Data from the prior week continued to highlight how supply constraints across the economy are putting upward pressure on prices. There are some signs that this could eventually impact economic activity. Some states are making changes to their unemployment policies that may cause supply to increase and bring down continuing jobless claims.
Markit provided updates on their flash manufacturing and services PMI reports for May. Both were at record highs and reported the same trends from prior months of strong new orders, backlog growth, and supply constraints causing delays. This led to record input prices on the services side and the highest since July 2008 for manufacturing. Demand continues to be strong as output (sales) prices also rose at a record pace for services and manufacturing. The same was true for the regional reports as the Empire State Manufacturing update reported the highest prices paid and received on record while the Philly Fed reported the fastest input and output prices growth since the early 1980s.
The manufacturing update had some potential warning signs if supply constraints continue. Employment growth slowed to the lowest level in five months and confidence levels declined to the lowest in seven. Both declines were driven by supply concerns leading to lost business from an inability to meet orders.
Supply constraints are also having a material impact on the housing market. Single family housing starts declined by 13.4% on an annualized basis and building permits declined by 3.8%. Part of the slowdown could be driven by lack of supply and an inability to effectively price out a project.
Existing home sales declined for the third consecutive month to the lowest annual rate since June 2020.
A slowdown in sales and building are likely making the supply situation worse as months available supply remains under two and half and houses are staying on the market for under 20 days. Nearly 90% of houses in April 2021 sold in under 30 days.
The lack of supply is likely causing prices to increase at a record pace and to a record level.
Looking at the labor front, total continuing jobless claims declined by close to 900,000 to just under 16 million. This is a positive development but still a very high level. Some argue that the economy has reopened to a point that the emergency unemployment policies put in place during the pandemic are no longer necessary and are holding back the pool of potential workers. There are 21 states that will be ending these policies during the month of June, ahead of the September 6th date included in the most recent federal stimulus bill. Over the next 30 days, these states will be ending the additional $300 per week federal enhancement to state-based unemployment, curtailing the extended benefits which allows people to stay on unemployment after the state benefits expire, and ending the pandemic unemployment assistance that applied to workers not usually eligible for unemployment.
We will be monitoring the impact this may have on the consumer in terms of employment, income, spending, sentiment, and if employers’ view of the labor market supply has improved after June.
While supply constraints continue to persist and there is the potential for this to pull down growth, the financial market signals we reviewed last week are not pricing in that risk at this time.
Vice President, Research and Strategy
Boyd Watterson Asset Management, LLC
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.