Rocking my Jimmy Choo's and I spy the punch bowl
America's back and the troubles are (arguably) fleeting ... in the nearer term.
My dance card is filling fast. After 16 months of working from my home, Anthony (my dog and constant companion) sees me dusting off my heels and looks worried. America is back. Consumer spending, despite May’s retail sales miss (more below), is accelerating. Bank of America says a greater share of spending is now occurring outside of consumers’ home bases than before the pandemic. Even the Taj Mahal is now open! The only drag on the booming economy are bottlenecks, and the jump in prices that these are causing globally. Business sales soared 40% year-over-year (y/y) in April, a sign Q2 S&P 500 revenues might blow past Q1’s 12% spike. Industry analysts expect earnings to skyrocket almost 60% this quarter, which the Atlanta Fed said is on track to post 10.3% real GDP growth. Fed dots now show two hikes in 2023 vs. none before, a move futures markets already were pricing in. From Evercore ISI’s perspective, nothing happened at the FOMC meeting to change its forecast for a 58% increase in cumulative S&P earnings over the next three years. The punch bowl remains.
Some market pundits worry 2023 may not be early enough to initiate rate hikes. But problematic inflation requires wage pressures. Wage growth decelerated sharply in May, and Redburn sees little evidence lockdown base effects and temporary supply-side squeezes are feeding into sustainable pricing dynamics. Historically, expansionary monetary and fiscal policies have stimulated growth and employment for years without serious inflation. Fundstrat believes structural inflation pressures will come as millennials and their associated consumption and wealth effects take hold. A worry five to 10 years down the road. Meanwhile, the disinflationary Amazon effect is being joined by long-dormant productivity-enhancing capex. Not being discussed enough, in my view. In March, when the minimum wage debate was in full swing, the Congressional Budget Office reported 61% of hospitality leaders overseeing 185K employees said they’d deploy new technologies if the minimum was pushed to $15 an hour. Absorbing 300 minimum-wage hikes at the state and local level, McDonald’s upped the use of touchscreen-ordering kiosks from 20% of restaurants in 2017 to 75% by 2019. And the use of advanced robots in warehouses, drone applications and farming bots continues to accelerate, with the pandemic an added catalyst. This has not prevented record job openings (see ‘What else,’ below). The punch bowl remains.
My HVAC guy came to the house this week. Backed up and overworked as his company struggles to find help, he’s chatty. Seems his niece was laid off last year from her $120 per-week job at Subway. She’s since collected $8,000 in stimulus monies. Jackpot! Meanwhile, tenants at his few rental properties stopped paying with a moratorium that keeps getting extended. Having paid a lawyer $2,500 to advise, there’s nothing he can do. HVAC man paid another $,2500 to a tenant to please vacate the property. “I’m selling the properties,’’ he said, disgusted, and thanked me for the therapy session. SIS Research says how the rent and mortgage moratorium gets resolved may be one of the most troubling problems the economy faces. Not being discussed enough, in my view. Inflation is, though, and it requires wage pressures. Redburn sees stronger wage inflation coming two ways: through rapid productivity growth that allows for higher pay without causing inflation (arguably, this is happening to some extent now), or government intervention via mandated minimum wages, higher unemployment benefits, universal basic income or a jobs guarantee (arguably, this is happening now, too). U.S. inflation indicators are near the top of the global pile. We have the largest monetary and fiscal stimulus in the world. And yet, over in D.C., Dems are racing the midterms’ clock. A bipartisan infrastructure deal that would top $1 trillion is gaining traction, but progressive Dems seeking more also are working on a separate package that could reach $6 trillion. All of this even as our output gap—the difference in output now relative to before the pandemic—is nearly closed. Why???
- There is no consumer cliff coming With the economy rapidly reopening, May retail sales slipped as the consumer’s attention shifted from big-ticket items (where stimulus checks came in handy) such as cars and appliances to restaurants and clothing (my work wardrobe, too, needs a refresh). Sales still jumped 28% y/y and were up 16% above their pre-pandemic trend, accounting for roughly half of total personal consumption, with goods purchases strong and services returning.
- The economy is booming Conference Board leading indicators rose a 13th straight month, with widespread strength consistent with above-trend expansion. The Business Roundtable CEO Economic Outlook Index increased in Q2 for the fourth straight quarter to a 3-year high and second-best reading on record—a good sign for continued acceleration in productivity-enhancing capex.
- Autos working through chip shortages Vehicle production jumped nearly 7% in May, the biggest increase in 10 months, and vehicle assemblies rose even faster to a 9.85 million annualized rate. That’s still more than a million short of pre-pandemic levels during 2020’s second half. Still, the improvement was a sign that supply chain imbalances are working themselves out.
- When is it no longer transitory? Both headline and core producer prices surprised in May, with the former posting its fourth-biggest monthly gain since data started in December 2009 and the latter one of its biggest increases on record. On a y/y basis, headline and core both posted record increases, with prices up at double-digit y/y rates across all stages of production.
- Housing dealing with supply issues Though less than expected, starts rebounded in May and are running well above long-term demographic demand. But permits slipped, as did builder confidence. Barclays viewed the reports as tentative signs of easing supply pressures in coming months, even as labor shortages and other bottlenecks hinder production.
- Synchronized global growth remains elusive Unlike in the U.S., the growth rates of leading indicators elsewhere decelerated over the winter on a resurgence in Covid cases, reimplementation of global restrictions and slow vaccine distribution. There has been some improvement this spring, with headline growth stabilizing in global indicators in May and rising in several countries the prior two months.
Automation a job killer? Hardly Automation and robotics are job accretive, Bank of America says. It estimates an anticipated 12 million new jobs will be added over the next decade by automation and digitization alone. It also projects that 65% of children in school today will work at jobs not even invented yet, including “genetic stylist,” 3D-printed food chef and space tourism guide.
Pink and green? Those used to be frat colors Pink (care economy) and Green (sustainability) collar jobs are the new blue or white, Bank of America shares. In fact, wind turbine and solar PV installers and technicians are the No. 1 and No. 2 fastest growing jobs in the U.S. No. 3? Nurses.
Little did we know! Back in the early 1980s, then-Fed Chair Paul Volcker strangled the money supply to suppress inflation that had exceeded 10% three straight years. The Mister and I had just gotten married when high double-digit interest rates began to decline. We raced to buy our first house before mortgage rates would turn back up. Little did we know rates had just begun a 40-year downtrend.