All posts by joel

March Philadelphia Fed NonManufacturing Index and February New Home Sales

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. 

February Existing Home Sales and Chicago Fed National Activity Index

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. 

March Philadelphia Fed Manufacturing Survey, February Leading Indicators and Weekly Jobless Claims

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.   

February Retail Sales, Industrial Production, Import and Export Prices and March Home Builders Index

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.

February Producer Prices and Mid-March Consumer Sentiment

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.”

February Employment Situation and January Trade Deficit

KEY DATA:  Payrolls: +379,000; Private +465,000; Restaurants: +286,000; Unemployment Rate: 6.2% (down from 6.3%); Wages: +0.2%/ Deficit: up $1.2 billion; Exports: +1%; Imports: +1.2%

IN A NUTSHELL: “The loosening of restrictions is leading to a massive rehiring of workers in those sectors most harmed by the pandemic.”

WHAT IT MEANS:  The pandemic has played havoc with so much of the world and the economic data reflect the ups and downs of the closures, restrictions and reopenings.  We are now in the positive portion of the process and those sectors that were hurt the most are starting to come back.  Payrolls soared in February, at least in the private sector.  Government employment, especially education, cratered.  Still, the overall increase was well above expectations and the gains were pretty widespread.  Fifty-seven percent of the private sector industries had higher employment.  The biggest increase, not surprisingly, was in leisure and hospitality, especially restaurants.  Three-quarters of the total job surge and over sixty percent of the private sector increase came from food service hiring.  Nevertheless, there are still two million fewer restaurant workers on the payrolls than there were in February 2020, just before the pandemic hit.  There were lots of jobs added in manufacturing, health care, retail, temp services, amusement parks and hotels.  Construction was the one private sector component where payrolls were cut sharply.  I am not sure why, but the polar vortex may have played a role in that decline.

As for the unemployment situation, the rate declined modestly, in part because the labor market was largely flat.  The average hourly wage rose moderately, but with the workweek declining sharply, weekly wages fell. 

The trade deficit widened in January, but that is typical of an economy that is growing solidly.  Both export and imports increased, which is what you want to see.  Since import levels are significantly higher than exports, you need export growth to greatly exceed imports for the deficit to narrow.  With the U.S. expanding more rapidly than most other industrialized nations, we should expect the deficit to keep widening for an extended period. 

IMPLICATIONS:  As the vaccines begin to work their magic and businesses and households become confident they can get back to whatever will be the next normal, job growth should remain strong.  But we have a long way to go.  Payrolls are about 9.5 million lower than they were a year ago and the unemployment rate is 2.7 percentage points higher. The issue is how quickly does the unemployment rate come down and where do we wind up at the end of the year.  That is critical since it is likely that the upcoming stimulus bill will be the last stimulus bill.  Thus, businesses will eventually have to start making money the old-fashioned way: They will have to earn it rather than being supported by Uncle Sam.  And household wage gains, not stimulus money, will have to drive income growth and spending.  The reckoning has been pushed off until 2022, when hopefully the pandemic will be largely under control and many firms that are currently nothing more than zombies can operate without the crutch of government welfare.  We will be left with a massive budget deficit and national debt load, but we will have had much stronger economic growth and the unemployment rate will be way below where it would have been without the stimulus funds. Still, it is likely the unemployment rate will be about two percentage points higher at the end of this year than it was when the pandemic hit.  The heavy lifting will come in a year, when the private sector has to take over and the sectors that had been restricted are already operating freely.  But let’s enjoy what should be a really good ride this year, thanks to what is likely to be a huge, if not excessive, third stimulus package. 

February Private Sector Jobs and NonManufacturing Activity

KEY DATA:  ADP: +117,000; Manufacturing: -14,000/ ISM(Nonmanufacturing): -3.4 points; Orders: -9.9 points; Employment: -2.5 points

IN A NUTSHELL: “It looks like the economy may have been caught up in the polar vortex in February.”

WHAT IT MEANS:  While it is pretty clear the economy has been accelerating, it looks it hit a pothole in February.  On Friday, we get the first glimpse of the government’s estimate of job gains in February.  Today, the employment services firm ADP released its closely watched measure of private sector hiring, and the February increase was somewhat disappointing.  The total increase was about half of what was expected.  The details were a mixed bag.  A couple of the sectors hit the hardest by the shutdowns, retails and leisure and hospitality, appear to be coming back.  There were also solid increases in health care and business and professional services.  But two sectors that look to be leading the way, construction and manufacturing, posted declines in their payrolls.  As for what size firms are adding workers, it looks like the gains are being spread across all categories.  None of them were high, though the small and large companies were somewhat cautious in their hiring.

Meanwhile, the long-suffering services portion of the economy may have hit another temporary bump in the road.  The Institute for Supply Management’s NonManufacturing index dropped in February and the details were disappointing as well.  While demand continued to improve, it did so at a much slower pace.  Inventories built rapidly, but they are viewed as too high.  Finally, the cost of doing business is skyrocketing as prices paid jumped. 

