  And many of those who believe in the exuberant growth theory are investors. 

May New Home Sales and June Philadelphia Fed NonManufacturing Index

KEY DATA:  Sales: +16.6%; Over-Year: +12.7%; Prices (Over-Year): +1.6%/ Phila. Fed (NonMan.): -3.6 (up 65 points); Business Activity: 7.3 (up 48.7 points)

IN A NUTSHELL:  “The leading light, housing, remains on a clear upward track.”

WHAT IT MEANS:  Yesterday, when the May existing home sales numbers came out lower than expected, I explained that the data were lagging in that they were closings of contracts signed in previous months.  I suggested we wait a few months to see how recent activity changes conditions.  Well, if the new housing sales numbers are any indication of the current state of the housing market, it looks like things are quite good.  Purchases, or at least contract signings, jumped in May with three of the four regions showing demand growth anywhere from 15% to 45%.  The only negative was in the Midwest, where sales fell.  It is unclear why demand was weak there, but it is also not unusual that one area differs from the others.  Still, there was one concern in the report: Inventory is extremely low and that could restrain sales, unless construction picks up.  As for prices, they rose, but only modestly.     

NonManufacturing activity picked up in the MidAtlantic area.  The Philadelphia Fed’s Index went from a record low to a nearly flat condition.  But remember, this is a diffusion index and it only shows direction, not magnitude of change.  Indeed, the negative index points to continued weakness in the economy, though the business index did show some gains.  That said, this was not a great report.  Orders are still falling sharply, order books are thinning and payrolls for both full-time and part-time workers continue to be cut.  Those details point out that changes in diffusion indices have to interpreted very carefully.    

IMPLICATIONS:  At least housing is in good shape.  With mortgage rates incredibly low and the Fed making sure there is plenty of money to go around (and around and around), as long as the virus doesn’t get totally out of hand, this sector should continue to do well.  For the next few months, as the reopenings continue, the darkest cloud is the virus surge in those parts of the country that didn’t have major problems early in the pandemic.  The virus sets its own conditions and even if areas don’t return to shut down status, a high level of cases would restrain a wide range of activities.  We still haven’t had a massive return of workers to downtown areas and high rises, especially in the hardest hit areas.  That could take months and it is unclear what will happen when they do return.  All those support businesses that depend upon office workers for their income are going to be stressed for a long time.  That means governments that depend upon tax revenues generated by those activities will continue to see shortfalls in income.  For example, the latest data from the City of Philadelphia has May tax revenues down 31.2% from the May 2019 level.  But investors see nothing but blue skies ahead and exuberance is hard to restrain.  In other words, equity prices are delinked from economics and the potential for earnings, and when that happens, forecasting the direction of the markets becomes even more difficult than forecasting the weather more than a few hours out. 

Weekly Unemployment Claims, June Philadelphia Fed Manufacturing Survey and May Leading Indicators

KEY DATA:  Claims: 1.51 million (down 58,000); Continuing Claims: 20.54 million (down 62,000)/ Phila. Fed: +70.6 points; Orders: +42.4 points; Employment: +11 points/ LEI: +2.8%

IN A NUTSHELL:  “Progress is being made on the unemployment front, but it is disappointingly slow.”

WHAT IT MEANS:  Even though the economy continues to reopen, the focus of attention remains on the labor market and right now, the improvement is less than hoped for.  New claims for unemployment insurance fell only modestly.  Yes, a 58,000-drop is a lot of people on an absolute basis, but given the huge number of people continuing to file – over 1.5 million – it is not that great.  With the entire country loosening restrictions, it was expected that the pace of workers being let go would decline and that would lead to a sharp drop in the number of people receiving unemployment checks.  While the continuing claims number did fall, the pace of decline was also disappointing.

