After a week of increased financial market volatility caused by the Fed’s “dots” (week ending June 19), the past week was like a walk in the park with much lower market volatility and rising equity markets. However, we have observed that much of the newly released data, including employment, housing, income, durable goods, and even inflation, shows that the economy is growing much more slowly than the markets assumed.
The data for the last two weeks of reporting (June 12 and June 19) show that initial unemployment claims (ICs) (state and pandemic unemployment assistance (PUA)) have risen slightly and are at the 500,000 level.
The graph above shows the weekly IC damage data for 2021 from the Department of Labor for the state and PUA programs. Notice the up stick on the right. The data in the graph are NSA (Not Seasonally Adjusted). The large impact of the pandemic on economic activity is not seasonal and the use of historical seasonal adjustment (SA) factors makes little sense. Nevertheless, markets and financial media seem to be stuck with the SA data. Since the PUA program has not existed long enough to calculate seasonal factors, the financial media only report extensively on the state SA headlines. So let’s look there first.
The original estimate of the state ICs for the week of June 12 was 412K. It was revised to 418K with the June 19 data release. But seconds before DOL’s weekly release, the benchmark figure was 412K. Hence, the 411K number released for the June 19th week had to be a disappointment. The market consensus estimate was for a number of 380K.
In keeping with the “hot” business narrative, the markets ignored this data. In fact, it’s not clear some in the financial media understand what the data means. Here is the opening paragraph of a story published by one of the major financial outlets:
Initial unemployment insurance claims remained high last week as employers struggled to fill a record number of job vacancies.
As we’ve reminded our readers on almost every recent blog we’ve discussed employment data, ICs are a proxy for new layoffs. Why should employers struggling to “fill a record number of vacancies” lay off employees? This figure of 500,000 is 2.5 times the “normal” pre-pandemic figure and indicates that layoffs are still at a recessive level! The story writer seems to be confusing ICs with Continuing-Unemployment Claims (CCs), which, as shown in the next graph, are still up and not down in the latest data release (14.8 million on both May 29 and also on June 5th) showed (newest) data weeks). How confused does the public have to be when the financial media coverage is so confused?
The federal unemployment allowance
Speaking of CCs, we’ve now seen the first hint that the $ 300-a-week government unemployment benefit is likely a major culprit in the ubiquitous “Help Wanted” narrative.
The table shows the aggregated percentage change in the CC programs of the federal states with the federal states grouped according to the end date of the federal supplement. Note the much larger percentage decreases in CCs in the states where the federal surcharge suspension has been implemented or is imminent compared to the states and territories listed in the last row of the table where the supplementation would continue through early September .
This has two implications: 1) This appears to be early evidence that the federal allowance is a major cause of the persistently high number of CCs, especially among low-income earners; and 2) These early data suggest that a significant number of those 14.8 million applicants will be looking for work by the end of the summer. Hence, we expect the “wage inflation” narrative to quietly fade by autumn.
Housing is a very important input for calculating GDP. Housing construction employs a significant proportion of the workforce. A flagging real estate sector is not a sign of a “roaring” economy.
The financial media are screaming about house prices. And well, they should. The median price of a single-family home rose 18% year-on-year (May), with price increases accelerating over the past six months. We have provided two charts, one graphing new home sales and the other graphing existing home sales. It appears that both new and existing sales have peaked.
The financial media blame the falling data solely on price (ie the “inflation narrative”). No doubt that is an important factor. But there can be other causes as well. Now that vaccines seem to be working, reopenings are taking place and some companies are calling some of their workforce back to the office, the demand for these suburban homes may have peaked. This is indicated by the inventory numbers. In relation to the monthly supply, May had 5.1 months and was thus around 1.5 times higher than the 3.5 months in October.
The real reasons for the slowdown in housing construction do not matter. The important thing is that the peak has (or at least appears to be) and that means slower economic growth in the second half of 2021. Is that factored into the financial markets? We do not believe!
Other dates and thoughts
- Durable goods orders rose by + 2.3% m / m in May. It missed the consensus figure of + 2.8%. Aircraft sales are significant here as the return of domestic traffic to about 75% pre-pandemic levels propelled aircraft orders as airlines that need aircraft now pulled the trigger on the purchase. For ex-aircraft the M / M increase was only + 0.3% (consensus: + 0.7%). In addition, core capital orders (these are non-defense capital goods minus aircraft) decreased by -0.1% (consensus: + 0.6%). Adjusted for inflation (ie an estimate of physical sales) the figure was -1.6%. Notice here how much lower the data is than the consensus, which suggests that financial markets are still too optimistic on the recovery.
- Consumer spending was unchanged in May (0.0%) (consensus: + 0.4%) and personal income fell by -2.0%. The effect of the stimulus diminishes significantly.
- The SF Fed released a study that concludes: 1) Covid biases increased core inflation 2.4 percentage points from 2021 to April; 2) Non-Covid-sensitive core PCE is around 1%. Data like this is the reason the Fed views today’s PCE inflation rate (+ 3.4% Y / Y; + 0.5% M / M) as “temporary”. [Note: The energy component of the PCE deflator is up +27.4% Y/Y (plummeting gasoline prices a year ago?). OPEC meets soon with some energy gurus indicating pressure for increased production from some members.]
- A recently published (May 31, 2021) paper by Michael Lebowitz (from 720 Global) entitled “What the upcoming Fed taper will mean for bonds and stocks”Shows that since Bernanke introduced quantitative easing (QE) during the Great Recession, bond yields (including stock prices) have fallen as the Fed declines (buying smaller dollar amounts of bonds each month – currently at $ 80 billion) Government bonds). and $ 40 billion monthly in mortgage-backed securities). The Fed is “talking about” tapering now. This is another reason for our forecast of lower bond yields in the quarters ahead.
Softer data, especially on housing, should invalidate the notion that the economy is “hot” or “roaring” and suggest that GDP growth will slow down in the second half of 2021. Is this weaker growth currently being priced into the financial markets? Probably not.
The excess liquidity we discussed on our last blog, currently being created by the Fed’s monthly QE buying, is likely to be responsible for much of the wealth inflation we see in stocks and house prices. Investors should be aware that there will be major market moves when the Fed begins to throttle, or at least when markets believe the throttle is imminent. The volatility around the Fed “dots” in mid-June, which the markets interpreted as a rather restrictive monetary policy stance, reinforces this view. The historical data suggests that the taper is bearish for stocks and ultimately bullish for bonds.
(Joshua Barone contributed to this blog.)