US data indicates “Boom”: base part effect, transient part, real part
The long-awaited economic boom has finally arrived! The New York Fed’s weekly economic index exploded higher in late March and early April (see chart above). Retail sales increased + 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 began to shut down. April’s Y / Y number will be even higher, as April 2020 was the first full month of a pandemic.
Next, look at the Consumer Price Index (CPI); it climbed to a reading of + 2.6% Y / Y. A few more months and the Fed will have reached its inflation target and can start raising rates! (said facetiously)
Those who read these blogs regularly know that while the financial media have been pushing a boom scenario, we do not accept accounts of the âRoaring Twentiesâ or âsystemic inflationâ. So, yes, the chart below shows that the M / M data for retail sales was a gargantuan jump of + 9.8%. The month of January was + 7.7%. It is no coincidence that these two months are the months when the majority of American households received “stimulus” payments of $ 1,400 per household member (March) and $ 600 (January). The positive September figure was associated with the earlier âstimulusâ ($ 1,200 / adult in the household and $ 500 per child under 17) which took significantly longer to deploy. (The slowness of the first stimulus payment happened because the IRS wasn’t prepared; but after the first round, they had a system in place that made the last two distributions much more efficient.)
Notice in the graph that the intervening months have shown negative changes in retail sales, including the holiday season of 2020! The norm for a “booming” economy is to see a constant flow of increasing sales (positive percentage changes), not a stop-stop-stop-start! We expect April to show positive retail sales growth as well, probably well below + 9.8%, but by June we will see these turn negative as a percentage as the last “stimulus” dissipates.
Fear of inflation
We have a similar view for inflation data. The chart below shows both the âheadlineâ and âcoreâ CPI. Note the sharp drops in March / April / May 2020 data for the headline CPI (blue line). Given this base from a year ago, it’s no wonder that the March headline CPI has risen. We can expect numbers this high at least until June, April / May probably showing up with even higher comps.
The prices of energy (gasoline), airline tickets, hotels and used cars were the main drivers of the title. With the exception of used cars, whose prices rose due to supply chain issues at US auto factories, other prices were just returning to pre-pandemic levels. These four categories represent only 17% of the index. But this is where the majority of the price increases have taken place, most of which was a return to pre-pandemic “normal” prices. The remaining 83% of the index posted an increase of 0.2%! There is no “systemic” inflation in these data.
Now look at the âcoreâ CPI (headline less food and energy). The Fed is much more influenced by this metric. It’s not as volatile as the headline. You can see the lack of volatility in the chart (gold line) throughout 2018 and 2019. There was slight volatility in the Core in 2020, but not as much as in the stock. While the March headline number (the one that excites the media) was + 2.6% year on year, the core rose to + 1.6% from + 1.3% in February. The core will show much less volatility over the next few months than the stock; and it’s something closer to the Core series that influences the Fed.
Our regular readers also know that we consider a healthy labor market to be a key component of the health of the economy. And there is finally good news about it. A few blogs (weeks) ago, we thought that the rapid drop in initial jobless claims during a pandemic unemployment (PUA) would result in lower CIs. (PUA applicants are mostly small business operators, while state applicants are laid-off employees of companies that pay into state systems, many of which are such small businesses.) In our last blog post, we expressed our disappointment with the rise in state CIs for a few weeks after the fall in PUA CIs. PUA claims fell significantly in the week of March 13, continued to decline slightly, then fell back again in April. Small businesses were reopening. In fact, looking only at restaurants, Open Table reservations for the first third of April were at 82% of their pre-pandemic norm compared to 52% in February. And, as you can see on the right side of the attached chart, the PUA CIs are dropping dramatically. We saw that this ultimately had an impact on state ICs, as they dropped dramatically on the last release of the week (April 10) (-153K from + 766K the previous week to + 613K).
Continuous unemployment (CC) claims (those who receive unemployment benefit for more than a week) are of equal or greater importance (see graph below). These had capped at 18-19 million since the beginning of December. The data here is 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 (50 weeks earlier), the number here was below 17 million. Considering the recent drop in PUA data and state IC, there is a high probability that we will see much lower numbers in this series in the future. And, given that bullish data, we also expect to see strong monthly payroll employment data for the next several months, perhaps hitting the magic million mark for a few of them.
