Prologue
The much anticipated economic boom has finally arrived! The NY Fed Weekly Economic Index exploded to the upside in late March and early April (see chart above). Retail Sales were up an amazing +9.8% M/M in March! That number is not Y/Y. The Y/Y number was +27.7%, but was greatly influenced by depressed Retail Sales last March when the economy was beginning to shut down. April’s Y/Y number will be even higher, as April 2020 was the first full pandemic month.
Then, look at the Consumer Price Index (CPI); it soared to a +2.6% Y/Y reading. A few more months of this and the Fed will have achieved its inflation goal and can begin to raise rates! (said facetiously)
Retail Reality
Those who regularly read these blogs know that, while the financial media have pushed a boom scenario, we don’t buy into the “Roaring 20s: or “Systemic Inflation” narratives. So, yes, the chart below shows the M/M data for Retail Sales was a +9.8% gargantuan jump. January’s was +7.7%. It is no coincidence that these two months are the months that the majority of American households received “stimulus” payments of $1,400 per household member (March) and $600 (January). The positive number in September was associated with the earlier “stimulus” ($1,200/adult in the household and $500 per child under 17) which took much longer to roll out. (The slowness of the first stimulus payment occurred because the IRS was not prepared; but after the first round, they had a system in place that made the last two distributions much more efficient.)
Note in the chart that the intervening months showed negative changes in Retail Sales including 2020’s holiday season! The norm for a “booming” economy is to see a steady stream of growing sales (positive percentage changes), not go-stop-go-stop-go! Our expectation is that April will also show positive growth in Retail Sales, likely a lot lower than +9.8%, but that by June, we will see these turn negative on a percentage basis as the latest “stimulus” wears off.
The Inflation Scare
We hold a similar view for the inflation data. The chart below shows both “Headline” and “Core” CPI. Note the large declines in the March/April/May 2020 data for the Headline CPI (blue line). Given that year ago base, it isn’t any wonder that March Headline CPI spiked up. We can expect such elevated numbers at least through June with April/May likely showing up with even higher comps.
The big movers in the Headline number were the prices of energy (gasoline), airline tickets, hotels, and used cars. Except for used autos, whose prices rose because of supply chain issues at U.S. auto factories, the other prices were just returning to pre-pandemic levels. These four categories represent only 17% of the index. But that is where the majority of the price increases occurred, most of which was a return toward pre-pandemic “normal” prices. The other 83% of the index showed an increase of 0.2%! There is no “systemic” inflation in this data.
Now look at the “Core” CPI (Headline less food and energy). The Fed is much more influenced by this metric. It isn’t nearly as volatile as the Headline. You can see the lack of volatility in the chart (gold line) throughout 2018 and 2019. There was some mild volatility in the Core in 2020, but not nearly as much as in the Headline. While March’s Headline number (the one the media gets excited over) was +2.6% Y/Y, the Core moved up to +1.6% from +1.3% in February. The Core will display much less volatility over the next few months than will the Headline; and it is something closer to the Core series that influences the Fed.
Labor Market
Our regular readers also know that we see the health of the labor market as a key ingredient of the economy’s health. And, there is finally some good news on this score. A couple of blogs (weeks) ago, we thought that the rapid fall in the Pandemic Unemployment Assistance (PUA) Initial Unemployment Claims (ICs) would translate into lower state ICs. (PUA claimants are mainly small business operators while state claimants are laid off employees of businesses that pay into the state systems, many of which are such small businesses.) In our last blog, we expressed disappointment as state ICs actually rose for a couple of weeks after the PUA ICs had fallen. PUA claims fell significantly the week of March 13, continued mildly downward, and then fell hard again in April. Small businesses were reopening. In fact, looking just at restaurants, Open Table reservations in the first third of April were at 82% of their pre-pandemic norm vs. 52% in February. And, as you can see from the right hand side of the accompanying chart, PUA ICs are down dramatically. We saw this finally impact state ICs, as they fell dramatically in the latest week’s (April 10) release (-153K from +766K the prior week to +613K).
Of equal or more import are the Continuing Unemployment Claims (CCs)(those collecting unemployment benefits for more than one week)(see chart below). These had plateaued at 18-19 million since early December. The data here are two weeks behind the IC data (week of March 27), but it is the latest data available. For the first time since April 11, 2020 (i.e., 50 weeks earlier) the number here was below 17 million. Given the recent fall in the PUA and state IC data, there is a high probability that we will see much lower numbers in this series going forward. And, given this upbeat data, we also expect to see robust monthly Payroll Employment data for the next several months, perhaps reaching the magic 1 million mark for a couple of those.
Before anyone gets too excited about these trends and buys into the “Roaring 20s” Wall Street narrative, we would like to reiterate our view that it is going to take a very very long time for this series to return to its pre-pandemic “normal” (2-3 million).
