Replacing one issue with another
There wasn’t a ton of economic data published this week, but we did get the latest read of the ISM Services Index showing the services sector grew in March for the 22nd consecutive month. Even though companies are still being impacted by capacity constraints, supply chain issues, and inflation, they are seeing the labor shortages starting to come off. At the same time, heightened geopolitical risks are adding another layer of complexity for a lot of businesses.
Moral of the story: The biggest takeaway for me from this report is the easing labor shortages – it basically means that supply of labor is starting to increase as COVID cases are declining and related restrictions are coming off. This also means that the price of labor is going to start stabilizing, which means wage growth is going to start stabilizing. If we don’t get inflation under control and wage growth comes off, it’s going to put a lot of Americans in a bind.
Despite labor supply pressures coming off, the labor market still seems to be steadily recovering from the pandemic as weekly jobless claims continue to hit lows. Last week, new unemployment claims fell to 166k, the lowest we’ve seen since November 1968.
Moral of the story: Jobless claims are considered to be a forward indicator of the labor market and this seems to still indicate that things are peachy keen for the American consumer as there are 5 million more job openings than people looking for jobs.
The big market-mover this week actually came in the form of Fed speak from a few different sources – first was Governor Lael Brainard’s commentary on Tuesday morning and the second was the first look at meeting minutes from the March meeting when the Fed raised interest rates for the first time in an effort to combat inflation. Brainard’s commentary highlighted the Fed’s prerogative to combat inflation with aggressive monetary policy by reducing the money supply in the economy and increasing interest rates. This was then further quantified by the meeting minutes that indicated the Fed wants to reduce the money supply by $95 billion each month and raising interest rates by 0.5% increments in the coming months, rather than the more gradual 0.25% we’ve seen historically.
Moral of the story: The last time the US was experiencing this level of persistent inflation was in the early 80s and the Fed had basically shut it down by also pushing the economy into a recession. The benefit today is that the labor market is really strong, which provides us a bit of cushion, but it’s no surprise that one of the biggest risks out there is that Fed’s aggressive correction here might drag us into a recession. This was top of mind for investors and markets pulled back as investors tried to digest this level of policy correction.