Summary
AIER’s Leading Indicators Index posted another gain in March, hitting the highest level since June 2018. The Leading Indicators index came in at 92 following an 83 reading in February and four consecutive months at 75 from October 2020 through January 2021. The March result marks the seventh consecutive month above the neutral 50 level. The Roughly Coincident Indicators index rose to a perfect 100 reading in March after four months between 83 and 92 while the Lagging Indicators Index rose to a still weak 33, up from 17 last month (see chart). The results indicate economic growth broadened again in March and suggest continued economic expansion in the months ahead.
Economic data over the past month showed a significant improvement, particularly in the labor market. The distribution of vaccines is a very positive development and is resulting in the cessation of restrictive government lockdown policies. As restrictions are eased, economic activity increases. While there are still risks associated with the spread of COVID-19 (especially as the virus mutates) and the potential for renewed government lockdowns, for now, economic activity is increasing, and the overall economic outlook is improving significantly.
Leading Indicators index hits the highest level since June 2018
The AIER Leading Indicators index rose to 92 in March, the highest level since June 2018. The March result is the seventh month in a row above the neutral 50 threshold. The results indicate that favorable trends have broadened among the 12 leading indicators and suggest continued overall economic expansion. In total, 11 of the 12 leading indicators were in a positive trend in March, with just one, the treasury yield spread, trending unfavorably, and none trending flat or neutral. The University of Michigan index of consumer expectations indicator was the lone change for the month, improving from a down trend in February to a positive trend in March (see below for more details on consumer sentiment).
Overall, the Leading Indicators index moved further above the neutral 50 level to a multiyear high, indicating widening breadth among the 12 indicators and suggesting continued expansion is likely. While government policies restricting consumers and businesses continue to distort economic activity, they are slowly being removed with the widening distribution of vaccines. However, mutations in the virus that causes Covid-19 could lead to a resurgence of the disease, causing renewed lockdown policies and threatening future growth. Despite the risk, economic activity is strengthening, and the overall economic outlook is improving significantly.
The Roughly Coincident Indicators index rose to a perfect 100 reading in March as all six individual indicators are now trending higher. The perfect result follows four months of readings in the 83 to 92 range and is the first perfect result since December 2018. The improvement came from the consumer confidence for the present situation indicator, changing from a negative trend in February to a positive trend in March.
AIER’s Lagging Indicators index rose to 33 in March following a 17 reading in February. While the March result is the highest level since July 2020, it is still well below the neutral 50 threshold. Just one indicator changed trend in the latest month: the composite short-term interest rate indicator, improving from an unfavorable trend to a favorable trend. Overall, four indicators were trending lower, two indicators were trending higher, and none were in a neutral trend.
Vaccinations and Stimulus Boost Consumer Sentiment
The final March results from the University of Michigan Surveys of Consumers show overall consumer sentiment rose in March, hitting the highest level in a year. Ongoing distribution of vaccines as well as expectations for stimulus were the primary drivers.
Overall consumer sentiment increased to 84.9 in March, up from 76.8 in February, a 10.5 percent rise and the highest since a reading of 89.1 in March 2020. From a year ago, the index is still down 4.7 percent. The sub-indexes both gained in March with the expectations component leading the move higher.
The current-economic-conditions index rose to 93.0 from 86.2 in February. That is a 7.9 percent gain and leaves the index with a 10.3 percent decrease from March 2020. The second sub-index — that of consumer expectations, one of the AIER leading indicators — jumped 9.0 points or 12.7 percent for the month to 79.7 and is now equal to the March 2020 result.
However, all three indexes are still below the pre-pandemic levels, with the Current Economic Conditions index 17.3 percent below its 2018-2019 average and the Index of Consumer Expectations 8.7 percent below the recent average. Combined, the overall index sits 12.7 percent below the pre-pandemic average.
According to the report, “Consumer sentiment continued to rise in late March, reaching its highest level in a year due to the third disbursement of relief checks and better than anticipated vaccination progress.”
However, the report goes on to add, “As prospects for obtaining vaccination have grown, so too has people’s impatience with isolation, as those concerns were voiced by nearly one-third of consumers in March, the highest level in the past year.”
