Weekly Commentary: August 16, 2021
The Week in Review: August 8 - 14
The infrastructure of reconciliation or fiscal looting? Take your pick.
The infrastructure bill finally passed the Senate last week, with the support of 19 Republicans. It was a true political feat, given the current divisiveness of our government. How much of the bill is true infrastructure is debatable, and only time will reveal its full impact.
Currently, the bill is in the House, where Speaker Nancy Pelosi has tied its passage to a much larger
$3.5 trillion spending bill that amounts to an all-encompassing wish list for Democrats. Given the current order of things — with Democrats in control of the White House and both congressional chambers — why not try and get everything you can, no matter the cost?
The challenge here is that tying the bills together puts both at risk. I've been saying for weeks that the most objectionable provisions of the Democrats' spending agenda have been pushed from one bill into the other and we would get to the end game eventually. The problem for markets is that all this spending is baked in — and if it falls off the rails, the markets will be unhappy.
There's a reason some of the provisions are non-starters. For some progressives, the spending doesn't go far enough; for fiscal conservatives, moderate Democrats and Republicans, the spending is too much. And for vulnerable incumbents, the risk of voting for things like amnesty for the undocumented, Green New Deal components, higher taxes and more carry risks of voter backlash in 2022.
Rather than take the infrastructure win by split decision along with some of the superfluous goodies included in the bill, Speaker Pelosi is currently trying for the knockout shot, getting everything in one fell swoop. It's a risky move that will likely upset the markets if it fails and, in my opinion, will potentially scuttle much-needed real infrastructure progress.
Jobs growth and openings galore!
The July jobs number was great, but the Job Openings & Labor Turnover Survey (JOLTS) number keeps growing too. Nonfarm payrolls came in at +943,000, a little more than the equally impressive June number of +938,000. That's great because it means jobs are being created and people are going back to work. The unemployment rate dropped from 5.9% to 5.4%. This is all fantastic news and an affirmation that the economy is growing.
Another measure of employment activity, the JOLTS report tracks monthly changes in job openings and offers rates on hiring and quits. If people are going back to work (as evidenced by the declining unemployment rate) and job openings keep increasing (10.1 million vs. the 9.5 million in May), it sounds like we have a pretty healthy jobs market. Why, then, are we paying extended unemployment benefits and providing stimulus? We created 950,000 new jobs and openings went up by 600,000. Does that mean that only 350,000 people took the newly created jobs?
To be fair, all these economic crutches are set to go away in a few weeks — or will they? I tend to be a little skeptical when I consider the recent eviction moratorium extension or the extension on student loan repayments. In the end, I think it will likely all end badly, and we will be all-knowing in retrospect. Simply put, you cannot pay people to stay home and produce while everyone (working or not) still consumes the same amount and expect prices and supplies to remain the same. Once you have goosed demand while at the same time stifling supply, you will see elevated levels of inflation. (More on that below.)
Markets still flying high as New York's Gov. Andrew Cuomo resigns and confidence tanks
Although last week was a relatively slow one, we saw several new market records set. Markets shrugged off higher inflation data as well as political turmoil around the resignation of New York Gov. Andrew Cuomo. The inflation data showed a 5.4% year-over-year change in the Consumer Price Index (CPI), slightly below or in line with the consensus estimate of 5.5%. The market took that as a sign that inflation was slowing; I don't know about that because the 5.4% reading was the same as last month's. Maybe a better way to look at it is to say the rate of increase is slowing, but that's not quite accurate either.
Whatever the logic, the market wanted to go higher — and it did. Producer Price Index (PPI) came out the following day at 7.8% year-over-year, well above the consensus estimate of 7.3%. (Coincidentally, that was the actual number from last month. Funny how that works out every time, almost like the experts assume what happened before will just repeat.)
Officially, the PPI from the Bureau of Labor Statistics (BLS) is a family of indexes measuring the average change over time in the prices received by domestic producers of goods and services. PPIs highlight the price change from the perspective of the seller. Why is this important? If costs increase for the people making stuff, they will sell the stuff at a higher price to the buyer (CPI). In my view, the pace of inflation hasn't slowed as the CPI number indicated. Instead, the PPI tells us that inflation just paused for a moment and will continue to grind higher in the coming months.
Maybe consumers are beginning to tell us something. Amid all this talk of more government spending, some people not going back to work, the Delta variant, returning coronavirus restrictions, masks for kids in school, higher gas prices and inflation, people just aren't feeling right — and that may end up being the most important measure of all. The University of Michigan consumer sentiment number dropped a whopping 11 points last week, one of the largest drops on record and the lowest reading since 2011. Last month the reading was 81.2 and all the economic "experts" were predicting 81.3 this month.
Finally, last Monday embattled Gov. Cuomo announced he would resign and leave his post in two weeks. Hailed as a model leader in the early days of the pandemic, his fall from grace was blindingly quick. After the New York state attorney released a report that 11 women had been sexually harassed by the governor, Cuomo quickly lost support from members of his party. Lt. Gov. Kathy Hochul will take over, becoming the first female governor of New York.
Not that the harassment allegations were trivial, but a much larger scandal was the policy of moving COVID-infected patients into nursing homes housing the most vulnerable of the virus's victims and the potential coverup afterward. Markets shrugged off news of Cuomo’s resignation, viewing it as just one less thing that can go wrong. That may be true, but I feel justice was not done.
Coming this week
July retail sales will be announced Tuesday. Expectations are for figures to remain robust, and a significant slowdown could be troublesome for the economy.
Federal Reserve Chairman Jerome Powell will speak Tuesday, and we will get the minutes from the last Fed meeting on Wednesday. Either event could offer some insights that may upset markets.
Mortgage applications and housing starts will provide a glimpse into the state of the red-hot housing market. Will it still be ablaze, or has it begun to cool?
Leading indicators and a major bond auction will close out the week on Thursday.
Have a fantastic day!
Tom Siomades, CFA®
Chief Investment Officer
AE Wealth Management
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