The Philadelphia Fed’s manufacturing index skyrocketed in early June.  It was expected to improve, but not nearly as massively as we saw.  However, this is a dispersion index and as I have mentioned before, you have to read these results carefully.  There are three categories in the survey, increase, no change and decrease.  When you go from decrease to either no change or increase, the index rises.  When you go from no change to increase, the index rises.  Thus, firms that had largely shut down in April, started to reopen in May and the process accelerated in early June.  So they tended to move “up” from decrease or no change.  Most firms are now either no longer cutting production or have stabilized (no change) or started back up.  But the report says nothing about the pace of activity.  So, you can have a huge change in the index without a similar huge change in production.  A sign that is the case is the employment index.  It was still negative, but layoffs are occurring at a slower pace.  Thus, don’t look at this report as saying manufacturing in the Mid-Atlantic region is surging.

The Conference Board reported that its Leading Economic Index jumped in May.  Again, this is a measure that has to be analyzed in detail and the details don’t say the economy is going to soar.  As the report noted, “The relative improvement in unemployment insurance claims is responsible for about two-thirds of the gain in the index”.  But we know, the level of claims remains at incomprehensibly high levels, so I am not impressed with the increase.  Indeed, I agree with the conclusion of the report: “The breadth and depth of the decline in the LEI between February and April suggest the economy at large will remain in recession territory in the near term.” 

IMPLICATIONS:  Unfortunately, the best way to describe the today’s labor market numbers is disappointing.  It is clear that a large number of firms and governments are continuing to cut their workforces.  Over the past four weeks, roughly seven million workers filed for unemployment compensation.  That is huge and it is important because as firms reopen, they are hiring back workers, which should lower the unemployment rate.  But before that can happen, hiring companies first have to overcome the loss of jobs from businesses cutting back and that level is extraordinarily high.  We can see that problem in the continuing claims data.  The number of people receiving unemployment checks hardly declined, indicating that at least so far, hiring firms are barely overcoming the firing firms.  Thus, the may not see a major decline in the June unemployment rate. Indeed, if BLS finally corrects its misclassification problem, we could actually see the rate rise from the May published rate.  That is because the “real” or “comparison” rate is not 13.3% but something around 16.3%.  Conditions are improving, but we need to stop looking at the percentage changes and start focusing on levels.  When you start at a very low level, the percentage change is going to be large.  That is just simple math.  But if the level remains low compared to pre-virus levels, that indicates the size of the hole that we still have to climb out of.  Right now, with 20.5 million people still receiving unemployment checks and undoubtedly many millions more unemployed, the hole remains extremely deep.  Almost certainly, fiscal policy will have to step up once again when the current unemployment subsidies disappear as scheduled to happen at the end of July.  Otherwise household incomes will fall sharply and much of the current rebound will fade.      

May Housing Starts and Permits

KEY DATA:  Starts: +4.3%; Permits: +14.4%

IN A NUTSHELL:  “The housing market is setting up to be the leading force in the recovery.”

WHAT IT MEANS:  One of the first sectors that was allowed to reopen was construction and we are seeing the positives of the decision to do that.  If you just looked at the construction numbers, you might not come to that conclusion.  Housing starts rose moderately in May, led by a major recovery in the West and a solid gain in the Northeast.  However, weakness persisted in the South and Midwest.  It was expected that starts would rise more, so this was a bit of a disappointment.  Indeed, if you compare the level of starts in May to February, you see a nearly 38% decline.  So why am I so upbeat?  Simple, housing permit requests are soaring.  They were up sharply in May and have are now about 15% below the February level.  That seems large, but it can be made up reasonably quickly.  More importantly, for the last three months, permits were running over fourteen percent above starts.  Builders are not wasting money on permits and the big gap points to a strong increase in construction over the next couple of months. 

Adding to the belief that the home construction and housing in general will be solid going forward was a report by the Mortgage Bankers Association.   As noted, “Purchase applications increased to the highest level in over 11 years and for the ninth consecutive week. The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence”.  That is very good news for builders, who seem prepared to meet the growing demand.    

