Approaching normal
Jobless claims increased last week by 4k, but still remain at a relatively low level compared to what we’ve been seeing in the last 18 months. Unfortunately, the resurgence of COVID cases across several states has resulted in restaurants, hotels, and other services industries feeling some additional pressures but most employers are actually still trying to hire more workers in anticipation of this wave of cases passing by in the (hopefully) near future. Continuing claims, which are more indicative of a steady “unemployed” number is down to 2.86m, which is a pandemic low.
Moral of the story: The fact that COVID cases began approaching prior peak levels but the new jobless claims effectively stayed flat means that we’re probably past massive disruptions in the labor market and getting closer to a normalized labor market. It also likely means that the jobs that were easy to recover have already been recovered, the rest of the recovery is going to be a little more challenging to achieve.
Holy inflation
Consumer spending just slightly increased for July, up only 0.3% as rising COVID cases took a toll. The Fed’s preferred measure of inflation, the PCE Index, came in at 4.2% in July, up from 4% in June, and the highest reading since January 1991. Stripping out volatile components, core inflation still came in at 3.6% for the month, the highest level in almost thirty years. Adjusting for inflation, consumer spending actually decreased 0.1% in July. The biggest spending categories continued to be in the leisure and hospitality space (dining out, vacations, etc.) Despite COVID-related unemployment benefits rolling off, incomes increased 1.1% for July because of the new child-care tax credit that was received by young families – totaling almost $170b in annual subsidies.
Moral of the story: Consumers are still sitting pretty with an elevated amount of savings and an appetite to spend that money, keeping the economy chugging along. But this elevated level of inflation most acutely impacts those at the lower end of the income spectrum – the Fed will have to skillfully manage bringing back jobs with inflation to avoid really hurting a large part of the population that’s feeling the pain of food, gas, rents, and many other necessities skyrocketing in prices.
Jackson Hole
Fed Chairman Powell’s speech during the Fed’s annual Jackson Hole symposium was the most anticipated economic update of the week. As largely expected, Powell indicated that the central bank is likely to start pulling its foot off the gas pedal before the end of the year, but raising interest rates was still far off in the future because employment still has a meaningful recovery ahead despite the higher inflation (which they’re still expecting to largely be temporary).
Moral of the story: Markets reacted positively to Powell’s speech on Friday morning as stocks hit new record highs and bond yields pulled back slightly. In the past, tapering from the Fed has resulted in negative reactions from the market (aka taper tantrums). But Powell has somehow managed to thread the needle carefully enough to avoid that so far, let’s see how things progress with the resurgence of COVID cases, but the Fed easing off accommodative policy means the economy is recovering well.