The markets waited all week for Fed Chair Powell to speak at the Kansas City Fed’s Annual Jackson Hole Symposium. Due to the Delta-variant, like many other business meetings, this one was held virtually. There was growing market concern that Powell would turn somewhat more hawkish, especially since some Regional Fed Presidents appear to have done so in recent speeches and media appearances. As a result, interest rates, as measured by the 10-Year Treasury, spiked from 1.26% on Friday, August 20 to 1.34% on Thursday, August 26. But Powell proceeded to be consistent with his past statements, i.e., inflation will prove to be “transitory” and while there has been improvement in the economy, the Delta-variant is concerning (so concerning that the symposium itself was changed to virtual from in-person at the last minute). He also reiterated that the FOMC (Federal Open Market Committee, the Fed’s policy making committee) would, when it meets, base policy on the emerging data and those trends. He did say that the FOMC would discuss the $120 billion/month purchases of Treasuries and Mortgage Backed Securities at the next (September) Fed meeting while being careful not to indicate when any tapering of those monthly purchases would start or how long the process would take. As a result, rates fell dramatically after his speech, ending the day down to 1.31%.
- Household Income: Household income did rise in July (+1.1%) as Washington began sending cash to some households which would be filing 2021 taxes using dependent child tax credits. Such checks will continue through December, with America’s households now having to reimburse the government come tax return time in 2022. These tax credits, having now been paid out in cash, will not be available to offset 2021 taxes, and many unsuspecting households will either get a much smaller than anticipated tax refund, or will, unexpectedly, have to find the cash to pay. This will have negative growth impacts in Q1 and Q2 2022.
- Spending: Because of such continued fiscal stimulus, including that from the unemployment programs, total consumer spending rose +0.3% in July, down from June’s 1.1% rise. As indicated in our last blog, July Retail Sales (spending on goods) fell -1.1%; -1.6% after adjustment for inflation. Spending on services was up in July. But, since summer’s start, spending on services appears to have slowed significantly, and such sluggishness appears directly related to the Delta-variant.
- There has been a rash of cancelled concerts, industry conferences, and festivals. Instead of personal meetings, America’s businesses continue to rely on virtual meetings (e.g., the Fed’s symposium) which impacts the travel and leisure/hospitality industries significantly.
- We examined June, July and August (through August 26) Open Table reservation data for 2021 relative to pre-pandemic 2019. In June, there were four days where 2021 reservations exceeded those of 2019. In July, there were three such days. None in August. In June, on average, reservations were -9.7% lower than in June, 2019. In July, that showed improvement to -4.8%. But, it deteriorated in August to -10.0%.
- A similar pattern emerges when we examine TSA passenger count data. Compared to 2019, June’s passenger counts were down -26.0%. They improved in July to -20.4%, but for August (through the 26th) they fell back to -22.6%. We believe that this may slow even further, noting in particular that David Ige, the Governor of Hawaii, has publicly urged tourists to “stay away” from the Islands!
Labor Market – Initial Claims
The media mentioned in passing that the weekly state Initial Unemployment Claims (ICs) rose +4K (Seasonally Adjusted). Because that number doesn’t fit the “economic boom/inflation” narrative, there was little further media analysis. As we have mentioned many times in this blog, the pandemic isn’t seasonally adjustable. The Not Seasonally Adjusted data, at 298K, were down -11K from the price week’s (revised) 309K level, moving ever closer to the 200K that was the pre-pandemic norm. Actually, a positive.
We look at the state data alone because, if the Pandemic Unemployment Assistance (PUA) programs (those that targeted the self-employed, usually small business people) do end in September as scheduled, then the state programs will be all that are available. It is noteworthy that the ICs in the PUA programs have been rising since early June (see chart). This data complements our observations from Open Table and the TSA, i.e., a notable slowing in economic activity (Delta-variant?).
Labor Market- Continuing Claims
Using the Continuing Unemployment Claims data (CCs), the majority of the improvement has come from the Opt-Out states (those states not paying the $300/week federal unemployment supplement). The first table shows that the percentage improvement in Opt-Out states was nearly twice that of those states remaining in the federal program (Opt-In states), a very strong indication that the federal program has dis-incented work and is at least a partial cause of the perceived labor shortages.
Percentage Changes in CCs: Opt-Out vs. Opt-In States
|# of States||% of Total on 8/14||May 15 to July 10||May 15 to July 31||May 15 to August 7||May 15 to August 14**|
*Includes D.C., Puerto Rico, Virgin Islands
**Advanced (Preliminary) data
The second table shows that, during the week of August 14 (preliminary data), the Opt-In states saw increases in CCs (+41.2K) while the Opt-Outs, representing 24% of the total claimants, reduced those counts by -86K (an 11.6% improvement in one week) and representing nearly 200% of the total nationwide improvement.