IMPLICATIONS: The home construction segment still has a long way to go to get back to the pre-virus pace of activity.  But while other sectors, such as restaurants or manufacturing, may take a very long time to get there, the indicators are mounting that housing will be one of the first segments to recover.  Unfortunately, the depressed April and May starts numbers point to home construction restraining second quarter growth significantly.  On the other hand, if the permits/starts gap gets narrowed during the summer as expected, the sector could add greatly to third quarter growth.  The markets have rallied on what I call false positive reports.  Those are numbers that look great, but only because they started from such a low level.  With housing, while the levels remain lower than hoped for, supporting data argue for a major comeback that could get us within range of the February standard of comparison in a reasonable time period.  But it is really not clear that the economic data are the major drivers of the markets.  The Fed is buying just about anything that is being sold and that includes individual corporate bonds.  Mr. Powell has made it clear he doesn’t want to give up the gains – even as he claims he doesn’t target the equity indices.  Really?  It is best to watch what the Fed does, not what the Fed Chair says, as he doesn’t want to appear to be supporting the equity markets, which of course he is doing.  About the only thing he admits he cannot do is to get money into the hands of specific household groups.  So, he has strongly suggested that Congress get busy doing that.  Let’s see: The Fed is supporting the equity and bond markets and the government is supporting businesses and households.  Isn’t capitalism great?     

May Retail Sales and Industrial Production and June Home Builders Index

KEY DATA:  Sales: 17.7%; Ex-Vehicles: +12.4%/ IP: +1.4%; Manufacturing: +3.8%/ NAHB: +21 points

IN A NUTSHELL:  “The reopening is creating massive increases in activity and that should continue in June and maybe even in July.”

WHAT IT MEANS:  The economy shut down in March and April, so when it started to reopen, it was expected that all the indicators would rebound sharply.  Well, just as we had historic declines in the previous month, we now have historic increases.  Retail sales soared in May, led by a rebound in vehicle purchases and demand for clothing.  The clothing number is a clear example of the volatility of the data.  In April, clothing purchases largely disappeared.  The level was less than one-third the lowest on record, which dates back to 1992.  May was up 188% from April’s historic low.  That looks amazing, but it is still down 63% from the February 2020 number.  So be cautious in thinking that happy days are here again.  We still have a long way to go before we start seeing numbers anywhere near what we had been recording.  Still, this was very good report.  Every component of sales rose and it was good to see restaurant demand pick up.  Of course, the food services component was still off nearly 40% over the year.

Industrial production was up solidly in May as well, mirroring the reopening of the economy.  Manufacturing activity jumped, though much of that came from the reopening of vehicle assembly plants that had been idled.  In April, almost no vehicles were built.  In May, they were at a 2.7 million annualized pace.  To put that in perspective, nearly eleven million vehicles were assembled in 2019.  Still, the sector is ramping up and that is key.  The paper products industry actually cut production for the fourth consecutive month.  If you were wondering why the stores remain empty, that tells you everything.  Why the sector hasn’t recovered is anyone’s guess.

Housing is coming back as well.  The National Association of Home Builders’ index surged in early June, with all components up massively.  The index is actually back to where it was in 2016 and is not that much below where it was a year ago.  That is the comparison we have to look for: How far have we come back to more normal levels.  The housing industry is not there yet, but certain components are getting there.  The housing starts and sales numbers for May and June will be telling.   

IMPLICATIONS: The economy is recovering, but when you start at historic lows and you reopen, that should not surprise anyone.  The issue over the next two or three months will not be how big a gain we get, but how close we get to the end of 2019 levels.  The strong retail and production numbers should lead to some improvement in second quarter forecasts.  I don’t expect to see too many forty percent declines and estimates in the thirties may start to disappear.  The latest Blue Chip consensus for the second quarter was -35.7%.  I started at -22% two months ago and reduced that decline to -18% last week.  I am sticking with it, though it is pretty close to the lowest decline in the forecast panels.  Keep in mind, if we get something in the 20% to 25% range and the reopenings continue to accelerate, then the third quarter growth rate would be a lot lower than people currently think. The Blue Chip estimate is +17.2%.  I am at +6%, so I am a true outlier.  Still, the real issue is how long it takes to get back to where we were when the virus shut things down.  Even the optimistic Blue Chip numbers, GDP doesn’t recover until near the end of 2021.  I don’t have it fully recovering until spring 2022.  What I am saying is that we knew the second quarter would be horrible and the third quarter would be great.  But it is the fourth quarter and 2021 that really matter and it is hard to forecast those growth rates because we will not know the extent of the damage until the end of this year.  So, enjoy the great data that we will be getting for the next two to three months, but also wait to see what things look like at the end of the year before getting too bulled up about 2021.    

