The Astor Economic Index® (“AEI”) improved slightly month over month and remains at a level indicative of strong fundamentals, reflecting very strong output measures across the U.S. economy, as well as declining jobless claim figures. The dip in the AEI from the second wave earlier this year has been mostly retraced as the U.S. recovers from COVID-19 and moves towards full reopening and on balance, the U.S. recovery continues apace. However, this month’s nonfarm payrolls figure was disappointing, and there are growing data and anecdotes around price pressures and (counterintuitively) labor shortages in sectors of the economy. We delve into some of the details below.
Measures of demand and output in the U.S. were strong in the month of April but declined slightly from the heights of March. The ISM manufacturing PMI printed at 60.7, a strong reading (above 50 indicates growth) but disappointing consensus estimates of 65. Survey respondents noted long delivery times for inputs, with the business supplier delivery subcomponent remaining elevated at 75.0. In sum, the manufacturing sector is still expanding rapidly, but facing increased headwinds from higher prices and shortages. ISM services, meanwhile, dipped to 62.7 against Bloomberg consensus estimates of 64.1.
The labor market showed worrying signs of a slowdown, with nonfarm payrolls improving by a meager 266,000 jobs and missing expectations of 1,000,000 by a wide margin. Headline unemployment increased slightly to 6.1%, though for good reasons as labor force participation improved, while underemployment (so called U6) ticked down to 10.4%, a new low for the recovery.
There are several working theories behind this month’s disappointing number. First, substantial fiscal support for unemployed workers via expanded unemployment benefits and checks in the mail may be keeping some people on the sidelines, although the evidence is mixed. Next, the ongoing pandemic likely has a persistent impact; for example, some parents are forced to stay home for childcare obligations while schools remain closed. Finally, the Federal Reserve and others have pointed to a growing skill mismatch between open positions and the available labor force.
April’s Consumer Purchasing Index (CPI) was one number that did not disappoint to the downside, with the m/m figure at 0.8%, well above estimates of 0.2%, and core CPI year over year at 3% (partially due to base effects). Although April’s number was high, much of the change came areas where we would expect to see price inflation following a long lockdown. Much of the gain came from reopening focused categories – by one estimate, about 0.5 percentage points of the m/m gain are from components like used cars, hotels and flights. The question, as always, is to what degree price inflation proves to be transitory and moderates following over the next several quarters, or persistently moves up inflation expectations and forces the Federal Reserve to act sooner than they may like and thereby subduing the ongoing expansion.
What should we make of these conflicting signals, and will the expansion over the next few months be more like the rapid pace of March or the more contained rate of April? Of course, we are not in the business of forecasting, but as the effects of stimulus roll off household balance sheets, more workers rejoin the labor force, and constrained supply catches up to increased demand, it seems more likely than not that growth will continue at an above trend clip and price pressures will moderate for the remainder of the 2021. As always, we at Astor will keep our ears to the ground and our eyes on the Astor Economic Index®.
The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.