U.S. Review: Reopening Boom, while Supplies Last
- This week’s economic data kicked off with a bang. The ISM Services Index jumped to 63.7, signaling the fastest pace of expansion in the index’s 24-year history. The strong report came with some caveats, however, as the headline was propped up by lengthened supplier delivery times.
- Predictably, given the disruptions along with surging demand, input prices continue to head higher. This morning’s Producer Price Index report showed prices for domestically produced goods and services jumped 1.0% in March, sending the year-over-year rate to 4.2%, the fastest pace in nearly 10 years.
International Review: Global Rebound Gains Momentum, but Pace of Recovery Uneven
- The rise in the global manufacturing and services PMIs for March pointed to an upswing that is gathering momentum but remains unevenly distributed by geographical region. The upturn in manufacturing is reasonably widespread. However, the recovery in services is more variable, with stronger gains in the U.S. and U.K. in contrast to more tepid trends in the Eurozone. On the inflation front, Mexico and Brazil both reported faster inflation for March, which could lead to central bank rate hikes in the months ahead.
- For the coming week, China’s Q1 GDP figures will likely be a market focus. PMI surveys hinted at temporary softness at times during the first quarter, although the momentum appears to have picked up again by quarter-end. That said, the brief pause in the upswing should be enough to see a perceptible slowing in China’s Q1 GDP growth to 1.4% quarter-over-quarter.
Interest Rate Watch: FOMC Minutes Shed Light on What the Committee Is Thinking
- The latest meeting minutes indicated that most FOMC members seem to be placing much more weight on labor market conditions at present, while placing much less weight on inflation.
Credit Market Insights: Consumer Credit Surged in February
- Consumer credit jumped $27.6 billion in February, far exceeding market expectations. Revolving credit (mostly credit card balances) increased $8.1 billion and nonrevolving credit (mostly auto and student loans) rose $19.5 billion.
U.S. Review
Reopening Boom, while Supplies Last
This week’s economic data kicked off with a bang. The ISM Services Index jumped more than eight points to 63.7, signaling the fastest pace of expansion in the index’s 24-year history. The blowout report is just the latest data suggesting the full reopening boom is upon us. All 18 industries reported an increase in March, and the index on current business activity climbed to an all-time high. The new orders sub-index also surged, indicating that the jump in activity was more than just a catchup after last month’s disruptions. The strong survey of purchasing managers came with some caveats, however. Like the manufacturing ISM survey, the headline was propped up by lengthened supplier delivery times. Predictably, given the disruptions along with surging demand, input prices continue to head higher. This morning’s Producer Price Index report showed prices for domestically produced goods and services jumped 1.0% in March, sending the year-over-year rate to 4.2%, the fastest pace in nearly 10 years. While some of this strength is a reflection of weak year-ago rates, it is not all base effects. PPI inflation has picked up since the start of the year, rising at nearly a 12% annualized pace the past three months.
In addition to bidding up prices, ongoing supply chain problems have started to hold back trade. Imports declined $1.7 billion in February, led by a 10.7% decline in autos & parts. The decline in autos likely reflects supply constraints more than dwindling demand, as auto sales rose to a three-and-a-half year high in March. The global shortage of semiconductors may have constrained auto imports, as manufactures struggle to get their hands on the key input. In addition to shortages of individual parts, the rapid recovery in goods spending through the back half of last year has put considerable strain on shipping. Even before the recent six-day blockage of the Suez Canal, congestion at the ports of Los Angeles and Long Beach, which together account for a third of U.S. container imports, caused container ships to anchor offshore while waiting for available port space. Transportation bottlenecks were also a factor on the export side; however, slower growth abroad has also been a major headwind and it will likely continue weigh on export growth even when supply chain problems start to dissipate.
Initial Claims’ Noise Should Not Take Away from Strong Labor Market Signals
Filings for initial jobless claims increased for a second consecutive week, resulting in a modest increase in the four-week average. The recent increases in initial claims contrast with virtually every other labor market indicator, including the March nonfarm payroll report as well as surveys of businesses and consumers.
Initial claims played a pivotal role in providing insight into the rapidly developing COVID crisis. The million-claim jumps last spring were some of the earliest indicators of the dire economic crisis unfolding and the fluctuations through the back half of last year were a key barometer of how new waves of COVID were filtering through to the real economy. Now, however, with the economy trending toward some semblance of normal, the weekly noise of initial jobless claims may again start to dominate the signal from this high-frequency series. In other words, there is little to suggest that the labor market recovery is again stalling, let alone backsliding, as recent claims figures hint. Instead, the sideways move likely reflects the usual weekly fluctuations as well as ongoing issues related to backlogs, substantial churn in some industries and even fraud.