Relative Performance: Opt-Out States vs. Opt-In States
|August 7: % of CCs||26.4%||73.6%||100.0%|
|No. of CCs||740,666||2,067,440||2,808,106|
|Chg. from prior week||-15,577||-26,698||-42,275|
|% of Total Chg.||36.8%||63.2%||100.0%|
|August 14: % of CCs (prelim)||23.7%||76.3%||100.0%|
|No. of CCs||654,577||2,108,599||2,763,176|
|Chg. from prior week||-86,089||+41,159||-44,930|
|% of Total Chg.||191.6%||-91.6%||100.0%|
|August 14: % of CCs Ex-CA||31.0%||69.0%||100.0%|
|No. of CCs||654,577||1,456,885||2,111,462|
|Chg. from prior week||-86,089||-54,588||-140,677|
|% of Total Chg.||61.2%||-38.8%||100.0%|
Note: The preliminary data in CA are highly volatile and, therefore, unreliable. Excluding CA from the preliminary August 14 data still shows relative outperformance of the Opt-Outs. The Opt-Ins, while now possessing 69% of total claimants still only represented 39% of the unemployment reduction.
The fact that the Opt-Out states have outperformed the Opt-Ins on a weekly basis over the 3.5-month period examined is strong empirical proof that the federal $300/week supplement is a significant work disincentive.
The PUA programs end in early September. There are 9 million in those programs that will not be getting unemployment checks. That leads us to believe that the scarce supply of labor that businesses are experiencing may well turn into a tsunami in this year’s Q4.
- Evictions: The U.S. Supreme Court ruled last week that Executive Orders banning evictions are unconstitutional. Unless Congress acts quickly, tenants will either have to pay their current rent and some back rent, or be put out on the street. From a consumption viewpoint, for more than a year now, some of the monies that were not used to pay rent were likely spent on consumption, and now, with rent+ having to be paid, consumption will inevitably fall.
- Inflation: In his presentation at the Kansas City Fed’s Jackson Hole Symposium, Powell once again emphasized the “transitory” nature of the current inflation. “Transitory” doesn’t mean prices will fall (although some prices will, like gasoline and the prices of homes). “Transitory” means that they will stop rising, at least stop rising at an unacceptable pace (the Fed thinks 2% is okay). The July Personal Consumption Expenditure (PCE) Deflator, an index similar to the CPI that is closely watched by the Fed, rose +0.4%, slower than June’s +0.5%. Excluding energy (mainly vehicle fuels), July’s rise was only +0.3%, 60% of June’s +0.5% increase. By that metric, “transitory” starts to make sense.
- Housing: While new home sales rose +1.0% in July (708K Annual Rate (AR)), slightly higher that Wall Street’s consensus estimate of 697K, such sales are -28.7% lower than in January (993K) and -15.8% below the Q2 monthly average. Past blogs have discussed the University of Michigan’s Consumer Sentiment Survey indicating that U.S. consumers are out of the home buying market (40-year low for buying intentions). Inventory of new homes has risen to a more normal 6.2 months’ supply (was 4.2 months’ in March). What is fascinating is that all cash (investor) sales as a percentage of total sales are at a 16 year high. Clearly investors are buying homes with the intention of renting them as the exodus from central cities continues along with the growing likelihood that a significant portion of former office staff will continue to work from home in the future.
- China: Normally, the run-up in commodity prices occurs when China is in rapid expansion mode. It’s no different this time. And, each time, the inflation-phobes come out of the woodwork proclaiming a 1970s style systemic inflation has begun. In our last blog, we catalogued several commodities that had seen significant reversals, including Lumber:-72%, Iron-ore: -36%, and Copper: -15%. Such pronounced moves normally occur when there is low demand from China. In a recent blog, Economist David Rosenberg said that “[t]he Chinese Economy isn’t just slowing – it is contracting.” He indicated that over the five months ended in July, retail sales there are down at a -18.5% AR, -9.7% for Industrial Production, -7.4% for exports, and -9.8% for imports. The unemployment rate there has ticked up and inflation has been flat.
The Fed is in no hurry to raise interest rates and will be guided by incoming data. That data will likely be much weaker than markets have priced in.
The Delta-variant has apparently slowed air travel (TSA), restaurant reservations (Open-Table), hotel occupancy… It has caused the cancellation of many business and social events. The return to the office has been put off by a significant and rising number of companies, and business travel remains at recession levels given the continued use of virtual meetings (including the Fed’s symposium).
PUA IC data are also signaling that a rough patch has returned for small business. The PUA program is scheduled to end soon (September), and that means that 9 million in the CC program will be without weekly checks. Ditto for the $300/week federal unemployment supplement for 29 Opt-In states and territories. Those, along with the suspension by the Supreme Court of the eviction moratorium, bode ill for Q4 consumption.
Inflation data is showing signs of slowing (”transitory!”), housing appears to have peaked, and China is no longer growing.
While interest rates spiked during the week through Thursday, August 26, on Friday, because Powell maintained his dovish posture, rates recouped nearly half of that spike. The economic data continue to tell us that the near-term pressure on rates is downward.
Robert Barone, Ph.D.
August 30, 2021