With regard to the economic outlook, the report adds, “The majority of consumers reported hearing of recent gains in the national economy, mainly net job gains. The data clearly point toward robust increases in consumer spending. The ultimate strength and duration of the spending surge will depend on the rate of draw-downs in savings since consumers anticipate a slower pace of income growth. Despite the vast decline in precautionary motives sparked by the easing of pandemic fears, those precautionary motives will not completely disappear.”
Light-Vehicle Sales Jumped in March
Sales of light vehicles totaled 17.7 million at an annual rate in March, well above the 15.8 million pace in February and the fastest pace since October 2017. Unit sales plunged in March and April to 11.4 million and 8.7 million annual rates, respectively. The pace of sales in April was the lowest on record since this data series began in 1976 and follows a run of 72 months in the 16 to 18 million range from March 2014 through February 2020.
Breaking down sales by origin of assembly, sales of domestic vehicles jumped to 13.5 million units versus 11.9 million in February, a gain of 13.1 percent, while imports rose to 4.3 million versus 3.8 million in February, a rise of 11.1 percent. The domestic share came in at 76.0 percent in March versus 75.7 in February.
Breaking down by size of vehicle, March light-truck sales totaled 13.9 million at an annual rate versus a 12.3 million rate in February, a gain of 12.5 percent. Car sales were 3.9 million at an annual rate versus 3.4 million in February, a rise of 13.1 percent.
The light-truck share stood at 78.2 percent for March, completely dominating the car share of 21.8 percent. The dominant share of light-trucks continues a long-term trend. As recently as February 2013, the split between cars and light-trucks (SUVs and pick-up trucks) was about even, with both segments selling about 7.8 million at an annual rate.
Household Net Worth Hits A Record
Despite the pandemic, restrictive government policies, and the worst economic contraction in history, household net worth rose again in the fourth quarter to a new record. Household net worth rose to $130.155 trillion, up 5.6 percent from the previous record of $123.229 trillion in the third quarter, and 10.1 percent from $118.220 trillion at the end of 2019. Total assets rose to $147.2 trillion while total household liabilities increased 1.8 percent or $297.3 billion, to $17.057 trillion.
Total assets consisted of $104.6 trillion of financial assets and $42.6 trillion of nonfinancial assets. The gain in total assets was due to a 6.3 percent increase in financial assets which contributed $6.2 trillion to the increase in net worth. Within financial assets, equities led with a 14.1 percent rise. Nonfinancial assets rose 2.5 percent, contributing $1.0 trillion to net worth. Within nonfinancial assets, real estate led with a 2.6 percent rise.
The change in total liabilities was led by a $148.9 billion, or 1.4 percent, increase in mortgage debt to $10.9 trillion, while consumer credit increased $44.5 billion or 1.1 percent to $4.2 trillion.
Household Debt Service Remains Low
Two key measures suggest that household balance sheets are generally healthy. As of the fourth quarter, the financial obligations ratio (monthly payments for financial obligations as a share of disposable personal income) was 14.71 percent, up from 14.32 percent in the third quarter. Like many economic statistics, these numbers have been heavily distorted by the pandemic, lockdowns, and government payments. Excluding the government transfer payments, financial obligations would be 18.9 percent, down from 19.0 percent in the third quarter. Both measures remain well below their 40-year average through the end of 2019).
Household debt service (a narrower measure that includes just minimum monthly debt payments) came in at 9.7 percent for the fourth quarter, up from 9.2 percent. Excluding the government transfer payments, debt service comes in at 12.1 percent. Both of these measures are also well below their 40-year average.
These data show that despite the damage done to the economy by the government lockdowns, in aggregate, household balance sheets are relatively strong. However, across the various cohorts of households, financial health varies widely. Some households have been severely impacted by lockdowns, particularly small business owners and low-wage workers in retail, travel, hospitality, and food services industries.
Initial Claims Rise but the trend in claims is lower
Initial claims for regular state unemployment insurance totaled 719,000 for the week ending March 27, up 61,000 from the previous week’s downwardly revised tally of 658,000, the lowest of the pandemic. Despite the uptick, the outlook for jobs and the economy has been improving as government restrictions on consumers and businesses continue to be lifted.