One important point that we can glean from this week’s jobless claims figures is the still-high number of workers facing unemployment. Continuing claims totaled 18.2M in the most recent week that data are available across all programs. The large number of individuals enrolled in these programs alongside other measures of labor market slack suggest there is still a long way to go in the jobs recovery. This sentiment was echoed in the minutes of the most recent FOMC meeting, in which members continued to stress, “the economy was far from achieving the Committee’s broad-based and inclusive goal of maximum employment.” For further reading on the FOMC meeting minutes released this week, see the Interest Rate Watch section of this report.
U.S. Outlook
Consumer Price Index (CPI) • Tuesday
We expect consumer prices continued to firm in March and forecast the CPI rose 0.6%. If realized, this would push the year-over-year (YoY) rate to 2.6%, or the highest since August 2018. While market participants will take note of the pickup in inflation, we expect the core measure, or prices excluding food and energy, rose a more modest 0.2% over the month. A subdued 1.6% YoY rate of core inflation should console markets that inflation is not yet spiraling out of control. Take note: The YoY growth rates will be bolstered in coming months by low base effects from when prices collapsed last year due to lockdowns.
Energy prices will again flatter the headline, as a gallon of regular retail gasoline averaged its highest price since April 2019 in March. Food prices will also provide a sizable boost to headline inflation based on higher food-related commodity prices. For the core index, services inflation likely continued to pick up, but prices may have remained constrained by leisure and travel-related categories, like airfare and lodging away from home, due to limited activity. More broadly, recent supply chain constraints are causing price pressures to intensify. Input costs according to the ISM surveys are rising at around their fastest pace since 2008, while businesses planning to raise prices have also risen to levels not seen in more than 12 years. With inflation expectations on the rise, at least some of these higher costs could soon be passed on to consumers.
Previous: 0.4% (Month-over-Month); Wells Fargo: 0.6%; Consensus: 0.5%
Retail Sales • Thursday
March was likely a blockbuster month for retailers. The public health situation rapidly improved during the month, and we estimate nearly 80% of the latest round of economic impact payments (direct checks) designated under the American Rescue Plan were sent to households. Based on how quickly the previous round of direct checks burned a hole in consumers’ pockets, we expect to see an immediate surge in spending. We forecast retail sales to surge 5.4% in March. Spending should be pretty broad-based, but autos are set to be particularly strong, as separately reported data from last week revealed auto sales notched a three-and-a-half year high in March. Strength extended beyond the auto sector in March, as high-frequency data from OpenTable showed the best month for seated diners since the lockdowns last year, which bodes well for another strong month for restaurant sales. Excluding autos, we expect retail sales rose a solid 4.6%.
If spending is even stronger than our forecast, the injection of cash as the public health situation is rapidly improving may have boosted optimism and led consumers to spend even more of the latest round of checks. But, if sales are worse, we would fault a delayed effect from payments and expect to see spending pick up more meaningfully in April.
Previous: -3.0% (Month-over-Month); Wells Fargo: 5.4%; Consensus: 5.4%
Industrial Production (IP) • Thursday
After activity was constrained by severe winter weather and logistics problems in February, we expect production picked up in March. We forecast total industrial production more than reversed its February decline and rose 3.1%. But, while the weather was a temporary disruption, supply problems remain and are set to restrain the overall pace of activity in coming months. Longer supplier delivery times continue to be reported and anecdotal comments from manufacturers in the latest ISM reports still emphasized difficulties across the supply chain. That said, orders should continue to roll in, fueled by low inventories as well as consumers and businesses in a strong position to spend. If output was worse than expected, supply bottlenecks likely weighed on activity more than we anticipated. A better-than-expected outturn, would suggest the industrial sector continues to produce despite these headwinds.
Previous: -2.2% (Month-over-Month); Wells Fargo: 3.1%; Consensus: 2.6%
International Review
Global Rebound Gains Momentum, but Pace of Recovery Uneven
The release of March manufacturing and service sector PMIs over the past several days pointed to a global upswing that is gaining some momentum, but one that is also unevenly distributed across geographical areas. The global manufacturing PMI rose to 55.0 in March from 53.9 in February, which according to the press release, was the best reading for the manufacturing PMI since February 2011. The firmness in the manufacturing indices was quite widespread, with the United States and Eurozone at high levels, as well as the United Kingdom to a lesser extent. Manufacturing PMIs for some emerging economies lagged modestly, however.
