- This is a weekly series focused on analyzing the previous week’s economic data releases.
- The objective is to concentrate on leading indicators of economic activity to determine whether the economy is strengthening or weakening, and the rate of inflation is increasing or decreasing.
- This week I will examine construction spending, the ISM and Markit manufacturing indices, consumer confidence, weekly unemployment claims, and the jobs report for March.
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As unemployment claims fall below one million per week, the number of new jobs being added back to the economy is on the cusp of rising above one million per month. As a result, the U.S. economy is starting to boom with the ink barely dry on the $1.9 trillion stimulus package that President Biden signed just a few weeks ago. Now the President is proposing another $2.2 trillion in a host of spending initiatives focused on transportation, electric vehicles, the electricity grid, broadband internet, clean water, carbon capture, housing, and education. If a revised version of this bill passes later this year, the economy will roar, but so will long-term interest rates and inflation. It is foolhardy to think that we can have record levels of growth without the higher rates and inflation that come with it. Inflation expectations are already at a decade high. This presents valuation headwinds for an S&P 500 index that just crossed above the 4,000 level at the end of last week, but it may also put wind back into the sails of gold.
Winter weather slowed the pace of construction spending in February. Total spending fell 0.8% with residential down 0.2%, but still up 21.2% over the past year, while non-residential was off 1.3% and down 6.1% over the past year. I expect non-residential construction will pick up significantly in the year ahead once a revised version of the infrastructure spending bill is passed by Congress.
ISM Manufacturing Index
The Institute for Supply Management's Manufacturing Index rose for a tenth consecutive month to a 38-year high of 64.7% in March. New orders and production are extremely strong with the employment sub-index at a three-year high of 59.6%. The only thing holding the manufacturing sector back from even more robust numbers are raw materials and qualified workers. This is leading to early signs of price inflation at the producer level, and the latest round of fiscal stimulus is bound to increase demand for durable goods in the months ahead. Manufacturing is firing on all cylinders.
IHS Markit Manufacturing Index
IHS Markit's Manufacturing Index for March was at its second highest level on record since the survey started in 2007 at 59.1. Again, supply shortages held back production. New orders for consumer goods were at record levels. The supply shortages and transportation delays due to the pandemic are leading to the steepest increase in input prices since 2011. This is resulting in higher consumer prices. There are early signs of stockpiling, as customers try to front run price increases, but it is too early to tell how deeply entrenched these inflation fears have become.
The Conference Board's Consumer Confidence Index surged in March to a one-year high of 109.7 for obvious reasons. The government distributed $1,400 checks to 90% of Americans, the vaccination process is running full steam ahead, and the economy is gradually reopening. Both present conditions and future expectations soared. The only concern in the survey was higher gasoline prices.
Last month I stated in this report that the day we finally fall below one million total claims will be a psychological turning point. We have now done that for a second week in a row with state claims unexpectedly rising 61,000 to 719,000 on a seasonally-adjusted basis, while claims filed through federal pandemic-relief programs totaled 237,025. That brought the total on an unadjusted basis to 951,548.
Continuing claims under all state and federal programs fell 1.5 million to 18.2 million through March 13, and this figure should continue to drop significantly in the weeks ahead as the economy continues to reopen and fiscal stimulus leads to a dramatic increase in services this spring.
The Jobs Report
After last month's report that the economy recovered 379,000 jobs in February, which was revised up to 468,000, I stated that we would see one million or more jobs recovered per month this summer. We are on track with the 916,000 estimated to have been added back in March. The unemployment rate fell from 6.2% to 6.0%, and labor participation improved with 350,000 joining the labor force, but we are still well short of the 3.9 million additional workers who were included in that figure before the pandemic.
The leisure and hospitality sector led in hiring 280,000 with restaurants accounting for 176,000 of that total, but job gains were seen across the board in every industry with the exception of information services, which includes media and public relations. The strength in the labor market is a function of containing the pandemic, increasing the vaccination rate, and injecting tremendous amounts of fiscal stimulus into the economy. We are on track for one million jobs per month this spring provided we can continue to make progress in reducing the number of new coronavirus cases per day. At the moment, we are headed in the wrong direction on that front, but my hope is that the accelerated rate of vaccinations will offset the recent surge in new cases.
As we enter a new season for the economy of strengthening economic growth and rising inflation, it appears from the chart below that the S&P 500 has more than accounted for the surge in corporate profits that is pending. Consensus earnings expectations for 2022 are approximately $201, which places Thursday new all-time high of 4,019 at more than 20x forward earnings. This new season will bring with it two headwinds to valuations. Higher interest rates will weigh on growth stocks, while rising rates of inflation will squeeze margins for all companies unless those higher costs can be passed on to consumers. I expect we will continue to see more rotation between sectors that results in limited upside from current levels for the broad index.
The rate of inflation should start to rise in coming months based on easy year-over-year comparisons with last year's recession. That should result in lower real yields provided long-term interest rates do not rise as quickly. Lower real yields bode well for the price of gold (GLD). Gold has had its worst start to a year in four decades, and I think the $1,700 level is presenting a buying opportunity after the yellow metal peaked last August at approximately $2,070.
Source: US Global Advisors
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This article was written by
Lawrence Fuller has been managing portfolios for individual investors for 30 years, starting his career at Merrill Lynch in 1993 and working in the same capacity with several other Wall Street firms before realizing his long-term goal of complete independence when he founded Fuller Asset Management.
He is the leader of the investing group The Portfolio Architect, which focuses on an overall economic and market outlook that complements an all-weather investment strategy designed to produce consistent risk-adjusted market returns. Features include: Portfolio construction guidance, access to an “All-Weather” model portfolio and a dividend and options income portfolio, a daily brief summarizing current events, a week ahead newsletter, technical and fundamental reports, trade alerts, and 24/7 chat. Learn More.
Analyst’s Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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