Commentary Directory

The Week Behind

US economic news last week gave us a lot to digest with several reports continuing to document the pace of the recover. Notably, the JOLTS and productivity and costs reports gave another glimpse of the labor market (after the booming jobs report) and CPI and PPI prints updated the inflation scoreboard. It was more of the same theme: demand from reopening continued to outstrip the ability of businesses to satiate it. However, last week the discussion of the economy felt less centered on these key indicators as concerns over the Delta variant dominated the headlines. Indeed, Wells Fargo downgraded its outlook for Q3 and Q4 GDP (projections down -1.9% and -2.0%) and even its full year view (projection down -0.8%). Regardless, let's dive in anyways.

The JOLTS report showed another record high in job openings as it surpassed expectations. Hires took off while separations rose only on increased quits. Evidence continued to point towards workers moving around and taking advantage of the tight labor market. The largest jump in openings was in the professional and business services sector (227,000) which almost doubled the struggling accommodation and food services sector (121,000) that is still bouncing from COVID lows. The sectors were flipped in the July jobs report with the former adding just 60,000 jobs while the latter added 380,000. The dynamics in these sectors represent the two labor trends present in the post-COVID economy:

• Businesses posting new job openings for jobs that were unfilled previously due to depressed activity. These businesses are seeing large positive employment changes due to low quit rates (accommodation and food services: 40k quits vs 122k hires in June).
• Businesses posting job openings for newly vacant positions. Job gains are mostly net neutral here because it involved a quit and a hire (professional and business services sector: 106k quits vs 246k hires in June).

With job openings at all-time highs, one would expect wages to be tracking high as well. That does not seem to be the case. The Productivity and Costs report for Q2 2021 showed that unit labor costs for all firms were up just 0.1% YoY as hourly compensation grew 2.0% YoY, just barely above productivity up 1.9% YoY. Manufacturing unit labor costs actually fell -5.8% YoY as output surged 16.5% YoY while hourly compensation was only up 0.6% YoY. However, the comparison was at least partly affected by low bases in Q2 2020 when government support (ex PPP program) was put in place to preserve the paychecks of workers despite lower output (and therefore productivity). This report suggests that inflation is not being driven by labor costs directly. Instead, it's possible that the disappointing growth in compensation (see negative real hourly compensation in Q2 2021) is discouraging potential workers from entering a very tight labor market.

Speaking of inflation, we got a double dose of it this week with the PPI and CPI releases. Businesses continued to see hot prices with another monthly gain of 1.0%. That makes 7 straight months of monthly gains over 0.7%, a truly robust period of consistent price increases. Core PPI is now up to 6.1% YoY, the highest since August 2014. There was an interesting divergence between core processed goods and core unprocessed goods. Nonfood unprocessed materials less energy were flat 0.0% MoM in July and 0.9% MoM in June after a 9.3% MoM jump in May. Processed goods less foods and energy, on the other hand, remained hot, notching another monthly gain above 1.5%. It seems that commodities are rotating away from their extreme rise in prices while propagations of those previous price increases are still lingering in processed intermediate goods. A good step towards "transitory" inflation is input prices peaking and beginning to level off. Lumber was the first commodity to do that, and more could follow. For now, inflation persists.

And of course, the report that everyone was watching (including Chair Powell), the July CPI report. We've peaked? We might have peaked. Headline CPI recorded its lowest monthly gain since Feb at 0.5% and, notably, used car prices grew just 0.2%. While it's a good step toward easing, there really is still no actual easing in auto prices yet. Transportation commodities still grew 1.0% and were up 19.8% over a year ago. While the movement in auto prices may support the narrative that inflation is here for longer, moderate Services (less energy) CPI growth of 0.3% MoM to just a 2.9% YoY move suggests inflation from reopening is a lot tamer than we think. Service spending has been the category of spending most sensitive to the pandemic, so it should see larger price increases as consumers start ramping up service spending again (as they have in the summer). Service inflation has actually been more in line with the framework set by the Fed which has said it is pushing for inflation above 2.0% to make up for periods below the target. This is probably what has the Fed leaning more dovish despite good shortages pushing the headline index up.

Chart of the Week

Inflation, as measured by Core CPI and Core PCE Price index, is streaking above 2.0%. A comparable period of short-term inflation following a recession occurred in late 2011 and early 2012 and lasted 10 days (as measured by Core CPI).

The Week Ahead

Retail sales and industrial production for the US come out this week alongside some real estate indicators in NAHB Housing Market Index and housing starts. More current developments on the Delta variant will also be observed as many are still waiting to see if the outbreak will be "transitory" like it was in the UK. Meanwhile, equity indexes remain near all-time highs and VIX at a near-term low.