KEY DATA: Claims: 963,000 (down 228,000)/ Import Prices: +0.7%; Nonfuel: +0.2%; Export Prices: +0.8%; Farm: +1.5%
IN A NUTSHELL: “Despite the slowing in the reopening process, the labor market continues to stabilize.”
WHAT IT MEANS: Has the virus resurgence begun to show up in slower economic growth? That is not yet clear. Or, maybe we really don’t know what is going on with the data. Take the weekly jobless claims report. For the first time since mid-March, initial unemployment claims were below one million. I guess that is good news, though the number is still almost 4.5 times what it was a year ago. So we still have a long way to go to get back to anything close to normal. Continuing claims, which represent people remaining on the rolls, fell as well, but here too, you have to put the number in perspective. Almost 15.5 million people are collecting unemployment checks compared to 1.7 million a year ago. The recently passed laws covering unemployment payments have extended out the number of weeks that a worker can receive those checks. Two programs, the Pandemic Emergency Unemployment Compensation and the Extended Benefits programs, provide up to an additional twenty-six weeks of checks and the numbers in those programs are starting to grow. In other words, while jobs may have started to become more available, they are well below what is needed, as seen by the number of people collecting compensation.
On the inflation front, there were three reports released this week, the Producer Price Index, Consumer Price Index and today the Import and Export Price Indices. All indicate that inflation is rebounding from the ultra-low levels hit in the spring. Imports prices, led by the continued rebound in energy costs surged. However, food and vehicle prices were down, capital goods costs were flat and consumer goods prices rose moderately. But imports don’t reflect services costs and for consumers, those are soaring, especially health care. On the export side, farmers are seeing some really large price gains, after four brutal months of declines. That said, export prices are still down over the year by over three percent, so the agricultural sector has a way to go to get back to where they were last year.
IMPLICATIONS: Should we be worried about what appears to be building inflation pressures? Not necessarily. In the spring, many businesses were forced to cut prices as demand disappeared. Now, with the economy starting to recover, they are taking the opportunity to recover some of those discounts. In other words, there is no such thing as a free economic rebound. Prices are rebounding as demand picks up. That is a good sign as it reflects growing economic activity.Indeed, I would read the inflation data as representing more the state of the economy than any sudden ability of firms to raise prices. The increases are not likely to last long, especially if the reopenings continue to slow. One question mark is back-to-school demand, which may look little like previous years. Technology may reign as so many schools are going virtual to start the year, but clothing sales may falter. That could mess up the retail sales numbers, as the seasonal factor may not be able to adequately handle the temporary change in student needs. As for investors, you know that insanity is the operative word when people actually thought the Russians perfected a vaccine many months before the rest of the world – and they actually acted on the report. I don’t think it is time to roll up our sleeves. Even if saner heads ultimately ruled, when the markets react to such wacko reports, you know that things are out of control. What I don’t see investors understanding is that most of the income flowing into the economy came from the government’s support programs. But because of gridlock in Washington, they are gone, reduced or running out. Where consumers and businesses will get replacement funds to buy goods and services or pay workers is anyone’s guess, but investors have decided not to even think about that. Love that pixie dust.