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Employment Reports Greatly Disappoint While Price Increases Apply Inflationary Pressures

U.S. job growth, as reflected in the Labor Department’s monthly nonfarm payrolls and unemployment report, diminished substantially in April from March, reflecting the difficulty that many large companies and small businesses are having in attracting workers. With the consensus forecast for an additional one million new jobs in April, payrolls only rose by 266,000 after a downwardly revised number of new jobs in March by 140,000, to 770,000. The unemployment rate increased from 6.0% in March to 6.1% in April, though the labor force participation rate increased, which was one economically positive piece of news in this report. This disappointing print leaves overall employment still 8.2 million short of pre-pandemic levels.

Seemingly counterintuitive to the weak employment numbers, prices throughout the economy are rising, and inflation indicators are gaining due chiefly to supply bottlenecks and logistical gridlocks. Tight inventories of key input materials, such as semiconductors, steel, lumber, corn, and cotton are contributing to rising costs and prices across various survey data. Manufacturers are reporting record backlogs and higher input prices as they scramble to replenish stockpiles and keep up with accelerating consumer demand as the American economy turns back up, fueled by record fiscal stimulus and a dampening of the coronavirus pandemic.

The number one question that policy makers, from the White House and Congress to the Federal Reserve and the Treasury, and market participants is whether these current and expected future price increases self-correct or if they stubbornly sustain. Most policy makers, except for Republicans in Congress, anticipate that inflation increases will prove to be “transitory”, a word that is currently overused in lieu of temporary, while investors across most asset classes are at best uncertain, if not wholly dubious on the future of fiscal spending, inflation, and higher interest rates.

Immediately following the surprising low jobs report Friday, the bellwether ten-year Treasury yield immediately fell from 1.575% to 1.485%, or by nine basis points (0.09%), after starting the week at a high of 1.65%. The note settled back on the day to its recent range of 1.55% to 1.60%. This represents a 16.5 basis point (0.165%) move in the ten-year yield over the week, a significant five-day range of movement, and hence volatility, given the low absolute level of rates.

On the shorter end of the interest rate curve, one-month and three-month USD LIBOR rates dropped to record lows of 0.09513% on Thursday and 0.15988% on Friday, respectfully. Treasury bill yields are less than 1 basis point (0.01%) for tenors of three months or less, while Treasury yields are zero for tenors of three weeks or less. This is all due to the unprecedented amount of cash in the money market system that is failing to find a home and causing significant capital costs to banks who, in some cases, are actually refusing deposits.

The labor market shortage

Small and large businesses alike say they are having a tough time getting low-wage workers to return to jobs lost during the pandemic. In fact, 42% of small businesses claim to be unable to fill all the positions they are seeking. However, many of these requested roles are for undesirable part-time, and not full-time, roles.

The knee-jerk response to this dilemma is to place blame on the American Rescue Plan Act of 2021 (a.k.a. The COVID-19 Stimulus Package or The American Rescue Plan) which provides for supplements to state unemployment insurance and stimulus checks. Research done at the height of the pandemic crisis last year, when $600 supplements to weekly pay were twice the $300 supplements that currently apply, proved this proposition to be wrong. While there certainly is a number of out of work Americans who chose to remain at home and collect unemployment benefits, the vast majority of the lowest paid workers, who benefit the most from the supplements, value work more than temporary payouts. Current supplements last longer this time around and could interact with the other hurdles workers face that deter their return.

There are several reasons for the reluctance for many unemployed to return to work. Fear is a major obstacle. Jobs in indoor venues, such as restaurants and bars, remain among the riskiest for workers to contract more contagious variants of the virus. These potential workers are wary of returning until they can be assured that they and their families will be safe. That cannot happen until they get widespread access to vaccines, which has only just begun to occur. Then, they will have to wait for the two to six weeks it takes for the vaccinations to hit their full efficacy. That means that many workers may not feel safe to return to work until June.

Another major roadblock is childcare. Many parents, mostly mothers, still have kids learning online instead of in school. They cannot leave those kids home alone to return to work. Summer programs could allow them more options to work, but we may not see a real return of some parents until schools can fully reopen in the fall. Extended unemployment insurance supplements will lapse in early September, the same time most kids should be back in school.

Other workers are suffering the physical long-haul effects from COVID, which is limiting their ability to work. Sadly, COVID cases were highest in the same communities hit hardest by COVID layoffs. Some people have developed a fear of leaving their home, which further diminishes the potential labor pool. It will take years to understand the full physical and mental health effects of the pandemic.

Retail behemoths, such as Amazon, Walmart, and Target that have grown dramatically during the pandemic, have announced wage increases to induce more needed workers. This is increasing the competition for workers. Many of the unemployed would rather accept work in stores or warehouses, where masks are mandatory and social distancing is more prevalent, rather than at restaurants or bars.

Lastly, retirements by older baby boomers have accelerated since the onset of the pandemic. It is unclear if these workers will return. If they do not, in the long run immigration reform will be required if the economy is unable to fill the holes in the labor market created by aging.

Initial jobless claims continue to fall

First time claims for state unemployment insurance for the week ending May 1st came in at 498,000 claims, the first time it has fallen below a half million and the new low water mark since the onset of the pandemic-induced economic collapse. Expectations for this report called claims to reach 539,000 for this reported week. Continuing claims ticked higher, rising by 37,000 to just below 3.7 million.

At any other time in history, a weekly jobless claim report of nearly a half million would have been a sheer catastrophe. But, coming off the high of over six million in April of last year, this declining level is very welcome. Nevertheless, combined with Friday’s nonfarm payroll report, these initial and continuing jobless claim numbers certainly indicate the economy still has a way to go in re-employing workers.

With unemployment insurance supplementary income lasting until September, the current level and rate of vaccinations, and study at home students returning back to school slightly before or after Labor Day in most parts of the country, major leaps in employment gains may be deferred until late summer or early autumn.

Treasury Secretary Janet Yellen’s snafu

Earlier this week, Treasurer Yellen committed a rookie (which she certainly is not) mistake. Yellen suggested in an interview with the Atlantic, recorded Monday and broadcasted on the web Tuesday morning, that the Federal Reserve might have to raise rates to keep the economy from overheating if the Biden administration's roughly $4 trillion spending plans are enacted. This obviously sent the bond and equity markets into a tizzy.

However, later in the day, Yellen was quick to clarify her comments by stating that that she expects any near-term increases in inflation will be temporary. She echoed remarks consistently made by Federal Reserve Chairman Jerome Powell that the central bank is not worried about a persistent rise in inflation and that he expects that price increases over the coming months will subside without any required Fed action.

The selloffs in the bond and equity markets corrected following this clarification.

Some economists, including former Treasury Secretary Larry Summers, have warned that the surge of federal spending this year stemming from March’s $1.9 trillion COVID relief package alone could prompt unwelcome inflation, let alone the additional proposed spending on the table.

Yellen said she expects to see some price pressures over the next six months, largely due to supply-chain bottlenecks, higher energy prices, and a near-term demand for workers as normal economic activity resumes. But she said she disagreed with Mr. Summers that the relief package would overheat the economy.

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