It’s Difficult To Ignore The Disincentives, With Employment Numbers Still Low

As much as the big miss in employment was a shock on Friday May 7, the May 12 CPI data turned out to be a double whammy. April headline CPI came in at +0.8% M/M, while market consensus was +0.2%, another huge miss by market forecasters. Y/Y CPI was +4.2%, up significantly from March’s 2.6% Y/Y print. What appears strange to us, and looks to be contradictory to reality, is that the Wall Street narrative continues to be that the employment numbers were an “aberration,” (i.e., we are in a “boom”) but, the CPI numbers (clearly caused by base effects (i.e., the fact that the CPI had dipped significantly last spring) and temporary supply chain issues) were symptomatic of a “systemic” 1970s style inflation. Neither sentiment, we think, recognizes reality.

Beneath the Employment Data

Looking at the changes in the raw (Not Seasonally Adjusted – NSA) job numbers (from the Establishment/Payroll Survey) just for the last three reported months of 2021 (February through April) (see table), it is clear that the NSA net new jobs are over a million each month.

But, the Seasonally Adjusted (SA) data are much lower, especially for April. Must be an anomaly, right? Wrong! The following table shows both the NSA and SA data for March and April since 2015.

Excluding the year 2020, March’s 1176K NSA number is significantly higher than the data from 2015 to 2019, indicating that the SA number should be higher than its predecessors. When it comes to April, however, the 2021 1089K NSA number is not much different than the 2015-2019 data. The mean of the NSA data for the April 2015 – 2019 data is 1068K, and the mean of the SA data for that period is 215. If we apply the ratio formula to the 1089K NSA number for 2021, we get 219 (1089/1068*215 = 219). While it appears a little high, we would tend to trust the 266K reading, as the SA factors may have changed slightly. So, No! April’s 1089K reading is not a number that represents a “booming” economy and the 266K SA number is not an “aberration.” Now, let’s turn to the March data. Using the same process as above produces a number for March of 258K, not 770K. If anything, the 770K number actually appears to be the “aberration.” Conclusion: The economy is not “booming.” 

More Slowdown Data

In the latest weekly Department of Labor release (for the week ending May 8), Initial Unemployment Claims (ICs) at the state level fell to 487K from 514K. By the way, that 514K was revised up from 505K, so the drop, as far as the market was concerned was just -18K, really not significant given the size of recent revisions. In the special Pandemic Unemployment Assistance (PUA) programs, there was a slight uptick in ICs from 102K to 104K.  Not a word in the financial media this week about the weekly DOL unemployment data! If anything, this data confirms our analysis that there really is no “boom,” just some recovery toward the pre-pandemic slow-growth economy. Of course, a continuation of helicopter money (the IRS just sent out $1400 checks to individuals as they process 2020 tax returns totaling $1.8 billion) will continue to fan the flames of the “boom” mentality. 

The critical Continuing Unemployment Claims (CCs) rose nearly 700K the week ended April 24 – latest data (see the chart at the top of this blog) and now sit at 16.9 million. Of these, 13.0 million reside in the PUA programs. The chart shows almost no progress for these CCs for the past three months.

Disincentives

After having been buried for months, the “disincentive” topic is finally seeing the light of day. The question is whether or not the enhanced (additional) federal unemployment benefits of $300/week is such a disincentive that it isn’t worth the effort for those unemployed who worked in the lower wage service sectors to return to work or find a new job. In the May 12 edition of the Wall Street Journal (“States End Enhanced Aid for Jobless,” A-2, McCormick & Cambon), the authors state that the extra $300/week supplements the state average of $318/week. Using a 40-hour workweek, this $618 week benefit is equivalent to $15.45/hour and to $32,136/year. In two recent editions of Barron’s, reference was made to the enhanced benefits being equivalent to a job paying over $32,000; so, these numbers corroborate each other.

In prior blogs, we indicated our belief that the enhanced $300/week benefit was a disincentive to work, especially for the lower paying wage sectors like leisure/hospitality.  We have observed that the No. 1 complaint of businesses has been the lack of applicants, and we have pointed out the ubiquitous-ness of the “Help Wanted” sign. 

