May 31, 2021



     The path of the economic recovery from last year’s pandemic-induced shutdown became less certain as there were some speed bumps in April suggesting economic momentum took a pause.  The much-weaker than expected April employment report raised questions about whether the recovery is as strong as advertised.  That report showed that employers added fewer hires than anticipated and the unemployment rate ticked up to 6.1%.  Enhanced unemployment benefits, stimulus checks, health and childcare concerns are thought to have played a role in constraining labor supply.  The March Job Openings and Layoff Turnover Survey (JOLTS) and the April National Federation of Independent Businesses (NFIB) Small Business Optimism Index highlighted the difficulties employers are having in hiring workers.  The JOLTS report revealed a record high 8.1 million job openings and small businesses said their biggest challenge was finding employees, or even just getting people to apply for job openings.


   Economic Activity


     Another speed bump was an underwhelming advance retail sales report for April.  Sales were flat month-on-month (m/m), and below consensus expectations.  March data, however, was revised to an even stronger 10.4% m/m from the 9.4% originally reported.  Overall, the level of retail sales is well above its pre-pandemic level.  There was also some encouragement in the report with early evidence of increased spending on services.  As the economy continues to re-open, services are expected to take the lead in driving spending growth.


Consumers Inflationary Expectations


     Supply constraints continue to affect many sectors in the economy.  Supply is struggling to keep up with demand, leading to price pressures and raising the specter of inflation risks to the upside.  Consumer inflation expectations are rising in response, with the University of Michigan’s measures of both short and long-term expectations leaping to the highest level in years.  Market-based inflation expectations have also recently reached multi-year highs as measured by “breakevens” which are spread between the yield of a Treasure secrutiy and the yield on an inflation-protected Treasury security of the same maturity.

Market Inflation

    The Consumer Price Index (CPI) for April surprised to the upside, rising by 0.8% month-on-month (m/m).  That boosted the headline inflation rate to 4.2% year-over-year (y/y), the fastest increase since 2008.  Meanwhile, core inflation rose to 3% y/y.  Some of the annual increase is due to base effects of price drops on the pandemic lockdown in 2020.  CPI, like so much of the data releases, is backward looking, but there are factors that have forward-looking implications.  Staffing challenges seem to be increasingly acute, implying upward pressure on labor costs at the same time businesses are paying more for parts and materials, and perhaps facing higher taxes.  Additionally, an 11% average price rise in houses has not been captured into the CPI measure as the government computes an Owners Equivalent Rent (OER), which is up only 2% y/y.  This component, which accounts for nearly 30% of core CPI, has been held down by the federal moratorium on evictions, which means some tenants are paying nothing.

CPI and Core CPI


     Policymakers at the Federal Reserve do not seem to be overly concerned, at least not yet, about the recent rise in inflation expectations and the actual rate of inflation.  The Fed believes that price pressures are driven by forces that are largely temporary in nature, a supply-demand mismatch as the global economic recovery was faster than expected.  Pandemic-driven supply bottlenecks and capacity constraints acted as a tailwind to prices that should be resolved as supply and demand rebalances.

Total Assets of Major Banks

Central banks around the world, including the Fed, are conducting untried monetary policy on a huge scale.  Coupled with unprecedented fiscal stimulus it could be appropriately called “emergency status.”  Now, more than a year later, they are still in emergency mode.

Total Assets of FED

     At the April Federal Open Market Committee (FOMC) meeting, the Committee maintained its very dovish forward guidance.  Members recognized improvement in the economy, but were cautious about risks to the recovery.  According to the meeting minutes, the Committee needs to see further progress toward their primary goal of full and inclusive employment, and will keep ultra-easy monetary policy until they do.  To be sure, the minutes may be somewhat stale and dated as the meeting occurred prior to key reports such as April’s employment, retail sales and CPI.  One month’s data, however, does not make a trend.  Even so, a “number” of officials said that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.  Generous stimulus, improving health conditions and re-opening of economies adds weight to odds the rapid progress will continue.  It is a slight opening of the door toward policy normalization.  A further opening of that door with talk of tapering asset purchases, while contingent on upcoming economic data, is imminent in our mind and deserves close scrutiny.