On the front page of the April 12 edition of the Wall Street Journal (WSJ): “Fear of Covid-19 Shrinks Labor Force.” The article concluded that the four million labor force drop-outs aren’t coming back anytime soon, not due to overgenerous unemployment benefits, and not due to inadequate wages, but because they perceive they are unsafe health-wise in their pre-pandemic work environment. This appears to be a contributing reason why the main complaint in business surveys is a lack of applicants.
Of course, as we have written here in the past, we do believe that the overgenerous unemployment benefits have also played a role. The PUA and additional unemployment benefits are currently set to expire in early September. If they aren’t renewed, some of these millions will have little choice but to seek employment. Maybe then, the ubiquitous “Help Wanted” signs will begin to disappear.
Vaccine Issues
On the front page of the April 16 edition of the WSJ: “Global Variants Fuel Covid-19 Surge.” Not only is the virus surging again worldwide, but JNJ’s and AstraZeneca’s vaccines have been pulled in the U.S. and in Europe. This has the potential to negatively impact the return to normalcy, especially in Europe. A slowdown there, and a slower reopening worldwide as a result, will have a large negative impact on U.S. exports (already -10% Y/Y). Already setting spectacular records, the trade deficit is a large negative offset in the GDP ledgers. The trade deficit was -$71.1 billion in February, an annual rate of more than -$853 billion (the current record trade deficit occurred in 2006 at -$764 billion).
In addition, the suspension of the two vaccines is likely to increase the percentage of the populations who will refuse to get vaccinated, making it more difficult to achieve “herd immunity.” Tourism, an important part of many economies, will also take longer to return than is likely priced into today’s financial markets.
Other Data
- Barron’s says loans in forbearance top $2 trillion.
- Stanford University observed that 60 million people missed debt payments in Q1. That’s 23%(!!) of the adult population, and this was with the helicopter money drops in January and March.
- Page B3 of the April 14 edition of the WSJ: “Americans Have Too Much Toilet Paper, Slowing Sales.” Remember, Americans went on a spending binge in 2020 for “stuff” (i.e., physical goods) since a majority of services were shut down. Like TP, the public is likely saturated with this “stuff.” So, while service spending is clearly returning, it will likely be offset by lower spending on “stuff.”
- We have noted shrinkage in bank lending in our last several blogs. Loans on the books are down at a -1.6% annual rate over the past quarter. Worrisome is the fact that over the past four weeks, that shrinkage has accelerated to a -8.9% annual rate. This past week, the major banks reporting earnings all beat Wall Street estimates significantly. However, the beats were on the backs of their capital markets, trading, and investment banking functions. Their loan books contracted -9% Y/Y. As we have written previously, we believe that loan expansion is a necessary ingredient for an economy to grow organically.
- Mortgage Loan Applications are down six weeks in a row, and in nine of the last 10. Over that 10 week period, the index fell -31.9%. The purchase sub-index fell -16.5%, and refis -38.6%.
- China’s Q1 GDP headline was +18.3% Y/Y. This is a seemingly great number and in line with the “Roaring 20s” narrative. What wasn’t much discussed was that the Q/Q GDP number was actually -3.3% (annual rate) lower than that of Q4. Perhaps something similar is coming to America.
Summary
Big numbers are showing up in U.S. data, partly due to the low levels of economic activity a year ago (base effect), and partly caused by the generosity of Uncle Sam.
The labor markets showed signs of life as reopenings got underway. State Initial Unemployment Claims (ICs) have finally turned lower after several weeks of lower claims in the special PUA programs. Of more importance, Continuing Claims (CCs) have begun to fall. Nevertheless, there are very compelling reasons why unemployment will be the major economic issue for an extended period.
The vaccine rollouts weren’t going well in most countries, but now, with the suspension of the JNJ and AstraZeneca vaccines, the hoped for return to “normalcy” worldwide may take longer than what financial markets have priced in.
Other data, including pent-down demand for physical goods, falling bank lending, and what looks to be a peak in housing, may have an undesirable impact on economic growth in the U.S.
Robert Barone, Ph.D.
Joshua Barone
April 19, 2021
Robert Barone, Ph.D. is a Georgetown educated economist. He is a financial advisor at Four Star Wealth Advisors. www.fourstarwealth.com. He is nationally known for his writings and Robert’s storied career includes his having served as a Professor of Finance, a community bank CEO, and a Director and Chairman of the Federal Home Loan Bank of San Francisco. Robert is currently a Director of CSAA Insurance Company (the AAA brand) where he chairs the Finance and Investment Committee. Robert is the co-portfolio manager of the UVA Unconstrained Medium-Term Fixed Income ETF (FFIU)