The global services PMI also rose to 54.7 in March from 52.8 in February, although the outcomes for the service sector were more uneven. In the U.S., the ISM services index rose to a record high 63.7 and the U.K. services PMI ticked down to 56.3, but the Eurozone services PMI of 49.6 was still below the breakeven 50 level. Nonetheless, given improving confidence surveys and hopes for a further rebound and as vaccine distribution progresses, the International Monetary Fund (IMF) lifted its GDP growth forecast in its latest outlook. The IMF now forecasts global GDP growth of 6.0% in 2021 and 4.4% for 2022.
Inflation Quickens in Latin America
Evidence of faster inflation in parts of Latin America is becoming more apparent with the release of March CPI reports. In Mexico, the CPI quickened to 4.67% year-over-year, above the upper-end of the central bank’s inflation target range, with a rise in goods inflation driving much of the recent acceleration. The core CPI also firmed to 4.12% year-over-year. In Brazil, the headline CPI showed similar acceleration for March, quickening to 6.10% year-over-year. The PMI surveys for March from Brazil and Mexico were something of a mixed bag. That said, we think it will be inflation trends that should be most influential for monetary policy in the months ahead, with the central banks in Brazil and Mexico both expected to hike rates within the next three (Brazil) to six (Mexico) months.
Canadian Employment Report Upbeat for the Economic Outlook
After last week’s blowout jobs report for the United States, Canada has also followed up with a knockout employment report of its own. March employment surged by 303,100, coming off the heels of a surge of 259,200 in February. The composition of that job growth was also robust, as full-time jobs rose by 175,400 and part-time jobs rose by 127,800. Meanwhile, the unemployment rate fell to 7.5%, the lowest since February of last year. The March manufacturing PMI was also upbeat, printing at 72.9, the highest level since 2011. Following some encouraging signals related to retail sales and overall GDP growth, the employment report offers further evidence that Canada’s economic recovery remains on track. Against that backdrop, we expect the Bank of Canada to adjust monetary policy modestly at its April meeting and anticipate a further reduction in the pace of government bond purchases from the current rate of at least C$4 billion per week.
International Outlook
U.K. Monthly GDP • Monday
Next week’s February GDP figures could show the first tentative signs of a turnaround in the U.K. economy, following the marked 2.9% month-over-month decline in January. While the U.K. has made rapid progress by international standards in vaccinating its population, fairly stringent lockdowns were still in place in February, with the government only announcing a gradual path toward reopening later that month. As a result, the consensus forecast only shows a partial recovery from January’s decline, with a February gain of 0.5% month-over-month expected. Services activity estimated to rise 0.5%, while industrial output is expected to rise 0.5%.
After a modest February increase, we expect the U.K. recovery to gather momentum in the months ahead, as COVID restrictions have been increasingly lifted over the past weeks and months, and with PMI survey data pointing to a much firmer GDP outcome in March compared to February.
Previous: -2.9% (Month-over-Month); Consensus: 0.5%
Australia Employment • Thursday
Australia’s March labor market report is expected to extend the run of solid outcomes seen in recent months. March employment is forecast to rise by 35,000, which would be the sixth increase in a row and comes after a February increase of 88,700. The split between full-time and part-time jobs will also be scrutinized, with full-time employment having also increased for several straight months. The unemployment rate is expected to dip slightly to 5.7%. The ongoing employment gains augur well for ongoing growth in the broader economy, after solid GDP gains were reported for Q3 and Q4 of last year.
Even with the continued labor market improvement, the Reserve Bank of Australia is unlikely to adjust its accommodative monetary policy stance for some time. The central bank held policy steady this week, saying wage and price pressures are subdued and that the unemployment rate is still too high. For wage growth to increase and CPI inflation return to its target range, the central bank said significant gains in employment and a return to a tight labor market will be needed—conditions the central bank does not expect to be met until 2024 at the earliest.
Previous: 88,700 (Monthly Employment Change), 5.8% (Jobless Rate); Consensus: 35,000, 5.7%
China GDP • Friday
With the release of Q1 GDP figures next week, China will become the most systemically important economy to report overall growth figures so far in 2021. Despite experiencing some increase in COVID cases and mild economic softness during the middle of the quarter, by March, China’s economy appeared to again be gathering some momentum. Nonetheless, the brief pause in the upswing during Q1 should be enough to prompt a perceptible deceleration in growth. The consensus forecast for a Q1 GDP gain of 1.4% quarter-over-quarter would be smaller than the gains seen in either Q3 of Q4 of last year. Due to base effects (that is, a sharp COVID-induced drop in GDP in Q1-2020), growth is, however, expected to surge on a year-over-year basis to 18.3%.