The four-week average fell 10,500 to 719,000, the lowest level since March 14. While the four-week average remains in the 700,000 to 900,000 range, there is a clear trend lower and it is likely to continue trending lower as the combination of vaccine distribution and easing government restrictions on consumers and businesses slowly push the economy closer to normal operation. However, significant damage has been done by the lockdowns and full recovery may be several quarters away.
Broad Strength in the Labor Market in March
U.S. nonfarm payrolls added 916,000 jobs in March after a gain of 468,000 in February and 233,000 in January. The two prior months had net upward revisions of 156,000. The March gain brings the three-month gain to 1.617 million and the eleven-month post-plunge recovery to 13.959 million but is still far from offsetting the 22.362 million loss in March and April of 2020, leaving nonfarm payrolls 8.403 million below the February 2020 peak.
Private payrolls posted an impressive 780,000 jobs gain in March after a 558,000 gain in February and a 122,000 gain in January. The two prior months had a net upward revision of 125,000. The March gain brings the three-month gain to 1.46 million and the eleven-month recovery to 14.172 million versus a loss of 21.353 million in March and April of 2020, leaving private payrolls 7.181 million below the February 2020 peak.
Overall breadth of gains for March were impressive with every major private category showing a rise except for one. Within the 780,000 gain in private payrolls, private services added 597,000 while goods-producing industries gained 183,000. For private service-producing industries, the gains were led by a 280,000 surge in leisure and hospitality (following a gain of 384,000 in February), a 66,000 rise in business and professional services, a 64,000 increase in education services, a 48,000 rise in transportation services, and a 36,000 gain in health care and social assistance. The one category to show a drop was information services, down 2,000 for the month.
Within the 183,000 gain in goods-producing industries, construction surged, adding 110,000 jobs, durable-goods manufacturing increased by 30,000, nondurable-goods manufacturing rose by 23,000, and mining and logging industries gained 20,000 jobs.
The total number of officially unemployed fell to 9.710 million in March, a drop of 262,000 from February. The unemployment rate fell to 6.0 percent while the underemployed rate, referred to as the U-6 rate, fell to 10.7 percent in March. In February 2020, the unemployment rate was 3.5 percent while the underemployment rate was 7.0 percent.
The participation rate rose in March, coming in at 61.5 percent versus a participation rate of 63.3 percent in February 2020. The employment-to-population ratio, one of AIER’s Roughly Coincident indicators came in at 57.8 for March, above the 57.6 ratio in February 2021 but well below the 61.1 percent in February.
Job Openings Rates Hit Record Highs
The latest Job Openings and Labor Turnover Survey from the Bureau of Labor Statistics shows the total number of job openings in the economy rose to 7.367 million in February, up from 7.099 million in January. The number of open positions in the private sector increased to 6.732 million in February, the highest level since January 2019. Private-sector openings are well above the low of 3.996 million in April 2020 at the height of government-imposed lockdowns. The private-sector job-openings rate, openings divided by the sum of jobs and openings, was 5.2 percent, up from 5.0 percent in January and a new record high.
The industries with the largest number of openings were education and health care (1.565 million), professional and business services (1.390 million), and trade, transportation, and utilities (1.364 million). The highest openings rates were in professional and business services (6.3 percent), education and health care (6.3 percent), and leisure and hospitality (6.3 percent).
Outlook growing stronger
The U.S economy showed significant progress last month, particularly for labor and consumer measures, as it continues to recover from the draconian lockdowns that began in 2020. The AIER Leading Indicators index hit its highest level since June 2018 and indicates growth broadened among the 12 individual leading indicators. The result suggests continued expansion in coming months.
The distribution of vaccines is a very positive development and is leading to sharply less government restrictions and increasing economic activity. Risks remain, however. Virus mutations could result in a reacceleration of the spread of Covid-19 and spark new government restrictions on consumers and businesses. In the meantime, declining government restrictions are boosting current economic activity and the outlook for future growth.
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