Now, after pleas from businesses and The Chamber of Commerce to halt the $300/week federal supplemental benefit, several states (all with Republican governors) are ending these enhanced federal supplements. At this writing, 11 states are moving toward the elimination of the enhanced $300/week benefit, and it appears more will join. If this indeed occurs, we should see significant reductions in the CCs, likely beginning in June.

Note: It appears that the Biden Administration has stumbled upon a de facto method to raise the minimum wage as companies are now competing with the $15.45/hour effective unemployment wage!

Inflation

As indicated above, the headline CPI was a shocker. Core CPI (ex food and energy) was the highest monthly increase since 1982. The day after the CPI, the PPI (Producer Price Index) produced another shockwave. April’s PPI (+0.6% M/M) was double the consensus view (+0.3%). On a Y/Y basis, PPI grew 6.2%, much of which had to do with “base effects,” but that number still plays to the view that the economy has entered a period of “systemic” inflation. As if in anticipation that the Fed would now be forced to abandon its “inflation will be transitory and last for a couple of quarters” stance, yield curves have risen. In addition, the idea that the Fed might have to tighten earlier than anticipated set off some selling in the equity markets, which were down three days in a row early in the May 9-15 week.

An analysis of the CPI data suggests that the price increases were concentrated in 7% of the economic sectors. For example:

• Airfares: +10.2% M/M
• Hotels: +8.8% M/M

The above two sectors were simply returning to their pre-pandemic pricing, as the travel/tourism economy has begun to reopen. Airfares are still down -20% in the index from pre-pandemic levels, and average hotel rates are still -6% lower. Las Vegas, for example, is now nearly 100% reopened.

The auto rental business has limited supply, and apparently didn’t effectively anticipate reopening demand. Early in the pandemic, rental companies slashed their rental fleets due to the shutdown and plummeting demand.

• Sports events: +10.1% M/M (because they could)
• Used Cars: +10.0% M/M

Demand for used cars remains high as people still are avoiding public transportation. The recent CDC announcement that vaccinated people needn’t wear masks any longer may help the public transportation industry, but we believe that the return of pre-pandemic demand is still a long way off.

For the other 93% of the economy, the core CPI index rose +0.3% M/M (annualized to 3.66%), and the all-important rent, medical, and education components only rose +0.2% M/M. 

As we have stated in past blogs, we agree with the Fed that the inflation in our midst is “transient.”

• Since the pandemic began and the service economy was crippled, consumers purchased goods (a lot of durable goods) in place of services. Home improvement sales skyrocketed during the shutdown. Demand for such items was pulled forward. Having purchased new appliances (or carpeting, or a hot tub) last year means that one is unlikely to purchase such durables this year. Demand for such durables rose double digits last year, so demand for these goods in the near-term is likely to be soft, especially once the helicopter money (stimulus checks) plays out. April’s unchanged Retail Sales (lower than expected), while still impacted by those stimulus checks, is likely a harbinger of things to come.
• Supply, on the other hand, was crippled by the pandemic. Factories closed, and transportation has been a nightmare. But supply chains now look to be coming back online. Outbound shipments from Asia are surging. Taiwan and So. Korea set export records for semiconductors in their most recent monthly data releases. And while container ships are still backed up waiting to offload in CA ports, backlogs are falling and those ports are setting records for the amount of cargo unloaded. 
• As a result, it appears that the return of supply to normal is occurring faster than markets have anticipated.

Conclusions

A deep analysis of the recent employment data convinces us that employment is lagging despite reopening and the need of businesses, and this lag seems to rest squarely on the disincentives provided by the federal government’s enhanced unemployment benefits. The financial media has finally recognized the topic. After business pleas, several states have moved to cancel the federal enhanced benefit before it expires in September. We believe such moves will result in a faster normalization of the labor markets.

Our views of the demand and supply landscape keep us in the “transient” inflation camp. We expect that by Q4, markets will realize that economic growth will return to 1%-2% (i.e., no “boom”) and that the inflation that we are currently seeing, and will continue to see for several more months, will calm, if not turn to deflation as the nearly 17 million unemployed vie for the eight million jobs that recently showed up in the latest JOLTS (Job Openings and Labor Turnover Survey).

(Joshua Barone contributed to this blog.)