Hello, summer

Meeting in the middle 

Democrats and Republicans have been going back and forth trying to find a middle ground for Biden’s original $2.3T proposed infrastructure plan. Republicans came back this week with a $928B plan, further narrowing the gap the Democrats’ latest $1.7T number. Biden wants to do this on a bipartisan basis, but it is possible to send this through reconciliation without Republican support. 

Moral of the story: The biggest hurdle, imo, is that there isn’t clear alignment on what “infrastructure” means to both parties – while Biden’s trying to solve for everything from roads and bridges to healthcare, others view infrastructure as more of a “roads and bridges” kind of thing. Once this plan does get passed, however, there is going to be a big boost in demand coming for whatever group of “infrastructure” industries get packaged into this deal.

Hot vax summer 

Consumption is finally doing what we had expected as the economy reopened – spending is shifting from goods (home goods, appliances, electronics, etc.) to services like dining out, traveling, etc. as consumer spending increased 0.5% for April. Consumers were funding this spending through their savings, which fell slightly to 15% but still remains 7% higher than pre-COVID levels. The increased demand for consumption pushed the core PCE index (the Fed’s preferred measure for inflation) to a 3.1% annual rate in April, which is much higher than the Fed’s 2% target. 

Moral of the story: Consumers have really ramped up savings through COVID and are sitting on nearly $2T incremental savings today than if the pandemic had never happened. We are just at the beginning of the hot vax summer and expectations are for consumption and (in conjunction) inflation to stay equally hot.

Still trending lower 

Jobless claims continue to trend lower with 406k new claims filed last week, down from 444k last week and below expectations for 425k. This number is likely to trend lower as several states have started shutting down their extended unemployment benefits programs as the economy is widely reopening. 

Moral of the story: Until the federal unemployment benefits run out in September, it’s unlikely for jobless claims to truly get back to pre-COVID levels. At that point, however, the labor market is likely to see the return of nearly 2m workers (mostly women) who left the workforce to care for their children or elderly at home. I’m not convinced that there is enough demand in the labor market to absorb that upcoming influx of supply… 

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