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Growth Will Slow Faster Than Expected

So Says the Current Data

The systemic “inflation” and “labor shortage” myths persist in the financial media despite data to the contrary:

  • Layoffs remain at recessionary levels;
  • Wage growth is slowing, not accelerating;
  • Bond yields are falling (where’s the inflation?);
  • Housing and auto buying intentions are at 40 year lows.


The one-year inflation expectation measure from the University of Michigan’s (U of M) Consumer Sentiment Survey did rise to 4.8% in July’s survey from June’s 4.2%.  But this measure is highly correlated with gasoline prices and likely the financial media’s inflation hysteria.  (The good news here is that OPEC+ agreed to increase supplies.)

The more appropriate measure of inflation expectations, the one which most influences inflation over the intermediate term, and the one watched closely by the Fed, is the 2-5 year inflation expectation measure.  In U of M’s July survey, that was 2.4%, DOWN from 2.5% in June and 2.7% in March.  As long as such expectations stay anchored, the Fed won’t move to tighten (again, good news because nearly all Fed tightening cycles end in recession).  

Wage growth, part of the financial media inflation myth, is confined to the low wage sectors which are still competing with the federal $300/week unemployment insurance supplement (more on this below). 

The Atlanta Fed’s Wage tracker is in a DOWNtrend and, at 3.4% (three month moving average for June), appears to be much closer to the 3.3% recent lows of the series (May ’21, September ’20, and April ’20) than to the 4%+ readings found in pre-pandemic 2019 (when there was no talk of inflation of any kind, much less “systemic”).  The bond market has sniffed this out and, while still somewhat volatile, the 10-Year Treasury yield has managed to fall from the 1.54% level (June 24) to 1.28% as of this writing.  Clearly, bond traders don’t see inflation, systemic or other, else the T-Note yield would be rising, not falling!

The Labor Shortage

The latest weekly (July 17) data (Not Seasonally Adjusted) show that Initial Unemployment Claims (ICs) (state programs) jumped more than +23K to 406K (from 383K reported last week, now revised upward to 392K).  In a growing economy, normal for this series fluctuates around 200K.  In addition, the special Pandemic Unemployment Assistance Program (PUA) also showed a +14K surge (to 110K from 96K).  These series are proxies for new layoffs.  If business is that good, why are layoffs still at recessionary levels?  (In this regard, perhaps business is good for large companies, but not so much for smaller ones.)

As of July 10, Continuing Unemployment Claims (CCs) were 12.6 million; 2 million was the pre-pandemic normal.  And while this is a nice down-move from the prior week’s 13.8 million level, all of the improvement was concentrated in the states that have opted out of the federal government’s $300/week unemployment insurance supplement (see below).

The “labor shortage” appears to be confined to the low wage (leisure/hospitality) sectors.  Both the NY Fed and Philly Fed recently reported that their employment sub-indexes had risen significantly (NY in its July survey and Philly in both June and July).  In the Fed’s mid-year monetary policy report, it pegged the unemployment rate at 8.7%, with full employment in the 4% range.  Looks like a lot of slack to us!

Once again, the data, by state, remain convincing that the $300 unemployment supplement is a major factor keeping service workers on the sidelines.  The table shows the percentage changes in unemployment by opt-out date from May 15 through the last three reporting weeks. 

                                    Percentage Changes in CCs by Opt-Out Date

  ———————Percent Change——————-
Date of Opt-OutNo. of States5/15 to 6/265/15 to 7/35/15 to 7/10
June 124-17.7-21.7-25.1
June 197-40.1-48.1-54.2
June 26-2710-8.2-15.8-15.8
Month of July3-13.2-10.7-15.8
September 629*-6.4-7.7-2.5

            *26 states + D.C. + Puerto Rico + Virgin Islands

Note the consistent downtrend in unemployment in the states that have already opted out, while those that haven’t actually lost ground the week of July 10.  Aggregating the data for the states which are already out of the supplemental program shows a -21.7% change in unemployment as opposed to the -2.5% change over the two-month period for the opt-ins.

Yes, you read that correctly. The week of  July 3 had shown the opt-ins with a lagging, but healthy -7.7% change in unemployment.  But CA showed a huge increase the week of July 10.  Removing CA from the mix shows the rest of the opt-ins with a respectable -11.7% unemployment change since May; but still only about half as fast as the opt-outs.