In addition to the GDP data, market participants will be paying attention to retail sales and industrial output figures for March. Base effects will again be significant, given the weakness seen in early 2020, although with that economy having started to recover by March last year, a modest slowdown in year-over-year growth is expected for the March 2021 figures. The consensus expects March retail sales to rise 28.0% year-over-year and industrial output to rise 18.0%, both of which would be smaller increases than seen in the first two months of this year.
Previous: 2.6% (Quarter-over-Quarter); Consensus: 1.4%
Interest Rate Watch
FOMC Minutes Shed Light on What the Committee Is Thinking
The minutes of the March 16-17 FOMC meeting were released this week. Although the minutes always reinforce the main message that the committee imparts in the statement immediately following the conclusion of the meeting, they often add some important nuances to that message. In that regard, the minutes indicated that most FOMC members seem to be placing much more weight on labor market conditions at present, while placing much less weight on inflation.
Committee members acknowledged the improvements in the economy and the labor market that have occurred recently, and they noted “encouraging developments regarding the pandemic.” However, they also stated “that economic activity and employment were currently well (emphasis ours) below levels consistent with maximum employment.” Specifically, “payroll employment was about 9.5 million jobs below pre-pandemic levels.” (The March labor market report, which was not available to the FOMC at the time of the March 16-17 meeting, shows that payrolls are still 8.4 million workers short of the February 2020 peak.)
Furthermore, the minutes went on to say that “the economic downturn has not fallen equally on all Americans and that lower-income and Black and Hispanic households had been disproportionately affected by the pandemic.” Although unemployment rates for all races are up relative to their pre-pandemic levels, rates for Black and Hispanic Americans have not receded as much as their White counterparts (see chart). The unemployment rate for White Americans currently stands 2.4 percentage points above its pre-pandemic level, but the rates for Black and Hispanic Americans are currently about 3.5 percentage points above their February 2020 lows. The minutes concluded that “the economy was far (emphasis added) from achieving the Committee’s broad-based and inclusive goal of maximum employment.”
Most committee members seem to be taking a complacent attitude toward inflation, characterizing the risks to the inflation outlook as “broadly balanced.” Most members believe that year-over-year inflation rates will move higher in coming months as low base effects from last year filter into the calculations. They also note that supply constraints could add to upward pressure on prices for some goods in coming months. However, most members view these effects as “transitory” and expect that “annual inflation readings would edge down next year.”
The minutes of March FOMC meeting reinforce our belief that the Fed will be on hold for quite some time. In our view, most committee members will want to see the level of payrolls return to near its pre-pandemic level before they even contemplate hiking rates. Our forecast implies that the level of payrolls will remain below its pre-pandemic peak until the second half of 2022, which is consistent with our view that the FOMC will refrain from raising rates until at least the end of next year. Furthermore, the minutes indicate that most members will want to see evidence that improvement in the labor market is broad-based and that unemployment rates among all Americans have fallen significantly from current levels. In sum, short-term interest rates likely will remain extraordinarily low for quite some time.
Credit Market Insights
Consumer Credit Surged in February
Consumer credit jumped $27.6 billion in February, far exceeding market expectations and posting the largest gain since late 2017. The improving vaccine rollout and loosening operating restrictions likely provided a boost to borrowing over the month. Revolving credit (mostly credit card balances) increased $8.1 billion and non-revolving credit (mostly auto and student loans) rose $19.5 billion.
Consumers dramatically pulled back on credit card spending during the pandemic. The level of revolving credit has declined in 10 out of the past 12 months (see chart), while nonrevolving credit has steadily increased. The dropoff in revolving credit, historic pace of deposit growth and survey evidence on how consumers have used stimulus payments suggest that households may be using some of their excess savings to pay down credit card debt. The latest round of economic impact payments, therefore, may pressure revolving credit flows in the near term to the extent households use the influx of cash to service their debt obligations.
February’s report may, however, signal a turning point for revolving credit. As the public health situation improves further, we anticipate a record pace of consumption over the second and third quarters of this year. We expect consumers to tap their excess savings, but revolving credit may also pick up as the one-time stimulus payments fade and consumers start to borrow more to sustain spending.