Mid-June Consumer Sentiment and May Import and Export Prices

KEY DATA:  Sentiment: +9.1%; Current Conditions: +6.7%: Expectations: +10.9%/ Import Prices: +1%; Fuel: +20.5%; Food: +2.2%; Exports: +0.5%; Farm:-0.5%

IN A NUTSHELL:  “Households are feeling a little better about the economy, but they are hardly exuberant.”

WHAT IT MEANS:  To get the economy really going, we need households to start spending a lot more.  How they feel about things will be the key factor in consumption and confidence is rising.  The University of Michigan’s Consumer Sentiment Index rose solidly in the first part of June.  Households have seen the unemployment rate go down and they feel a little better about the labor market.  That said, this is hardly a “happy days are here again” report.  As the statement noted: “… few consumers anticipate the reestablishment of favorable economic conditions anytime soon. Bad times financially in the economy as a whole during the year ahead were still expected by two-thirds of all consumers, and a renewed downturn was anticipated by nearly half over the longer term.”  While uncertainty about the future is beginning to ease, it is still higher than it was at anytime during the Great Recession.  That raises questions about the willingness to purchase big-ticket items.  If we don’t see that happen, the recovery will be slower than hoped for.

As for inflation, import prices rose in May, but you can chalk that up to the rebound in petroleum costs and the continued increase in food prices.  Crude petroleum led the way, rising by over thirty percent.  Food costs were driven by jumps in meat and vegetable prices.  Excluding those two categories, the cost of foreign products entering the country fell slightly.  On the export side, the long-suffering farm sector took another hit as prices sold around the world declined again.  They are now off by 3.5% since May 2019.    

IMPLICATIONS:  There is no reason that inflation should surge, which is important as the Fed is embarking on flooding the economy with massive amounts of liquidity.  The energy price increases we have recently seen represent the ending of the price war between Russia and Saudi Arabia.  Prices should settle down now.  As for food, eventually the supply chain will start catching up and while we may see a few more months of elevated food cost increases, those should also move back toward more normal levels.  So the Fed has a green light to do whatever it wants to do – and from Chair Powell’s comments this week, it intends to do that.  Still, the Fed can provide only liquidity; it cannot get income into workers hands or convince people to spend.  That would require a combination of fiscal policy and improving consumer confidence.  From the Michigan survey discussion, it is clear that the threat of a resurgence in the virus continues to hang heavy on household thinking.  With so many states seeing an uptick in cases, the impact on confidence could offset, at least to some extent, the improvement created by the reopening of the economy.  Also, as we go through the summer, the income supplements are slated to disappear.  That raises questions about the ability of many households to keep spending even at their reduced pace.  Thus, there remain many uncertainties facing the economy. 

The markets have bought into the V-shaped recovery with no impact from a virus resurgence. But the extent of the right side of the V is in doubt.  Yesterday’s meltdown is an example of what could happen once the surge in job gains fades after the economy largely reopens and if the current uptick in cases accelerates and becomes more widespread.  The exuberance has taken us almost all the way back and it can have long legs.  Alan Greenspan gave his famous irrational exuberance talk in early December 1996.  The market (NASDAQ) kept going up for another 3.5 years. When the music will stop, if it ever will, is anyone’s guess, especially given all the liquidity the Fed is pumping into the system.  But as we saw on a number of occasions over the past twenty years, if it does, the impacts can be massive.    

Linking the Economic Environment to Your Business Strategy