After a week of heightened financial market volatility caused by the Fed’s “Dots,” (week ended June 19), the past week was like a walk in the park with much lower market volatility and the equity markets resuming an upward bias. What we have observed, however, is that much of the newly released data, including employment, housing, income, durable goods, and even inflation shows the economy expanding at a much slower speed than markets have assumed.

Employment

Data for the last two reporting weeks (June 12 and June 19) show Initial Unemployment Claims (ICs) (state and Pandemic Unemployment Assistance (PUA)) rising slightly and sitting at the 500K level.

The chart at the top shows the weekly IC claims data for 2021 from the Department of Labor for the state and PUA programs. Note the uptick on the right-hand side. The data in the chart are NSA (Not Seasonally Adjusted). The large impacts of the pandemic on economic activity aren’t seasonal and using historical seasonal adjustment (SA) factors makes little sense. Yet, markets and the financial media appear stuck on the SA data. Because the PUA program hasn’t been around long enough to calculate seasonal factors, the financial media only widely reports on the state headline SA numbers. So, let’s first look there.

The original estimate of state ICs for the June 12 week was 412K. It was revised up to 418K with the June 19 data release. But, seconds prior to the DOL weekly release, the market comparable number was 412K. Thus, the 411K number released for the June 19 week had to be a disappointment. The market consensus estimate was for a 380K number.

In keeping with the “hot” economy narrative, markets ignored this data. In fact, it isn’t clear that some in the financial media understand what the data means. Here is the opening paragraph of a story put out by one of the major financial media outlets:

Initial Claims for unemployment insurance remained elevated last week as employers struggled to fill a record number of job openings.

As we have reminded our readers in nearly every recent blog in which we have discussed the employment data, ICs are a proxy for new layoffs. Why would employers struggling “to fill a record number of job openings” be laying people off? That 500K number is 2.5 times the pre-pandemic “normal,” and indicates that layoffs are still at recessionary levels! The story writer appears to be confusing ICs with Continuing Unemployment Claims (CCs), which, as seen in the next chart also continue to be elevated and showed no downward movement in the last data release (14.8 million in both the May 29 and June 5 (latest) data weeks). How confused must the public be when financial media reporting is so muddled?

The Federal Unemployment Supplement

Speaking of CCs, we’ve now seen the first hint that the $ 300 / week federal unemployment supplement is likely a major culprit in the ubiquitous “Help Wanted” narrative.

The table shows the aggregate percentage change in the state CC programs with states grouped by the end date for the federal supplement. Note the much larger percentage declines in the CCs in the states where suspension of the federal supplement had been implemented or was imminent compared to the states and territories shown on the last line of the table where the supplement would continue until early September.

There are two implications here: 1) This looks like early proof that the federal supplement is a major culprit in the continued high level of CCs especially among lower wage earners; and 2) it appears from this early data that a substantial number of those 14.8 million claimants will be looking for employment by summer’s end. Thus, we expect that the “wage inflation” narrative will quietly disappear by fall.

Housing

Housing is a very important input in the GDP calculation. Housing employs a significant percentage of workers. A weakening housing sector is not a sign of a “roaring” economy.

The financial media screams about housing prices. And well they should. The median price of a single-family home rose 18% Y / Y (May) with price increases accelerating over the past six months. We have provided two charts, one graphing New Home Sales, the other Existing Home Sales. It appears that both new and existing sales have peaked.

The financial media blames the falling data solely on price (ie, the “inflation narrative”). No doubt, that IS a major factor. But there may be other causes at play. Now that vaccines appear to be working, re-openings occurring, and some companies calling part of their workforce back to the office, demand for those suburban homes may have peaked. The inventory numbers would seem to indicate that. In terms of months’ supply, May showed 5.1 months, about 1.5 times higher than October’s 3.5 months.

The actual reasons for housing’s slowdown don’t really matter. What matters is that the peak is in (or, at least, appears to be) and that means slower economic growth in 2021’s second half. Has that been priced into financial markets? We don’t think so!

Other Data and Musings

  • Durable goods orders rose + 2.3% M / M in May. It missed the consensus number of + 2.8%. Aircraft sales are significant here, as aircraft orders were spurred by the return of domestic travel to about 75% of its pre-pandemic level, as airlines, now needing planes, pulled the “buy” trigger. Ex-aircraft, the M / M increase was only + 0.3% (consensus: + 0.7%). In addition, core capex orders (these are non-defense capital goods less aircraft) fell -0.1% (consensus: + 0.6%). Adjusted for inflation (ie, an estimate of physical sales), the number was -1.6%. Note here how much lower the data is than consensus, indicating that the financial markets are still too bullish on the recovery.
  • Consumer spending was flat in May (0.0%) (consensus: + 0.4%), and personal income fell -2.0%. The impact of the stimulus is clearly fading.
  • The SF Fed published a study that concludes: 1) Covid distortions have added 2.4 percentage points to core inflation in 2021 through April; 2) Non-Covid sensitive core PCE is about 1%. Data like this is the reason the Fed sees today’s PCE inflation rate (+ 3.4% Y / Y; + 0.5% M / M) as “transitory.” [Note: The energy component of the PCE deflator is up +27.4% Y/Y (plummeting gasoline prices a year ago?). OPEC meets soon with some energy gurus indicating pressure for increased production from some members.]
  • A recent (May 31, 2021) paper by Michael Lebowitz (of 720 Global) entitled “What the Coming Fed Taper Means for Bonds and Stocks, ”Demonstrates that since quantitative easing (QE) was introduced by Bernanke during the Great Recession, bond yields have fallen (stock prices, too) when the Fed tapers (ie, purchases lower dollar amounts of bonds each month – currently $ 80 billion of Treasuries and $ 40 billion of mortgage-backed securities each month). The Fed is now “talking about” tapering. This is yet another reason for our forecast for lower bond yields over the coming quarters.

Conclusions

Softer data, especially housing, should dispel the concept that the economy is “hot” or “roaring,” and should lead one to the view that second half 2021 GDP growth will soften. Is that softer growth currently priced into financial markets? Likely not.

The excess liquidity that we discussed in our last blog that is currently being created by the Fed’s monthly QE purchases is likely responsible for much of the asset inflation we see in equities and home prices. Investors should be aware that major market movements occur when the Fed begins its taper or, at least, when the markets believe that the taper is imminent. The volatility around the Fed’s “Dots” in mid-June, which markets interpreted as a more hawkish monetary stance, reinforce this view. The historical data indicate that the taper is bearish for stocks and ultimately bullish for bonds.

(Joshua Barone contributed to this blog.)



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John R.

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