In mid-July, the national polling firm, Morning Consult, cited the result of their early June survey as follows:

Forty-five percent of those who turned down a job offer cited the generosity of UI benefits as a major reason why they did not accept the job offer…

We didn’t see this poll widely reported!

We do expect the opt-in states to play catch-up in August and (especially) September.  By mid-October, “Help Wanted” signs should be less ubiquitous.

Unintended Consequences

There are a couple of unintended consequences of the federal supplemental unemployment program:

  • Its presence has caused upward wage adjustments for those sectors that pay the lowest (minimum) wages.  Such sectors do not comprise a huge percentage of total employment, so perhaps that is why the Atlanta Fed’s wage tracker is behaving as described above.  The politicians apparently stumbled upon the uplift in the low wage sector caused by the supplemental program; perhaps this method will be used in the future to push up the minimum wage.
  • Service sectors have now developed strategies to cope with the dearth of lower wage employees.  For example, automated ordering at restaurants.  In the hotel industry, some chains are offering lower prices for multiple day stays if the client opts for no daily room cleaning/maid service.  This reduces the hotel’s need for its lower wage cleaning staff.  A long-term consequence of the supplemental unemployment program is that the highly employee intense service industries may not soon return to their pre-pandemic employment levels.  Since the Fed has emphasized its employment mandate for this cycle, such a development may keep the Fed on the sidelines for longer than markets currently anticipate.

While the program may have pushed up starting wages in some service industries, long-term, there may be fewer employment opportunities in that space.  A mixed bag at best!

Other Data

We have commented for several blogs about an economy showing softening characteristics.  The initial Q2 GDP numbers will be released on Friday (July 30).  As Q2 progressed, both the NY and Atlanta Regional Federal Reserve Banks have been reducing their GDP estimates, as it has become clear that the reopening acceleration faded as Q2 progressed.  Indeed, June is looking very soft. 

Buying Intentions

Both New and Existing Home Sales fell as the quarter progressed (blame high prices!).  In addition, new auto sales were weak (blame the semiconductor shortage), as were “Real” (inflation adjusted) Retail Sales (free money slowed to a trickle).  Nonresidential Construction and Durable Goods Manufacturing were also slowing as the quarter progressed

.  The latest U of M Consumer Sentiment Survey puts both home and vehicle buying intentions (leading indicators) at 40-year lows.

No matter the reason(s) for the drop in such intentions, there will be a dramatic impact on economic growth in the year’s second half (and likely on prices, too).  Perhaps the inflation narrative will die over the next few quarters.


In the housing arena, starts rose dramatically in June (all in the West and South; starts fell in the Northeast and Midwest).  This caused the price of Lumber in the commodities pits to reverse its rapid fall  (from $1,686/thousand board feet on May 6, to $536 on July 15 to close at $647 on Friday, July 23 – still a 62% retreat).  On the other hand, permits, a better barometer of future activity, fell -5.1% M/M (June), is now down three months in a row and in four of the last five.  The consensus estimate for permits was high by nearly 100K units, leading us to believe that the coming softness isn’t yet in the price.

Delta Variant

We don’t yet appear to be completely out of the woods when it comes to the pandemic.  The more contagious Delta variant has significantly pushed-up new infections and hospitalizations, especially among the lower vaccinated populations.  While it doesn’t appear that business lockdowns are imminent or even contemplated (perhaps a lesson learned!) some political jurisdictions (Los Angeles, for example) have reimposed mask requirements.  But, even without mandates on businesses, it is inevitable that the rising concern over the spread of infection will negatively impact economic activity, likely consumption of services first as consumers hunker down once more.


  • Inflation expectations remain well anchored despite rising gasoline, used car, and some service industry prices.  The Fed pays special attention to such expectations.
  • Wages are rising in the 3% range; that’s down from 4%+ in 2019 (pre-pandemic) when there was nary a mention of inflation.
  • The weekly data continue to show new layoffs are still at recessionary levels.  And, there is little doubt that the federal unemployment insurance supplement is a major factor in the “labor shortage” saga.
  • Indications of Home and Vehicle buying intentions (leading indicators) are at 40-year lows.  Perhaps that is why building permits have fallen of late.
  • The Delta-variant of Covid-19 is another unknown risk.  And it isn’t a positive.

Viewed wholistically, the data points to a second-half in which economic growth will be slower than is currently priced into financial markets.

Robert Barone, Ph.D.

Joshua Barone

July 26, 2021


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