Reade Pickert

Inflation brews for US producers while services wages pick up

Inflation continues to brew in America’s industrial heartland as growing materials shortages cascade into record-long delivery times and leave manufacturers struggling to keep pace with an energized economy. As producers attempt to navigate supply-chain pitfalls for the commodities necessary to produce their wares, wage growth is beginning to percolate. A recent Labor Department report showed the largest quarterly increase in worker pay at companies since 2003. This combination of higher labor and materials costs will probably lead to a bigger pickup in consumer inflation at a time when monetary and fiscal policies are conducive to faster economic growth. Colgate-Palmolive Co., food and beverage maker Mondelez International Inc. and Kimberly-Clark Corp. are among a growing number of companies raising prices. While Federal Reserve Chair Jerome Powell says the central bank views the shortages in materials and supply-chain challenges as temporary, companies are saying the constraints will linger, possibly into 2022. The Labor Department releases April inflation data on May 25. The following charts highlight the latest developments in materials shortages, delivery times and wages: Longer lead times are one of the clearest indications of the supply-chain challenges that producers face. Wait times of factories for production materials grew to 79 days in April, the longest in records dating back to 1987, according to the latest Institute for Supply Management data. The average delivery time of supplies for maintenance, repair and operations was also the longest in ISM data. Such delays have inflated order backlogs to record levels and kept a lid on a breakout in production growth. The ISM’s monthly reports also provide a clear indication of a growing number of commodities in short supply. In November, purchasing managers listed just 8 materials companies were struggling to get their hands on. Five months later and it’s expanded to 24. While some things like personal protective equipment and gloves have been in short supply for months, others like aluminum, wood pallets and rubber-based products are new additions to the list. Meantime, companies largest cost — labor — is accelerating as the lifting of coronavirus restrictions leads to a broader pickup in economic activity. The government’s latest employment cost index, a quarterly measure of compensation, showed wages in the private sector climbed in the first quarter by the most in 18 years. Most economists prefer the ECI because, unlike average hourly earnings in the monthly jobs reports, the worker-pay data aren’t distorted by the compositional changes in employment that have been particularly severe amid the pandemic. The overall ECI, including government workers, registered the biggest increase since 2007. Despite an elevated unemployment rate, many firms have cited troubles finding qualified workers. As a result, some are offering incentives like signing bonuses and boosting wages to attract applicants. Some 28 percent of small businesses reported raising compensation in a March survey by the National Federation of Independent Business. Increasing vaccinations have also allowed more Americans to head back to their favorite restaurants or begin traveling again. For service providers, that means hiring more workers. That will only increase amid projections for a wave of pent-up demand. But it’s been challenging to attract workers, which may reflect lingering child care obligations and enhanced unemployment benefits. The more generous jobless insurance and two latest rounds of pandemic-relief checks have given some workers the opportunity to be more selective about which job they take. These factors may help explain a big increase in first-quarter wages for service providers. The 1.3 percent gain was the largest quarterly gain in two decades of record keeping.

US recovery’s surprise strength linked to aid, quick reopening

The U.S. economic recovery’s strength has consistently surprised over the past several months, thanks in part to steadfast consumer finances that were underpinned by robust government aid and ultra-low interest rates. Three months ago, economists were penciling in third-quarter growth at an annualized 18 percent. The latest Bloomberg survey of economists now shows a median projection almost double that — a record 31.8 percent pace — for the report due Oct. 29. Even with such an outsize quarterly improvement, the economy still has its work cut out for it as the value of output will remain below the previous peak of $21.7 trillion at the end of 2019. Unemployment is more than double pre-crisis levels and COVID-19 is expected to restrain growth for months and possibly years to come. A confluence of factors, though, helps explain why economists underestimated the rebound so far. For starters, some states’ COVID-19-related business lockdowns were lifted within weeks rather than months, allowing for a quick rebound in retail sales. The government’s response — particularly in sending many Americans $1,200 stimulus checks in April and adding $600 PER week to unemployment benefits for several months — was also key and may have been more effective than first estimated. In addition, American households had more savings as income growth outpaced spending even after subtracting government assistance. Moreover, the rapid changes to the economy spurred analysts to rely increasingly on data from so-called high-frequency indicators such as restaurant bookings and mobile-phone movements. That allowed a more real-time picture of the recovery but also made forecasting trickier for analysts accustomed to computer models that incorporate traditional indicators. The high-frequency data have “given some head fakes here and there,” said Brett Ryan, senior U.S. economist at Deutsche Bank AG. Total receipts at retailers are well above their pre-pandemic levels, while single-family housing starts and previously owned home sales are the strongest in more than 13 years. Regional manufacturing data show orders continue to mount, in part because inventories were drawn down to lean levels. Record-low mortgage rates are driving demand in the housing market, but it has also enjoyed a shift in Americans’ living preferences — leaving city centers in favor of the suburbs and roomier homes that can also double as personal office spaces. “People were not sufficiently upbeat about the consumer,” said Stephen Stanley, chief economist at Amherst Pierpont Securities, who now sees 34.1 percent third-quarter growth after forecasting 18 percent in April. “There were a lot of concerns that the fiscal stimulus in the spring boosted consumption temporarily and that as soon as that flow of money stopped that the consumer would stop spending.” To be sure, the economy is projected to settle back into a more moderate growth pace through the end of the year. A resurgence in coronavirus cases and the extended deadlock over fresh stimulus threaten to limit further gains, while the timing and effectiveness of COVID-19 vaccines remains uncertain. Even so, some measures help explain just how much analysts have underestimated the economy’s progress. Surprise indexes from Citigroup Inc. and Bloomberg — which measure the degree to which analysts under- or over-estimate trends — have been consistently positive since early June. “Retail sales, industrial production, the PMIs, earnings, employment have all performed better than we had expected. So it’s a pretty broad-based gain,” said Stan Shipley, an economist with Evercore ISI. Shipley added that plenty of the economy’s outperformance has roots in government stimulus. The biggest surprise of all came earlier in the pandemic. The May jobs report in early June showed employers added 2.5 million workers to payrolls, compared with a median projection for a loss of 7.5 million. Economists were wrongfooted by jobless-claims numbers that showed millions of Americans losing their jobs; they missed the greater number who were being hired or rehired. Since then, the unemployment rate has also declined faster than forecast, though September’s payrolls gain of 661,000 trailed projections. Jobless claims remain above their pre-pandemic levels — worse than expectations for a steeper decline by now — and the number of people who are permanently out of work is at a seven-year high. At the same time, the latest retail sales data were surprisingly solid: Purchases increased 1.9 percent in September, the most in three months and exceeding all but three of the 75 estimates in the Bloomberg survey. “People just got too pessimistic on the economy,” Joseph Lavorgna, special assistant to President Donald Trump and chief economist at the National Economic Council, said in an interview last week. Government policies “are very successful, growth has come roaring back” and virus treatments will boost the economy further, he said. Democratic challenger Joe Biden, for his part, said during the Oct. 22 debate with Trump that to help the economy, he would seek to limit virus transmission through targeted shutdowns and distancing measures. Biden also highlighted getting money to schools to help them reopen. Whoever wins the presidential election will have more work to do on the economic recovery even if the data continue to surprise on the upside.
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