Outstanding Economic Rebound Slows Its Growth While Inflation Explodes

After last year’s partial economic shutdown, the outstanding economic rebound slows its growth while inflation explodes. Over the last few months, economic growth slowed, particularly in newly created jobs.

Meanwhile, pandemic and unemployment benefits begin to expire. Thus, experts monitor the workforce to see if there will be a return to form. As a whole, analysts watch for the returning workforce’s impact on the economy.

Outstanding Economic Rebound Slows as Employment Report Falls Short

The highly anticipated monthly Employment report was an enormous miss. However, the reason why is far less clear. In April, the economy gained just 266,000 jobs, which was far below the consensus forecast of 975,000.

Unemployment Rate Increases

The unemployment rate increased to 6.1%, above the consensus for a decline to 5.8%. Investors debate the shortfall’s cause. Some believe it’s unexpectedly slow job creation by companies. Others feel that the cause is a lack of available workers to fill positions.

Not all states are struggling with rising unemployment rates. Though not at pre-pandemic levels yet, things are beginning to look more positive in some states. People continue to get vaccinated. Restrictions loosen even further.

A study by WalletHub compared the states based on key economic metrics. It showed that the states with the strongest unemployment bounce-back include:

  • Vermont
  • Utah
  • Nebraska
  • South Dakota
  • Idaho
  • New Hampshire
  • Alabama
  • Kansas
  • Montana
  • Oklahoma

On the other side some states are having a more difficult time with unemployment bounce back. These are: Hawaii, New Mexico, New York, Nevada, Connecticut, California, Washington D.C., Louisiana, New Jersey, and Illinois.

COVID-19 Unemployment Aid Ending in Some States

At least 25 states have announced that they plan to prematurely end COVID-19 unemployment aid this Summer. States originally planned to end the $300 a month on September 6th. Now, many plan to end it over the course of the summer with many having ended in mid-June.

The states who have decided to end their benefits are:

  • Alabama
  • Alaska
  • Arizona
  • Arkansas
  • Georgia
  • Idaho
  • Indiana
  • Iowa
  • Maryland
  • Mississippi
  • Missouri
  • Montana
  • Nebraska
  • North Dakota
  • Ohio
  • Oklahoma
  • South Carolina
  • South Dakota
  • Tennessee
  • Texas
  • Utah
  • West Virginia
  • Wyoming

Businesses Having Harder Time Filling Positions

A study by Indeed showed a 5% uptick in job application activity. This study showed that the activity increased on the days when states announced their plan to cut off the additional unemployment aid from during the pandemic.

But, that uptick was short-lived. Activity levels fell back to April averages after 8 weeks. Experts believe there could be other factors keeping Americans out of work. These factors include fears over childcare or contracting COVID-19.

Some companies have had to resort to benefits such as hiring bonuses to lure unemployed Americans back to work. Even some states—Arizona, Colorado, Connecticut, Kentucky, Main, Michigan, Montana, New Hampshire, Oklahoma, and Virginia, as of now—are providing workers up to $2,000 when they accept a new job. The Chamber of Commerce CEO Neil Bradley urges more states to begin offering these types of incentive programs.

Wage Growth Becomes More Volatile

Another notable component of the report was average hourly earnings, an indicator of wage growth. In April, earnings rose 0.7% from March. This statistic far exceeded the consensus forecast for just a slight increase.

However, they still were only 0.3% higher than a year ago, down from an annual rate of increase of 4.2% last month. The rapidly shifting proportion of higher paying and lower paying jobs in the U.S. has made average wage growth highly volatile in recent months.

Outstanding Economic Rebound Slows While ISM Manufacturing Index Drops Unexpectedly

Reports from the Institute of Supply Management (ISM) also fell short of the forecasts. The ISM national manufacturing index unexpectedly dropped to 60.7, well below the consensus forecast of 65.0.

National Services Index Falls

Similarly, the ISM national services index fell to 62.7, below the consensus of 64.0. These two reports did not meet the elevated expectations of investors. Levels above 50 indicate that the sectors are expanding. However, both reports remained quite strong by historical standards.

Rising Inflation Worries Investors as Outstanding Economic Rebound Slows

Inflation reduces the value of future cash flows. Higher levels are negative for mortgage-backed securities (MBS). Thus, higher inflation trends negatively for mortgage rates. The pandemic caused a significant decline in inflation. This led to the record-low mortgage rates seen last year. With the reopening of the economy, investors worry about rising inflation. The latest report certainly justified these concerns.

Core PCE Inflation Numbers Concerns Investors

The reduced economic activity resulting from the pandemic caused a large decline in inflation last year, which was one of the factors responsible for record low mortgage rates. With the distribution of the vaccine and the reopening of the economy, investors are now concerned that inflation may be heading much higher, and the latest data reinforced this view.

The core PCE price index is the inflation indicator favored by the Fed. In April, core PCE was 3.1% higher than a year ago, matching the consensus forecast, but up from an annual rate of increase of 1.9% last month. The question facing investors is whether higher inflation is mostly due to temporary factors related to the reopening of the economy or to more persistent issues, and the answer will have a big impact on future mortgage rates.

Outstanding Economic Rebound Slows Despite Jumping Consumer Price Index

Analysts widely follow the Consumer Price Index (CPI) report. This monthly report examines the price change for goods and services. In April, core CPI, which excludes the volatile food and energy components, jumped 0.8% from March. This result far exceeded the consensus forecast for an increase of just 0.2%.

