by Franklin J. Parker, CFA
The Summary
- Last week’s big news was the surprisingly high inflation print for May. Markets had largely expected higher inflation, predicting a 4.7% year-over-year increase in prices. However, headline inflation posted at a startling 5%. The Fed, of course, has repeatedly said that they expect inflation to run hotter than normal due to both base effects (comparisons to last year’s drop in prices means the increase looks larger than it actually is) and temporary supply chain problems brought on by the pandemic.
- Speaking of the Fed, this week is the monthly FOMC meeting. Given the ongoing improvement in the labor market and the recent inflation surprise, the committee is fully expected to start “talking about talking about tapering.” In English, this means they are expected to at minimum mull a timeline for the slowing of money-printing, and at maximum offer a specific timeline for the end of that policy. I estimate that markets have priced-in a Q4 begin to tapering. Wednesday’s press conference may well move markets if that expectation is shifted.
- In addition to Fed commentary, we get data on producer prices (another inflation measure), retail sales, and industrial production—all on Tuesday. These are important data points to watch as they will give a strong indication at the health of the ongoing economic recovery. As the Fed begins to remove its support, economic growth will become ever-more important to investors.
Charts of the Week / The Details
Rather than dive deeper into one topic, this week I’d like to parooze several data points regarding the US economic recovery. As mentioned in The Summary, I expect the economic recovery to become an ever-more important data point as the Fed backs away.
Since all of this economic trouble was pandemic-induced, a look at how the US is progressing toward eliminating the pandemic is a good start in estimating how quickly economic life returns entirely to normal. As it stands, a little over 50% of the 16+ population has been vaccinated. Given that in January of this year, about 0% of the population was vaccinated, I would say that this is pretty good progress. However, if we look at the total number of the population who have both had Covid or have been vaccinated, we can see that the data is more encouraging. Over 60% of the adult population has either had Covid and/or received full vaccinations, which is not that far from the 70% needed for herd immunity. Some of that is overlap of course (some people have had both Covid and Vaccines), and kids are not included in these stats, but this is nonetheless an encouraging step toward getting economic growth back on track!
Looking at the breakdown of job losses and gains during and after Covid shows that Leisure and Hospitality took a pretty big hit. Total employees in the industry dropped from about 17 million in January of 2020 to about 9 million—an almost halving of total employees! While the recovery has begun, there are still 3 million or so employees who need to be rehired just to get back to January 2020 levels—not to mention the extra employees needed to simply recover the growth that would normally occur over the course of 18 months. There are several sectors where this is so, though few (if any) as dramatic as Leisure and Hospitality.
Job openings have risen to a record high. This is a good sign for workers, but there is a mystery here, as well. While job openings are at an all-time high, the unemployment rate remains in the high 5%-range. In other words, the improvement is not as quick as one might expect given this level of bounce in job openings. In that vein, there are several competing data points in the labor market, some which show dramatic improvement, and some which show considerable ground yet to cover to be fully recovered.
Another way to gain some sense of economic confidence is to look at the percentage of small businesses planning capital expenditures in the next 3 to 6 months. After cratering in 2020, small businesses appear to have regained some confidence, with around 27% of businesses reporting their intent to spend money on capital improvements.
In the end, there is quite a lot of good news out there. The economy is still recovering, to be sure, but it does appear that it can stand on its own. As I’ve written about before, a too-quick withdrawal of support would be a definite negative to markets. However, if the Fed manages to get the balance right, investors may not need to worry too much about whether the economy sustain its own growth.
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