Last week I predicted the ISM Manufacturing Report would be in the mid 60’s after seeing a number of Fed Manufacturing reports as well as gleaning information from other sources. In March the ISM report was 64.7. The April report was actually 60.7 surprising me as well as many others. Throughout the report the numbers were down from new orders, production, and employment. Supplier deliveries and inventories also fell raising the specter of the impact of the supply chain. Discussion within the report centered on worker absenteeism, parts shortages causing shutdowns as well as long lead times for raw materials.
While a step down in the growth level, manufacturing activity continues to increase at a nice level. All 18 manufacturing industries reported growth again in April. Overall two areas are limiting the growth right now. First is the semiconductor chip shortage, the second is hiring. The chip shortage is expected to continue as many of our trading partners, including India, continue to struggle with COVID shutdowns. The US can not just open up production centers to produce chips. There is no real replacement right now for the production lost from overseas. Finding trained, willing to work employees to fill open slots is a real issue up and down the wage/training scale for all employers.
The jobs report on Friday is a clear indication of the structural changes in the market that are occurring. Economic theory states that when left alone, markets will eventually clear, reaching an equilibrium where demand and supply will meet. Over the past year, interference in the market process has made the labor sector highly inefficient, not allowing the market to clear.
The labor participation rate had been rising, reaching 63.1% in 2019. By the end of 2020 the participation rate had fallen back to 61.7% where it stands at the end of April. The participation rate bottomed out a year ago at 60.2%. Over the last year the number appears to have a cap set right at 61.7%. This is not an issue with a lack of open position, employers continue to try to hire people. Job openings are hovering at 7.4 million unfilled positions. The openings are across the board, health care, arts and entertainment, accommodations/food service as well as manufacturing.
With the current unemployment benefit program, many qualified workers are sitting on the sideline collecting funds for not working. This is a highly inefficient program that offers not productive value to the economy as a whole. The existing program is not expected to end until at least September, 2021. There is no incentive for someone find a job if that job pays less than about $13.00- $15.00 per hour. There is also not incentive right now to enroll in a training program to enhance any personal skills, although that would be the best thing to do right now if one is out of work. This means that the labor market will be unable to operate efficiently until the manipulation of various programs is removed. Until that occurs, it is hard to predict either the unemployment rate, new jobs numbers or the actual wage growth levels in the US.
While the CPI is not showing inflation, it is rampant in the economy. The CPI basket of goods is only catching a few price issues. The majority of inflation is outside the CPI basket. Housing prices are over 10% higher than last year. Car prices are rising rapidly due to shortages, new and used. Lumber prices have increased 36% over the past year. Look at the stock market, even the crypto markets are showing rapid inflation as people flush with cash are investing. There are no signs of hyper inflation, however this is the kind of market that creates bubbles. Bubbles always burst and can do so in ugly ways. 2022 and 2023 could be a rocky ride. We will see.
Have a great week