The April Jobs Report Looks Better… But Inflation Is Still Accelerating

Published by Matt Warder on May 6, 2021

Tags

Thursday morning’s employment data was certainly encouraging to the market.

Initial claims fell to a new pandemic low — coming in well under expectations at 498,000. And while continuing claims came in a little higher than anticipated, total persons claiming unemployment actually fell by a roughly equal amount.

Source: Bloomberg

Of course, we’re far from out of the woods yet, as total unemployment remains 34% above peak levels during the Global Financial Crisis.

Source: Bloomberg

But the overall economic trajectory remains positive nonetheless, with this morning’s Challenger Job Cuts figures down over 96% year-on-year as last year’s all-time high provided an easy comparison due to base effects. But on an absolute basis, one has to go all the way back to the year 2000 to find a lower monthly number.

Source: Challenger Gray, Seawolf Research

Moreover, hiring continues to improve, as indicated by accelerating job postings on Indeed.

Source: Indeed

And one of the results we’ve seen recently is an uptick in middle-class savings in relation to the upper class — which last year’s lockdown had already rendered ridiculous.

Covid-19 Savings Stockpile Could Accelerate Economy—if Consumers Spend It - WSJ

Source: Federal Reserve

That’s interesting to us, because those well-to-do folks with exorbitant savings already deployed a ton of that money into the market, driving up literally everything from housing to durable goods to trucks to exercise equipment by 4% on average.

Source: The Daily Shot

And companies have been happy to charge them full freight, as shown by net margins reported within the S&P 500.

Corporate America Rides Wave of Inflation to Record Profits

Source: Federal Reserve

And the amalgamation of all that activity is basically what pushed U.S. Gross Domestic Product (GDP) up by 6.4% in Q1.

Source: Bloomberg

Let’s think about that for a moment.

The economy grew at 6.4%… But prices inflated by 4.1%.

Now we have unemployment improving, jobs ramping up, the population getting vaccinated, businesses reopening, the government continuing to spend…

And both middle- and lower-class people will be out there spending those savings on stuff that now costs a whole heck of a lot more.

I talked about this very idea — called the Cantillon Effect — all the way back in August.

Back then, I said “any change in relative prices occurs because the change in money supply has a specific injection point and therefore a specific flow path through the economy. The first recipient of any new supply of money — in this case, wealthy people and corporations — is in the convenient position of being able to spend this money before prices have increased.”

“But whoever is last in line — in this case, the middle and lower classes — receives their share of this money after prices have increased. That means the Fed should be monitoring a heck of a lot more prices than the “basket of goods” that comprises the Consumer Price Index.”

Since that time, here’s what commodities have done on a percentage basis:

Source: Bloomberg

Nickel is up 18%, wheat is up 25%, power prices are up 27%, copper is up 50%, soybeans are up 52%, iron ore is up 70&, oil is up 76%, corn is up 91%, thermal coal is up 101%, steel is up 117%…

And lumber — powered by all those wealthy people driving up the real estate market — is up a staggering 324%.

And yet just last week, Federal Reserve Chair Jay Powell told “60 Minutes” that this bout of inflation was “transitory”.

Part of the reason he likely thinks he can continue to tell blatant lies like that one, is due to a comparatively low rate of change in the Consumer Price Index (CPI) of “Shelter.”

Source: Seawolf Research

This figure comprises roughly one-third of the calculation for the overall CPI, which is the Fed’s preferred metric to track inflation. So, when this figure declines, it has an outsized effect on the Fed’s policy stance.

But more importantly, when owners don’t know the answer to the CPI survey question, “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?” The CPI calculation records it as a zero.

And let’s face it, who knew what the New York City rental market was going to look like in January?

This YoY percent change number of 1.7% is clearly, without a doubt, artificially low.

But the CPI Shelter is most assuredly going to rip higher alongside commodities when New York City fully opens up, for instance, and folks begin to head back into the office.

But it won’t be done there.

Housing inventories are at an all-time low.