Before anyone gets too excited about these trends and embraces the Wall Street âRoaring 20sâ narrative, we want to reiterate our point that it will take a long, long time for this series to return to its pre-pandemic. normal â(2-3 million).
On the front page of the April 12 edition of the Wall Street Journal (WSJ): “Fear of Covid-19 is shrinking the workforce.” The article concluded that the four million dropouts from the labor force would not return anytime soon, not because of overly generous unemployment benefits, and not because of inadequate wages, but because they felt unsafe on the job. health plan in their pre-pandemic work environment. This seems to be one of the reasons why the main complaint in business surveys is the lack of candidates.
Of course, as we have written here in the past, we believe that overly generous unemployment benefits have also played a role. The PUA and additional unemployment benefits will currently expire in early September. If they are not renewed, some of those millions will have no choice but to look for a job. Maybe then the ubiquitous âHelp Wantedâ signs will start to fade.
Problems with vaccines
On the front page of the April 16 edition of the WSJ: âGlobal Variants Fuel Covid-19 Surgeâ. Not only is the virus making a new surge in the world, but the JNJ and AstraZeneca vaccines have been withdrawn in the United States and Europe. This can have a negative impact on the return to normalcy, especially in Europe. A slowdown in this country, and a slower reopening in the world as a result, will have a significant negative impact on US exports (already -10% year-on-year). Already setting spectacular records, the trade deficit is a major negative compensation in the GDP records. The trade deficit was – $ 71.1 billion in February, an annual rate of over – $ 853 billion (the current record trade deficit in 2006 stood at – $ 764 billion).
In addition, the suspension of the two vaccines is likely to increase the percentage of populations that will refuse to be vaccinated, which will make it more difficult to obtain “herd immunity”. Tourism, an important part of many economies, will also take longer to return than is likely valued in current financial markets.
Barron’s claims forbearance loans exceed $ 2 trillion.
Stanford University observed that 60 million people defaulted on their debts in the first quarter. That’s 23% (!!) of the adult population, and that 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, Slow Sales.” Remember, Americans have been spending spree in 2020 on âstuffâ (ie physical goods) because the majority of services have been shut down. Like TP, the public is probably saturated with this “stuff”. So while spending on services is clearly making a comeback, it will likely be offset by lower spending on âthingsâ.
We have noticed a decrease in bank loans in our last blogs. Loans on the books are down at an annual rate of -1.6% during the last quarter. The fact that over the past four weeks this decline has accelerated to an annual rate of -8.9% is worrying. Last week, the major banks reporting profits all significantly exceeded Wall Street estimates. However, the beats were on the back of their functions of capital markets, trading and investment banking. Their loan books contracted -9% year-on-year. As we wrote earlier, we believe that loan expansion is a necessary ingredient for the organic growth of an economy.
Mortgage applications are down six straight weeks and in nine of the last ten. During that 10 week period, the index fell -31.9%. The buy sub-index fell -16.5%, and again fell -38.6%.
The headline of China’s GDP in the first quarter was + 18.3% year on year. This is a seemingly large number and in line with the âRoaring Twentiesâ narrative. What wasn’t discussed much was that the Q / Q GDP figure was actually -3.3% (annual rate) lower than in the fourth quarter. Maybe something similar is happening in America.
Big numbers are showing up in US data, partly due to low levels of economic activity a year ago (base effect), and partly due to Uncle Sam’s generosity.
Labor markets have shown signs of life as the reopenings have taken place. The state’s initial Unemployment Compensation (UI) claims eventually declined after several weeks of reduced claims in special PUA programs. More importantly, Continuing Claims (CCs) started to decline. Nevertheless, there are very compelling reasons why unemployment will be the main economic problem for an extended period.
Vaccine deployments were not going well in most countries, but now, with the suspension of JNJ and AstraZeneca vaccines, the hoped-for return to “normalcy” in the world may take longer than financial markets have. planned.
Other data, including pent-up demand for physical goods, declining bank lending and what appears to be a spike in housing, may have an unwanted impact on economic growth in the United States.