Goldilocks and the three bears

All the confidence in consumers 

Consumer confidence increased to 127.3 for June, its highest level since February 2020, driven by the improvement in the labor market and optimism about the economy reopening. Consumers are showing strong demand for not only services as travel demand surges but also continued spending on capital goods (cars, appliances, etc.) and homes.

Moral of the story: Consumer savings increased an incremental $2T during the pandemic and people are ready to spend. Consumer spending, which accounts for nearly two-thirds of the economic activity in the US, was largely focused on goods during COVID since services were basically all shut down. What this month’s survey shows is that even though the resurgence in spending for services (dining, travel, etc.) is happening in a big way, consumers are still likely to continue spending on goods as well, which should continue boosting the manufacturing industry. And despite the home price appreciation we’ve already seen in the last year, it seems like consumers are still looking to buy homes, which means that home prices are likely to continue increasing for the foreseeable future.  

Where are the people 

ISM’s June manufacturing index indicated the 13th consecutive month of growth for the manufacturing sectors coming in at 60.6 (any number above 50 indicates an expansionary environment). However, this is a deceleration from last month’s reading of 61.2 and indicative of the continued supply chain issues – record-long material lead times, wide-scale shortages of basic materials, rising commodity prices, difficulties with transportation, and labor shortages that are all making it difficult for suppliers to keep up with the increasing levels of demand. 

Moral of the story: The employment component index was the only component that fell below 50 this month, indicating a contraction for the first time in six months. Absenteeism and difficulties in filling job openings are major issues that are limiting the growth potential in the manufacturing industry. Once unemployment benefits run on this fall, I would expect the labor shortage in the manufacturing sector to become less of an issue. Until then, this unfortunately means we’re going to see additional inflationary pressures as demand is exceeding supply across the manufacturing industry.  

Just right 

We added 850k new jobs last month, coming in stronger than expectations for 706k new jobs. The May number was also revised up 24k to 583k. The unemployment rate, however, increased to 5.9% despite the labor force participation remaining unchanged. The hospitality industry continues to be the biggest contributor to job gains as we’re seeing the pent-up demand materialize for bars, restaurants, hotels, etc. 

Moral of the story: Markets reacted positively to this news as it was really a Goldilocks type of number – strong enough to demonstrate a good recovery but not so strong that it created worries about the economy overheating. We’ve recovered 15.6m jobs lost during the pandemic but still have another 7.1m left to recover in order to get back to pre-COVID levels. 

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