The month of October brought plenty of exciting macroeconomic data to discuss. Despite the fervor around the recent inflation print (which we’ll delve into below), our reading of the U.S. economy is still quite strong. The Astor Economic Index has ticked down slightly from the middle of the year but remains at an above average level.
The general health of the economy is thanks in large part to a robust labor market. Non-farm payrolls increased by 531,000, and the prior month was revised upwards to 312,000, bringing the unemployment rate to 4.6% (U6 8.3%). Once again, much of the gains came in pandemic affected areas like hotels. There are some interesting nuances behind the headline numbers.
For one, job openings remain at or near historical highs. The NFIB small business job openings index is just a touch down from its all time high, and similar measures published by Indeed.com and others tell a similar story. A corollary of this apparent shortage of workers is improved wage gains, with average hourly earnings increasing by 4.9%. Labor force participation for those aged 25-54 was essentially unchanged at 81.7%. In aggregate, the labor force story is that of continued improvement, but it appears that many workers are remaining on the sideline. Ultimately, wages may need to move up in a meaningful way for more re-entrants into the workforce.
Of course, it is impossible to touch on wages without mentioning inflation. Core CPI was above expectations of 4.6% y/y. We’ve entertained ourselves over the past six months with alternative measures of inflation – median readings, trimmed readings, reweighting and stripping out COVID-19 categories. What is undeniable now is that inflation is broad based and shows no immediate signs of relenting. Consumer demand remains weighted towards durable goods, rather than moving back to the historical preference of services. Moreover, its likely that shelter prices have further to run, having lagged the broader trend to date.
The market reaction has been a dramatic flattening of the yield curve, with 2-year yields moving up in the U.S. and across much of domestic markets. Ultimately, pricing in bond markets suggests that participants view the Fed moving faster than previously communicated, but inflation contained over the medium term. The Fed, for their part, has stuck to their narrative of transitory inflation, and has not suggested a faster tapering or an earlier rate hike. The Fed is in a bit of a bind – rate hikes would probably only serve to constrain demand, not fix supply chain issues. On the other hand, rising inflation expectations from consumer prices could contribute to the dreaded wage-price spiral, forcing their hand earlier than they would like.
In sum, inflation is likely more persistent than policy makers had previously believed. The silver lining is solid demand from robust consumer balance sheets and a strengthening labor market – despite tanking consumer confidence from inflation, most people are in a better place, as aggregate incomes are higher. At Astor, we will be watching closely for signs of upward real wage pressures as a portent for things to come.
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The Astor Economic Index®: The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points. 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. 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. All conclusions are those of Astor and are subject to change. Astor Economic Index® is a registered trademark of Astor Investment Management LLC.