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April 11, 2022 Reading Time: 11 minutes

Summary

As expected, volatility is creeping into the AIER business cycle indicators. AIER’s Leading Indicators Index partially rebounded in March, posting an 8-point rise following a 17-point drop in February and a 13-point gain in January. The Leading Indicators Index is fluctuating around the neutral 50 threshold, hitting 54 in March after a 46 in February and a 63 in January. The average for the first quarter comes in at 54 versus a neutral 50 average for October through December (see chart).

Among the most significant forces driving the economy and at least partially responsible for the increased volatility include the persistent upward pressure on prices, the tight labor market, and fallout from the Russian invasion of Ukraine. Rapidly rising prices negatively impact consumer attitudes and consumer behavior including consumer spending. Rapid price increases have also provoked a new Fed tightening cycle, raising the risk of a policy mistake. Fallout from the Russian invasion of Ukraine has caused volatility in capital and commodity markets, especially energy markets, contributing to price pressures while also potentially further disrupting global supply chains. Offsetting these is the strong labor market which provides some support for consumer attitudes, incomes, and spending, though it also has the potential to ignite a wage-price spiral.

Increased volatility should be expected to continue in capital and commodity markets, the economy, and economic statistics over coming months. Expect continued volatility for the AIER business cycle indicators as well. Caution is warranted.

AIER Leading Indicators Index Partially Rebounds in March

The AIER Leading Indicators index rebounded in March, adding 8 points, partially offsetting the 17-point drop in February. The March level of 54 is back above the neutral 50 threshold following a 46 in February. February was the first reading below neutral since August 2020 in the wake of government lockdowns that sent the U.S. economy to the worst recession in history. Along with a 63 reading in January, the average for the first quarter was 54 following three consecutive months at the neutral 50 level for October through December.

Three leading indicators changed signal in March, with two showing improvement and one deteriorating: the average workweek in manufacturing moved from an unfavorable trend to a favorable trend while real retail sales improved from a negative trend to a neutral trend. The total heavy-truck unit sales indicator weakened in March, dropping from a neutral trend to a negative trend. Among the 12 leading indicators, five were in a positive trend in March while four were trending lower and three were trending flat or neutral.

The Roughly Coincident Indicators index improved in March, rising to 92 following four consecutive months at 75. Two indicators showed improvement in March with real manufacturing and trade sales improving to a positive trend and The Conference Board Consumer Confidence in the Present Situation indicator improving from a negative trend to a neutral trend. Overall, five indicators were trending higher: nonfarm payrolls, employment-to-population ratio, industrial production, the real manufacturing and trade sales, and real personal income excluding transfers, while one indicator, The Conference Board Consumer Confidence in the Present Situation indicator was in a neutral trend.

AIER’s Lagging Indicators index was unchanged at 83 in March. January through March was the first three-month run above neutral since the fourth quarter of 2019. No individual indicators changed trend for the month. In total, five indicators were in favorable trends, one indicator had an unfavorable trend, and none had a neutral trend.

Overall, labor shortages, rising costs and shortages of materials, and logistics and transportation bottlenecks are restraining production, and sustaining upward pressure on prices. Upward price pressures have resulted in substantial declines in consumer sentiment and may be impacting consumer behavior including consumer spending decisions. Furthermore, rapidly rising prices have also provoked a new cycle of Fed policy tightening, raising the risk of a policy mistake.

While cresting numbers of new Covid cases in late January and early February had the potential to support businesses’ efforts to improve supply chains and expand production, geopolitical turmoil surrounding the Russian invasion of Ukraine has had a dramatic impact on capital and commodity markets, especially energy markets, adding to upward price pressures and launching a new wave of potential disruptions to supply chains and business activity.  

The labor market remains the strongest support for the economy. Continued jobs growth, near record levels of open jobs, and rising wages help consumer attitudes and consumer spending, though they can also encourage a wage – price spiral. On balance, the outlook remains highly uncertain, and caution is warranted.

Private Payrolls Add 426,000 Jobs in March

U.S. nonfarm payrolls added 431,000 jobs in March, extending a run of 11 consecutive months and 14 of the last 15 months with gains above 400,000. The average monthly gain over the last 15 months is 562,000. Private payrolls posted a 426,000 gain in March, the 10th in a row and 13th in the last 15 months above 400,000. The average gain over the last 15 months is 530,000. Both total nonfarm payrolls and private payrolls are less than 1 percent below their February 2020 peaks with total nonfarm down by 1.6 million and private payrolls down by less than 1 million.  

Gains in recent months have been broad-based. Within the 426,000 gain in private payrolls, private services added 366,000 versus a 12-month average of 460,500 while goods-producing industries added 60,000 versus a 12-month average of 54,800. Within private service-producing industries, leisure and hospitality added 112,000 versus a 12-month average of 173,800 for the month, business and professional services added 102,000 (versus 91,300), education and health services increased by 53,000 (versus 50,100), retail employment rose by 49,000 (versus 45,600), and wholesale trade gained 7,000 (versus 12,800); transportation and warehousing lost 500 jobs (versus an average gain of 33,900).

