February’s employment report showed strong gains in the most beleaguered areas of the economy, with the leisure and hospitality sector adding 355,000 of the 379,000 total jobs created. The unemployment rate fell slightly to 6.2%, while the participation rate held steady at 61.4%. We also saw an upward revision to last month’s employment number from an initial 49,000 to 166,000, bringing the two-month total to 545,000 jobs added. The latest report was even better than indicated, as winter weather hampered construction jobs in the Midwest. The increased pace of vaccinations right in time for the summer travel season could lead to a substantial recovery in employment by mid-year.
The economy shows signs of picking up steam in both the manufacturing and services sectors of the economy. The latest ISM data shows expansion in both surveys, with manufacturing at 60.8% and non-manufacturing at 55.3% (Values greater than 50% indicate growth). The latest round of stimulus check is hitting consumers’ bank accounts, which pushed January income growth to 10%, yet spending remained constrained at 2.4%. As with the employment figures, the picture is better than the numbers imply. Economic growth remains muzzled by supply chain constraints, particularly by a dearth in semiconductor inventories. This will be rectified in the coming months, putting economic growth into territory not seen in decades in the US. The latest consensus estimates call for 5.5% GDP growth this year and 3.8% in 2022, but recent upgrades call for upwards of 7% and 5% growth for this year and next.
Inflation remains our number one concern over the near to medium term. The latest consumer inflation numbers show a manageable 1.5% level, but there are clouds building on the horizon. The latest ISM reports showed the highest prices paid for producers since 2008 and could make their way into consumer prices if not offset by productivity gains or margin compression. Additionally, companies are offering higher wages to bring back workers, and this trend is likely to intensify over the coming months as the businesses reopen. Medium- and long-term inflation-protected bonds are pricing a manageable 2.3% inflation rate, but we could see a bit of a spike over the shorter run as higher wages, excess consumer savings, along with base effects risk higher inflation prints.
Bottom Line: The recovery appears to be accelerating as businesses reopen, and expectations of speedier vaccinations have led to a substantial increase in hiring. Growth in the coming quarters is likely to be well above trend and may bring the economy back to full employment well ahead of current predictions. The risk is that higher growth and excess liquidity could lead to a level of inflation that would cause interest rates upwards to a level that would force the Federal Reserve to raise the federal funds rate prematurely. For now, we are positioned for a robust economic recovery, but we remain vigilant for signs of any cracks in that trajectory.