Just keep swimming

Taking a wrong turn 

In an unfortunate turn of events, it seems like the labor market recovery has halted and even slightly reversed. Last week, new unemployment claims increased for the fourth week in a row. New jobless claims under the state and federal programs increased to 1.69m last week from 1.59m the week before. More concerningly, continuing claims also increased slightly to 13.4m, which was the first time this measure has increased in the last five weeks. 

Moral of the story: This could be driven by the return of federal unemployment benefits ($300/wk by executive order) or could be indicative of a new wave of layoffs as businesses try to minimize costs. As much as we miss life pre-COVID, we’ve pretty much figured out “normal” for the time being – much of the economy has opened to facilitate this new normal but jobs haven’t recovered at the same pace, which is less than ideal.

All the student debt

Consumer borrowing increased in July for the second month in a row, but it was boosted by big-check items like cars and college tuition. This increase comes on the back of a 20% drop in the use of credit in April during peak COVID-19 crisis. Reading past the headline number, borrowing on revolving lines of credit (aka credit cards) decreased for the fifth straight month. 

Moral of the story: Even though credit card usage is declining, the rate at which it’s declining is slowing, aka people might be returning to “normal” credit card spending as jobs and spending **slowly** return. The biggest surprise has actually been the spending on cars – typically auto sales are very cyclical – they rise and fall with the economy. This time, low borrowing rates and a summer full of road trips has given an unexpected boost to the auto industry. 

Lower for longer

The cost of goods and services (inflation as measured by CPI) increased again in August to an annual rate of 1.3% (from 1% in July). The strength in the auto industry extended into this economic metric as well – 40% of the increase in August inflation was driven by the cost of used cars and trucks increasing at the sharpest rate we’ve seen in 51 years. Core inflation (excluding food and energy) increased to an annualized rate of 1.7% in August (from 1.6% in July). 

Moral of the story: If you remember the Fed’s inflation policy change, we’re still far from their 2% average target. The issue today is that companies just can’t afford to raise prices much with the economy still in recovery and millions out of work – and that’s probably not going to change until we see some meaningful improvement in the labor market. 

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