Within the 60,000 gain in goods-producing industries, construction added 19,000, while durable-goods manufacturing increased by 22,000 and nondurable-goods manufacturing added 16,000 and mining and logging industries increased by 3,000.

Despite the strong, broad-based gains over the past year, only about half of the industry groups in the employment report are above their pre-pandemic levels. Transportation and warehousing is the largest gainer, with payrolls more than 10 percent above pre-pandemic levels. That may be a positive sign for some of the logistical problems plaguing U.S. businesses.

Average hourly earnings rose 0.4 percent in March, putting the 12-month gain at 5.6 percent. The average hourly earnings for production and nonsupervisory workers also rose 0.4 percent for the month and are up 6.7 percent from a year ago. The average hourly earnings data should be interpreted carefully, as the concentration of job losses and recovery for lower-paying jobs during the pandemic distorts the aggregate number.

The average workweek for all workers fell to 34.6 hours in March while the average workweek for production and nonsupervisory workers fell 0.1 hour to 34.1 hours. Combining payrolls with hourly earnings and hours worked, the index of aggregate weekly payrolls for all workers gained 0.5 percent in March and is up 10.80 percent from a year ago; the index for production and nonsupervisory workers also rose 0.5 percent but is 11.5 percent above the year ago level.

The total number of officially unemployed was 5.952 million in March. The unemployment rate came in at 3.6 percent while the underemployed rate, referred to as the U-6 rate, was 7.2 percent in March. In March 2020, the unemployment rate was 3.5 percent while the underemployment rate was 6.9 percent. For February 2020, the unemployment rate was 3.5 percent while the U-6 rate was 7.0 percent. The employment-to-population ratio, one of AIER’s Roughly Coincident indicators, came in at 60.1 percent for March, still significantly below the 61.2 percent in February 2020.

It has taken two years, but the labor force is nearly back to the size in February 2020. However, with population growth over that time, the overall participation rate remains well below February 2020. The participation rate was 62.4 in March 2022 versus a participation rate of 63.4 percent in February 2020.

The March jobs report shows total nonfarm and private payrolls posted more strong gains. Both are close to matching pre-pandemic levels as is the civilian labor force. However, with population growth, labor force participation remains significantly below pre-pandemic rates. Getting people into the labor force and employed would likely help ease upward pressure on consumer prices.

Private-Sector Job Openings and Quits Remain Elevated

The latest Job Openings and Labor Turnover Survey from the Bureau of Labor Statistics shows the total number of job openings in the economy fell to 11.266 million in February, down from 11.283 million in January. The number of open positions in the private sector decreased to 10.185 million in February, down 50,000 from 10.235 million in January. Both remain at very high levels. The total job openings rate, openings divided by the sum of jobs plus openings, was unchanged at 7.0 percent in February while the private-sector job-openings rate held at 7.4 percent.

Two industry categories have more than 2.0 million openings each: education and health care (2.226 million) and professional and business services (2.088 million). Trade, transportation, and utilities (1.863 million), and Leisure and hospitality (1.705 million) are both above 1 million.

The highest openings rates were in leisure and hospitality (9.9 percent), professional and business services (8.7 percent), education and health care (8.5 percent), transportation, and utilities, trade (6.2 percent), and manufacturing (6.0 percent), and all are all above the pre-lockdown-recession private-sector peak of 5.1 percent. Among the private-sector industry groups, only construction (4.8 percent) is below 5.1 percent.

The number of private-sector quits rose, coming in at 4.106 million, up from 4.032 million in January. Trade, transportation, and utilities led with 1.061 million quits followed by leisure and hospitality with 863,000 quits, and professional and business services with 704,000. The total quits rate rose to 2.9 percent for the month, up from 2.8 percent in the prior month while the private-sector quits rate was unchanged at 3.2 percent.

The quits rates among the private-sector industry groups are still dominated by leisure and hospitality with a rate of 5.6 percent, well ahead of the number two, trade transportation, and utilities, with a 3.7 percent rate, and number three, professional and business services, with a 3.2 percent quits rate. All the major groups within the private sector have a quits rate above the average over 2001 through 2019.

The number of job seekers (unemployed plus those not in the labor force but who want a job) per opening fell to 1.078 in February, a new record low. Prior to the lockdown recession, the low was 1.409 in October 2019.

The job openings data continue to suggest a very tight labor market. The tight labor market is leading to significant turnover among employees and contributing to the headwinds facing businesses as they try to boost production.

Consumer Sentiment Fell in March, Remains at Recessionary Level

The final March results from the University of Michigan Surveys of Consumers show overall consumer sentiment fell again, hitting the lowest level since August 2011. The composite consumer sentiment decreased to 59.4 in March, down from 62.8 in February, a drop of 5.4 percent. The index is now down 41.6 points from the February 2020 peak.

