A new round of robust economic data last week was also served with a reminder that inflationary pressures are rising. As the U.S. continues to gradually emerge and recover from the COVID-19 pandemic, the conversation is beginning to shift toward just how long the current accommodative monetary policy and government stimulus efforts will be required.
How much growth is too much? It’s likely too soon to tell because a couple months of data are not enough to determine if rising producer prices are sustainable and will be transferred to consumers in a meaningful way.
Until there is concrete evidence on that front, the Federal Reserve has pledged to keep short-term interest rates low to support a full recovery of the U.S. labor market. Even with the robust job growth experienced in the private sector the past couple of months, it will likely take several more quarters to achieve that goal.
On the fiscal side, we’ve had about $5 trillion of economic stimulus since March 2020, with another $2 trillion infrastructure plan currently being debated in Washington, D.C. Those bills will come due at some point in the future and likely be paid for in the form of higher taxes.
In the meantime, the near-term outlook for economic growth and corporate earnings remains bright. We believe that financial markets can continue to benefit in the current environment, although this shift in the policy conversation is worth monitoring closely.
WALL STREET WRAP
ISM Shows Record Services Activity: On Monday, the Institute of Supply Management (ISM) announced a March figure of 63.7 for its non-manufacturing index. This marked the highest-ever reading of the survey, dating back to 1997. The blowout report was driven by record business activity and new orders in the services sector, while the prices paid component rose to the highest level in nearly 13 years.
Combined with the manufacturing index report earlier in the month, 35 of 36 sectors tracked by the ISM grew during March. In comparison, just four of those sectors expanded in April 2020, when the country was first coping with the COVID-19 pandemic.
Jobs Openings on the Rise: The Bureau of Labor Statistics posted the JOLTS report on Tuesday, which showed the U.S. reached a two-year high of 7.37 million job openings in February. This is a positive indicator when companies increase hiring, and we believe this trend will continue as vaccine distribution expands and more areas of the country reduce business and travel restrictions.
Producer Prices Exceed Expectations: On Friday, the Bureau of Labor Statistics said the March producer price index (PPI) increased by the most in 10 years. The headline PPI figure showed 4.2 percent growth from the previous year, while core producer prices (excluding food and energy) increased by 3.1 percent.
These emerging signs of inflationary pressure are somewhat expected, as many businesses are experiencing shortages with so many areas of the economy restarting at one time. For now, the Federal Reserve has repeated a willingness to let prices run hotter for longer, with a primary focus of returning the U.S. labor market to pre-pandemic levels.
Economic Recovery Expanding Overseas: Outside the U.S., China’s economy appears to be rebounding, as the privately conducted Caixin Services PMI survey was reported on Tuesday with a March reading of 54.3. The data confirmed earlier reports from the Chinese government that showed both the manufacturing and services sectors grew in March after a slow start to 2021.
It’s also worth noting that Europe could soon experience a similar post-pandemic recovery in its services sector. Bloomberg reported last week that an internal European Union memo suggested its vaccine supply should improve by the end of June, allowing for the majority of citizens to be immunized sooner than previously expected.
THE WEEK AHEAD
Consumer Data in Focus: The March consumer price index (CPI) will be announced on Tuesday. While lagging the growth seen in PPI, economists are also expecting inflationary pressure to have risen on this front last month.
In addition, March advance retail sales will be posted on Thursday, with expected growth likely to have been driven by the third round of individual stimulus checks for qualified individuals.
Finally, the preliminary reading of the University of Michigan consumer sentiment survey will be released on Friday, offering one of the first looks at April data on the services side of the U.S. economy.
Manufacturing Numbers on Deck for Thursday: The Federal Reserve will announce March industrial production and capacity utilization figures on Thursday.
We’ll also get the Philly Fed and Empire State manufacturing indexes for April. Last month, these reports were an early barometer to suggest that March would produce some robust data.
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