Core CPI was 3.0% higher than a year ago, up from an annual rate of increase of 1.6% last month. The big question is to what degree the pickup in inflation is due to temporary factors or to longer-term influences.

Consumer spending accounts for over two-thirds of U.S. economic activity. Concurrently, the retail sales data indicates growth. However, the results this month met mixed reception. In April, retail sales remained flat from March. The resulting numbers fell below the consensus forecast for a gain of 1.0%. However, analysts revised the amazing March results to be even higher from an increase of 9.8% to 10.7%. Overall, the data roughly offset the shortfall in the April figures.

Durable Goods Orders Fall

In economic terms, durable goods are items which last three years or longer, tend to be expensive, and generally are purchased infrequently, such as large appliances and vehicles. In April, new orders of durable goods fell 1.3% from March, which was far below. the consensus forecast for a moderate increase.

However, excluding the transportation category, which contains mostly aircraft orders that are highly volatile from month to month, new orders exceeded expectations with an increase of 1.0% from March. In addition, analysts revised the figures for March to be higher. As a result, analysts viewed the report as roughly neutral overall for mortgage rates.

Existing Home Sales Fall While Outstanding Economic Rebound Slows

A lack of inventory remained a major obstacle for the housing sector, as April existing home sales unexpectedly fell 3% from March.

Despite the modest decline, sales still were 34% higher than a year ago (which is somewhat misleading due to the partial shutdown of the economy at that time) and 11% higher than April 2019. The median existing-home price jumped 19% from last year at this time to a record level of $341,600.

Home Supply Remains Low

On a darker note, the number of homes for sale was 21% lower than a year ago. This represents just a 2.4-month supply nationally. Overall, this result fell well below the 6-month supply. Analysts consider a 6.0-month to be a healthy balance between buyers and sellers.

Given the critical need for more homes in many areas, the report on housing starts released this week was a bit disappointing. In April, housing starts fell 10% from March, which was below expectations. Builders say that rising prices and shortages for land, materials, and skilled labor are restraining the pace of construction.

Like last week’s report on existing home sales, the data on new home sales released this week fell short of expectations. In April, new home sales declined 6% from March, and the March results were revised significantly lower. A lack of inventory, especially in the lower price range, remained a major obstacle. The median new home price of $372,400 was 20% higher than last year.

Biden Infrastructure Plan Aims to Help Potential Homeowners

President Biden’s new infrastructure plan comes with steps that aim to make it easier for low and middle-income families to become homeowners again, especially among the difficult housing market brought upon by the COVID-19 pandemic.

The $213 billion plan would look to ‘rehab, retrofit, and renovate’ over a million homes for renters and homeowners, hoping to increase supply in underserved areas of the country by updating older homes.

Additionally, the plan will build 500,000 affordable homes and hopes to eliminate exclusionary zoning laws that limit the types of housing that can be built in certain areas by establishing minimum plot sizes and blocking the construction of more affordable homes.

The plan also includes tax incentives and grant programs to focus construction on clean energy investments in disadvantaged communities to help ‘mobilize private investment into distributed energy resources,’ such as rooftop solar panels.

Fed Expected to Reduce Pandemic-Created Monetary Policies While Outstanding Economic Rebound Slows

As the economy gradually improves, analysts expect the Fed will reduce the loose monetary policy measures implemented during the pandemic to help the recovery.

In the detailed minutes from the April 28 Fed meeting, investors primarily were seeking guidance on the timing for scaling back the Fed’s massive bond buying program.

According to the minutes of the meeting, some officials felt that if the economy continued to improve rapidly “it might be appropriate at some point in upcoming meetings to begin discussing a plan” for a reduction in bond purchases. The investors who hoped for a more precise time frame met disappointment instead.

Vaccination Rates Reveal Potential Risk as Outstanding Economic Rebound Slows

Around 300,000 new people received the COVID-19 vaccine every day in the U.S. Hospitalization rates quickly fell. Over half the population took their first shot. That said, this national data seems to be hiding some different vaccine statistics at local levels.

In parts of the south and central United States, vaccination rates are low and there’s little sign that they’ll be catching up anytime soon as the gap between the more and less-vaccinated counties is growing. Experts claim these numbers posted by these trailing counties fall below levels needed to potentially halt future waves of infection, including the spreading ‘delta variant’ of the Coronavirus.

In these low-vaccination counties, most of which are rural, poorer, and less educated, only 28% of people have received their first dose. The threat of re-infection and large outbreaks of COVID-19 is high in these places where, according to experts, the numbers are nowhere near enough to achieve herd immunity.

Many worry about the spread of the delta variant. Experts believe the Delta variant is more contagious. In addition, the Delta variant showed up in less-vaccinated parts of the country.

Delta Variant Has Outbreak Potential

Former Commissioner of the FDA, Scott Gottlieb, says that areas of the country could see ‘very dense outbreaks’ of the concerning delta variant in the coming months.

“It’s going to be hyper-regionalized, where there are certain pockets of the country [where] we can have very dense outbreaks,” Gottlieb said.

Originally found in India, scientists found the Delta variant in 49 states and Washington, D.C. Experts believe the new variant is more transmissible which could lead to more severe disease than other strains.

Hospitalizations rose in under-vaccinated states. Some experts worry it could lead to more hesitancy amongst workers. In conclusion, this shows potential to impact the economy again.

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