The dip that kept dipping

Waiting for the roaring twenties

The manufacturing industry posted its ninth straight month of expansion in February as the ISM Manufacturing Index came in at 60.8, which is 2.1 points higher than January. Optimism across business leaders in the industry is increasing overall as demand is expanding. The services industries, which make up a much bigger part of the US economy today, hasn’t seen quite as smooth a recovery (you don’t need me to remind you that it’s been over a year since you’ve gone out for an appropriate celebration of brunch with friends on a Sunday). The ISM services index actually fell to its nine-month low in February. The silver lining is that this wasn’t caused by a lack of demand, but actually from shortages or delays in their supply chains and is likely to be temporary. 

Moral of the story: The manufacturing industry has survived 2020 in large part because our consumption has been forced to shift from services to goods because services have been shut down. But, the expectation is for most of us to be vaccinated by mid-summer and living life as normally as possible after living like Gollum for the last year. A return to normal means a resurgence of the services sectors. We’re probably about to enter the roaring 20s irl and it means good things for consumption, which means good things for economic growth.    

Starting back up 

The big report of the week was the February jobs report that showed we created 379k jobs in the month and the unemployment rate fell to 6.2%. This report was well ahead of expectations. A big part of the hiring we saw last month came from the hospitality sector, which alone added 355k new jobs across bars and restaurants, hotels, amusement parks, casinos, and other recreational businesses. However, even after these job gains, the hospitality sector is 3.5m short of its employment levels pre-COVID. 

Moral of the story: After the holiday-induced surge in COVID cases forced many regions to impose government-mandated shutdowns, employment recovery had started to backslide. But between falling cases, vaccine distribution, and warming weather, this jobs report is the first indication of the employment recovery resuming. Even then, there are still 8.5m more unemployed people today than pre-COVID so we’ve still got a long road ahead.  

Investor tantrums 

I thought I was buying the dip last week, but the dip kept dipping this week as investors continued the shift toward “reopening” stocks. For example, the energy sector (struggled throughout 2020 because oil prices were low, nobody was traveling so there was less demand for oil) is up over 38% this year as investors are starting to see travel return in the near future. At the same time, the tech sector (benefitted from more people living and working virtually) is down 1.3% this year as it’s not expected to benefit in the same way from a return to normal. And when you add rising interest rates and worries about higher inflation to the mix (like we discussed last week), it creates a recipe for lots of volatility in the markets. 

Moral of the story: Rising rates indicate improving economic conditions but also means the market is adjusting to the concept of having to pay to borrow money today, whereas last year they could do it effectively for free. It’s only natural that investors are not pleased about this, but they’ll get over it soon enough. Separately, the rising inflation issue could be a worry and it’s the Fed’s job to get that under control. But based on Chairman Powell’s commentary this week, it doesn’t seem like the Fed is going to drift from its accommodative policy anytime soon (which wouldn’t control higher inflation, so investors were not pleased). Are you sensing a trend? TGIF. 

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