The current-economic-conditions index fell to 67.2 from 68.2 in February. That is a 1-point decrease for the month and leaves the index with a 47.6-point drop since February 2020. The second sub-index — that of consumer expectations, one of the AIER leading indicators — sank 5.1 points for the month, dropping to 54.3. The index is off 37.8 points since February 2020. All three indexes remain below the lows seen in four of the last six recessions.

According to the report, “Consumer Sentiment remained largely unchanged in late March at the same diminished level recorded at mid month. Inflation has been the primary cause of rising pessimism, with an expected year-ahead inflation rate at 5.4%, the highest since November 1981. Inflation was mentioned throughout the survey, whether the questions referred to personal finances, prospects for the economy, or assessments of buying conditions.”

The one-year expectations has spiked above 3.5 percent several times since 2005 only to fall back. The five-year inflation expectations remained unchanged at 3.0 percent in March. That result remains well within the 25-year range of 2.2 percent to 3.5 percent.

The report states, “Confidence that economic policies will resolve the problem is essential. Unfortunately, half of all consumers unfavorably assessed current policies, more than three times the 16% who rated them favorably. Making the situation even more difficult, policy makers need to take account of two unusual sources of economic uncertainty, one rather minor (the new covid variant), and a major source of continued economic disruption (the Russian invasion of Ukraine).”

One positive note in the survey was continued favorable views of the labor market. According to the report, “The sole area of the economy about which consumers were still optimistic was the strong job market. Consumers anticipated in March that during the year ahead it was more likely that the unemployment rate would post further declines than increases (30% versus 24%).”

Consumer Confidence Improved Slightly as Expectations Plunged in March

The Consumer Confidence Index from The Conference Board rose slightly in March and remains at a moderately favorable level overall. The composite index increased 1.5 points or 1.4 percent to 107.2. From a year ago, the index is down 6.7 percent. The small change for the month hides much larger changes in the two major components.

The expectations component sank 4.2 points, taking it to 76.6 while the present-situation component increased 10.0 points to 153.0. The expectations index is at its lowest level since February 2014 and only about 6 points above the 2001 recession lows.

Within the expectations index, all three components fell versus February. The outlook for the jobs market weakened in March as the expectations for more jobs index fell 2.0 points to 17.4 while the expectations for fewer jobs index fell by 1.9 points to 17.7, putting the net down 0.1 points to -0.3.

The index for expectations for higher income rose 0.2 points to 14.9 while the index for expectations for lower income rose 0.7 points, leaving the net (expected higher income – expected lower income) down 0.5 points to 1.2.

The index for expectations for better business conditions fell 2.6 points to 18.7 while the index for expected worse conditions rose 3.9 points, leaving the net (expected business conditions better – expected business conditions worse) down 6.5 points to -5.1.

For the present situation index components, current business conditions and employment conditions improved. The net reading for current business conditions (current business conditions good – current business conditions bad) was -2.5 in March, up from -7.5 but still a net negative. Current views for the labor market saw the jobs hard to get index decrease, falling 2.2 points to 9.8 as the jobs plentiful index rose 3.7 points to 57.2 resulting in a 5.9-point gain in the net to 47.4. A net above 40 is considered strong by historical comparison.

Inflation expectations rose to 7.9 percent in March, a record high; expectations were 4.4 percent in January 2020. Inflation expectations remain extremely high as prices for many goods and services continue to rise at an elevated pace. The extreme outlook for inflation is a key driver of weaker expectations among consumers.

Rising Prices Boost Retail Sales in February

Retail sales and food-services spending rose 0.3 percent in February following a 4.9 percent surge in January. However, these retail sales data are not adjusted for price changes. The AIER real retail sales indicator (adjusted using the total CPI) fell 0.1 percent in February following a 0.6 percent gain in January. The solid gain in January combined with a small decline in February resulted in a neutral trend in the AIER real retail sales. Nominal total retail sales are up 17.6 percent from a year ago while the AIER real retail sales indicator is up 9.0 percent from a year ago.

Core retail sales, which exclude motor vehicle dealers and gasoline retailers, fell 0.4 percent for the month, following a 5.2 percent jump in January. The decline leaves that measure with a 15.8 percent gain from a year ago.

Categories were mixed for the month with seven up and six down in February. The gains were led by a 5.3 percent rise in gasoline spending. However, the average price for a gallon of gasoline was $3.68, up 5.0 percent from $3.50 in January.  Food services and drinking sales followed with a 2.5 percent increase while miscellaneous store sales rose 1.9 percent and sporting goods, hobby, and bookstore sales gained 1.7 percent. Nonstore retailers led the decliners, down 3.7 percent, followed by health and personal care store sales, down 1.8 percent, and furniture and home furnishings store sales, off 1.0 percent.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals.

Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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