“If you want to see the forest, you’re going to have to look past the trees.” ~ 1 Samuel 16:7
Question: How do you suggest we interpret the economic data as the economy reopens?
Answer: Economic data rarely follow a smooth path; weather and external events have effects, consumer spending can be uneven, and new orders tend to come in bunches. This is why it is best to watch for trends rather than placing too much weight on one month’s worth of data. The stories behind the numbers are what’s important. There is a lot of optimism as we look to the remainder of the year, some degree of fear regarding inflation, more than a fair amount of uncertainty with geopolitical and economic policies that influence taxes and interest rates.
Weather was unusually mild in January and exceptionally bad in February. Consumer spending, durable goods orders and shipments, construction activity, new and existing home sales, and industrial production all posted declines in February, while still exhibiting strength on a year-over-year basis. For example, orders for nondefense capital goods ex-aircraft, a rough proxy for business investment in equipment, fell 0.8% in February, but the total for the first two months of the year were up 8.5% from the first two months of 2020. Consumer spending on durable goods dropped 4.7% in February but was still up 17.2% from a year earlier. Existing home sales fell 6.6% in February but were up 9.1% year-over-year. This data and the below, are provided by the Bureau of Economic Analysis
Consumer service business were especially hard hit by the pandemic. Households spending on services is roughly six times the spending on long-lasting items. Consumer spending on services edged up 0.1% in February, as bad weather offset the impact of a general opening in the economy. We can expect sharp improvement in March.
While the rate of new COVID-19 cases has fallen, it’s not zero. So now, it’s a question of how many will accept the vaccine and return to pre-Covid lifestyles. In his post-Federal Open Market Committee (FOMC) press conference, Fed Chair Powell said that the recovery could go “more quickly than it has in the past, because it involves reopening the economy, as opposed to stimulating aggregate demand and waiting for that to produce demand for workers.” Translated, this means that it will still take time for unemployment to go down and for labor force participation to recover. With 9.5 million unemployed, firms continue to report difficulties finding skilled labor. A cynic might say this simply means difficulty finding people willing to work for what you want to pay them, but there are clearly issues in manufacturing. Worker shortages contribute to supply chain issues. Some training will be required, but that takes time. Training should be less of a problem in the lower-skill services industries, but there are likely to be challenges matching millions of unemployed workers to available jobs.
If the Fed’s “patiently accommodative” monetary policy stance proves to be a mistake, and inflation rises above 3% for an extended period and inflation expectations become unanchored, then it may have to hit the brakes harder later on, which means potential disruptions to financial conditions and a weaker growth outlook. We won’t know for sure until after the fact, but Fed officials remain confident that everything will work out.
Gauging the Recovery
The trend in COVID-19 cases is much less horrific than at the start of the year (when new cases averaged 250,000 per day), but the level is still pretty high (weekly deaths at about 7,200, vs. over 23,000 in mid- January). Vaccines are arriving a lot sooner than expected, but the virus is still out there.
The New York Fed’s Weekly Economic Index rose to +4.14% for the week ending March 20, up from -0.33% a week earlier (revised from -0.97%), signifying strength relative to the weak data of a year ago. The WEI is scaled to four-quarter GDP growth (for example, if the WEI reads -2% and the current level of the WEI persists for an entire quarter, we would expect, on average, GDP that quarter to be 2% lower than a year previously). The continued elevated level of claims appears to reflect people repeatedly getting short-term work. The data point toward hearty increases in consumer spending, but much depends on how inflation may impact the draw down on consumer savings. Stay focused and plan accordingly.
This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no assurance that any investment strategy will be successful. The opinions expressed are those of the writer as of April 5, 2021 but not necessarily those of Raymond James and Associates, and subject to change at any time. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
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This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email email@example.com Website: www.raymondjames.com/Darcie.