IMPLICATIONS:It really looks like the economy is in very good shape.  Incomes are soaring as a consequence of the stimulus checks going out and most reports have manufacturing and construction going like gangbusters.  So, why did the February data released today raise some questions about conditions?  My guess is that is just a weather thing.  The polar vortex devastated that middle half of the country, freezing out business activity all the to the Gulf of Mexico.  Texas was a disaster.  But the cold has moved back up north and businesses are reopening and the repairing of the damage has begun.  That negative impacts were concentrated in the February data, but the recovery should show up in the March numbers so look for those to be really strong. But the warning is that the frigid weather could have led to layoffs and limited hiring, so Friday’s job gain may be less than hoped for.  The consensus is for something around 200,000 and that might turn out to be high.  But all that does, as just noted, is set us up for a sharp rebound in March, so don’t get worried if the headline number is disappointing.  More importantly, even with the clearly improving economic situation, another massive stimulus bill, with lots of free money for everyone, looks like it will be passed within the next two weeks.  That will add fuel to the slowly building fire and growth this year should be really strong.  Investors will likely spend the rest of the year battling over slowly rising inflation and interest rates versus robust growth.  As long as the Fed keeps downplaying the inflation risk, growth should retain the upper hand.

February Manufacturing Activity and January Construction

KEY DATA: ISM (Manufacturing): +2.1 points; Orders: +3.7 points; Employment: +1.8 points/ Construction: +1.7%

IN A NUTSHELL: “The economy is starting to shift into higher gear.”

WHAT IT MEANS: A slowdown from the massive summer rebound was expected and it did happen to some extent. But it looks like the economy, helped along by the second round of stimulus, is picking up some steam. In February, the Institute of Supply Managers’ manufacturing activity index rose to its highest level in three years and the details were just as strong. The new orders measure jumped as fewer firms reported a decline in demand and a rising proportion said orders were higher over the month. This improvement is broad based as only 6.4% of the respondents indicated demand has softened. As a consequence, production accelerated and hiring increased. With order books filling, it looks like we could see manufacturing take a place as a leading sector of growth.

Construction is also did extremely well starting off the year. Spending on public and private, residential and nonresidential building rose strongly in January. In other words, everywhere. About the only really weak link was private commercial construction. With uncertainty about the extent to which work from home will be sustained, that component is likely to be soft for some time.

IMPLICATIONS: It’s starting to look like first quarter growth could exceed the strong, 4.1% growth in the fourth quarter of last year. Much of that can be credited to the reopening of the federal government’s stimulus spigot, which sent money flowing to businesses and households. Consumption is surging even with households saving much of the funds. That okay because it means they are better able to continue shopping like crazy. And round 3 of stimulus is coming soon. No matter what the final number is, it will be big. The markets got a little spooked last week by rising interest rates, but that is because too many people actually thought the ridiculously low level of rates could be sustained. Maybe the Fed will remain on hold for another couple of years, but if growth this year hits the consensus of about 4.5%, there is little logic in thinking the low, longer-term rates could be sustained. With that kind of growth, inflation had to start rising back toward more normal levels from the low rate posted as a result of the pandemic. But we are not talking high inflation; just levels that reflect a solidly growing economy. As I noted many times before, a 10-year rate below 1% made little sense when the Fed was determined to get back to an average of 2% inflation. Yes, housing may moderate, but once again, does anyone think a 3% or 3.5% 30-year fixed rate mortgage is high? We are looking at an economy that is picking up steam and the government turning up the heat with a new stimulus bill. If that doesn’t help investors overcome their fear of returning to normal interest rates, I don’t know what will.

January Income and Spending and February Consumer Sentiment

KEY DATA:  Disposable Income: +11.4%; Consumption: +2.4%; Savings Rate: 20.5%; Prices (Over-Year): +1.5%/ Sentiment: -2.2 points; Expectations: -3.3 points; Current Conditions: -0.5 point

IN A NUTSHELL: “The checks are no longer just in the mail, they are being cashed and spent.”

WHAT IT MEANS:  Let’s hear it for Uncle Sam.  The government’s December stimulus checks got largely distributed in January and it led to a massive rise in household income.  No surprise there as the only other time we saw an increase in disposable/spendable personal income that large was last April, when the first round of stimulus checks went out.  Unfortunately, if it weren’t for the government, the rise in income would have been modest, as wage and salary increases were nothing great.  That shows, again, how much the economy depends upon the federal government’s largesse.  Also, as expected, households spent some, but hardly all of that money.  As a consequence, the savings rate skyrocketed, to the second highest level on record.  When was the highest?  You guessed, last April, of course.  As for inflation, the Personal Consumption Expenditure deflator, the Fed’s preferred measure, rose fairly strongly for the second consecutive month. Over the year, though, inflation remains tame, even when food and energy are excluded.

The checks may be hitting people’s bank accounts, but they are not making them very exuberant about economic conditions.  The University of Michigan’s Consumer Sentiment Index declined in February.  Expectations fell the most.  Both the future outlook and current conditions measures are at disturbingly low levels.    

IMPLICATIONS:  The second round of government money is doing its job: It is bolstering spending and given how much was distributed, it is creating a cushion for future spending for some households.  Without the welfare being paid out, the economy would be limping along.  Instead, we could see growth in excess of 4% both this quarter, and if the next stimulus round is as big as projected, for the entire year.  But we need to see wage and salary gains start accelerating.  The stimulus checks create a one- or two-month surge in income, but labor income eventually has to be the key source of funds used to sustain growth.  However, salaries are increasing at a pace that would only support mediocre growth.  And many families are still stretched, so the jump in consumption in January will not be repeated.  All this says is that to get to the end of this year, when hopefully the economy will can reopen fully, we need a large amount of government support.  To those who ask, “Can we afford it”, I respond by asking “Can we afford not to spend the money?”  Without the stimulus, the sluggish growth coming out of the Great Recession would probably look great.  Since we really don’t know how much is enough, the real question remains: “Which mistake would you prefer making, spending too little and having a substandard economy or spending too much and possibly creating higher than desired inflation?”  You can control inflation.  But as we saw during the 2010s, too little stimulus leads to growth that doesn’t make many households feel very good.