Today’s employment numbers show jobs growing at only about a 2 percent annual rate. While most measures of the economy are booming, jobs are lagging because of attractive government payments for not working. Labor shortages caused by government payments remain a problem for many businesses.
The Week That Was
The economy soared going into the first quarter, with current dollar spending (GDP) up at an 11 percent annual rate. Recent data indicate business continues to increase rapidly this quarter.
Today’s job report shows the number of private payroll jobs increased by 218,000 in April. This was well below expectations. The latest numbers show employment levels remain about 5 percent below the prior peak.
Government payments have encouraged people not to work. This keeps employment down and increases the shortage of workers.
Weekly employment data continue to show a substantial improvement. Initial weekly unemployment claims were 498,000 at the end of April. This is down from an average of 577,000 claims for all of April and 724,000 in March.
The ISM surveys of business activity in April confirm business activity is moving up rapidly. Although manufacturing and service businesses slowed a bit from March, the slowdown was not significant.
New orders remain very strong, inventories are low, and backlogs are increasing.
Things to Come
Inflation has been percolating in commodity markets for several months. Retail prices are heading higher amid shortages in materials and labor. Reports of supply shortages for building materials, food supplies for restaurants, and repair parts are becoming more prevalent. Inflation is about to rise to the surface.
The Fed’s favorite inflation measure (the core consumer spending deflator) rose at a 6 percdent annual rate in March. The more popular consumer price index in March rose at an 8 percent annual rate, whereas core consumer prices were up at a 4 percent rate.
I forecast that this trend toward much higher inflationnumbers will continue in the months ahead. Wednesday’s consumer price index report is likely to be the second consecutive month with annual rate increases of 4 percent or higher.
With the aid of stimulus checks, retail sales in March were up 10% from February. The increase put sales 17 percent higher than their prior peak in February of a year ago. Sales this elevated are well above normal levels and subject to a correction. Given the ongoing impact of federal stimulus checks, it’s difficult to say whether sales will ease off in April or in the months ahead.
Market Forces
Stocks were mixed this past week.
The Dow was up 1½ percent to a new all-time high. Other key indexes were flat to down. The S&P500 was unchanged, while the Nasdaq and QQQs fell by 2 percent to
3 percent.
Amid signs of an economic boom, foreign Central Bank heads are talking about tapering the monetary stimulus. Some Fed officials have also referred to a need for adjusting policy The Fed is lagging the rest of the world in recognizing the likely damage from current policy. Expect more hints from the Fed about slowing its purchases of securities.
Stocks will continue to take hits whenever there are signs of a change in Fed policy. Stocks will take another hit when the Fed begins to raise interest rates.
These hits to the market are likely to be temporary setbacks. The real hit to stocks will come when the Fed makes a move to significantly slow the growth in the money supply.
It’s likely we are still a long way from that move. Although the S&P500 remains 26 percent above its fundamental value, the Fed’s ongoing purchases of securities should keep stock prices elevated.
For now, stay bullish and enjoy the ride.
The recent drop in longer-term interest rates is a temporary development. If you are considering borrowing money, do it now. As inflationary pressures continue to build, look for interest rates to head higher.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 overvalued by 26 percent
Monetary Policy: highly expansive