Summary
AIER’s Leading Indicators Index posted another slight decline in May, coming in at 83 versus 88 in April. Despite the pullbacks, the May result marks the ninth consecutive month above the neutral 50 level. The Roughly Coincident Indicators index held at 100 in May. The Lagging Indicators Index moved back to 33 from 17 in the prior month (see chart). Overall, the latest results for the business cycle indicator indexes still suggest continued economic expansion in the months ahead.
The cessation of restrictive government lockdown policies and reopening of the economy remain the driving forces behind the economic recovery. As restrictions are eased, economic activity increases. While some data have softened over the past month, the economy and in particular the labor market remain on a clear recovery path.
Primary risks in the short term include tightening labor conditions, shortages of materials, lingering logistical issues, and rising prices. The increases in price aggregates are garnering significant attention and likely to result in increased focus on monetary policies. Overall, the economic outlook remains tilted to the upside.
Leading and Roughly Coincident Indicators Indexes Remain Solidly Positive
The AIER Leading Indicators index posted a second consecutive decline in May, decreasing to 83 from 88 in April and 92 in March. However, the May result is the ninth month in a row above the neutral 50 threshold and suggests continued overall economic expansion in the months ahead.
Among the 12 leading indicators, ten were in a positive trend in May versus two trending unfavorably while none were trending flat or neutral. Just one leading indicator changed direction in May; real new orders for consumer goods changed from a neutral trend in April to a declining trend. Given the strong results from other measures of consumer spending, it is likely this indicator will return to a positive trend in the near future. The second unfavorable trend came from the Treasury yield spread which was also in an unfavorable trend last month.
Overall, the Leading Indicators index remained above the neutral 50 level for the ninth consecutive month, suggesting continued expansion is likely. Over the last nine months, the leading indicators index has averaged 79.2, the highest level since December 2018. Government policies restricting consumers and businesses continue to be removed, supporting a recovery in economic activity. However, ripple effects from the lockdowns continue to disrupt labor supply, production, and logistics and transportation, resulting in scattered shortages of input materials and rising pressure on prices.
The Roughly Coincident Indicators index held at a perfect 100 reading in May with all six individual Roughly Coincident indicators continuing to trend higher. The third consecutive month of perfect results follow four months of readings in the 83 to 92 range and are the first three-peat of perfect scores since July through September 2018. The Roughly Coincident Indicators index has been above the neutral 50 level for eight consecutive months, posting an average reading of 87.5, the highest since May 2019.
AIER’s Lagging Indicators index returned to a reading of 33 in May, the seventh consecutive month fluctuating between 17 and 33. Those seven months follow back-to-back readings of zero in September and October 2020 and mark the 13th consecutive month below 50. The average over the last 13 months is 21.8.
Three of the six lagging indicators changed trend in the latest month: real manufacturing and trade inventories fell to an unfavorable trend while the composite short-term interest rate indicator and the 12-month percent change in the core consumer price index indicator both improved to favorable trends. Overall, four indicators were still trending lower, while two indicators were trending higher, and none were in a neutral trend.
U.S. Economy Adds 559,000 Jobs in May
U.S. nonfarm payrolls added 559,000 jobs in May after a gain of 278,000 in April. March and April had net upward revisions of 27,000. The May gain is the fifth in a row and 12th in the last 13 months, bringing the five-month gain to 2.391 million and the 13-month post-plunge recovery to 14.733 million, but is still well below the 22.362 million loss in March and April of 2020, leaving nonfarm payrolls 7.629 million below the February 2020 peak.
Private payrolls posted a 492,000 jobs gain in May after a 219,000 gain in April. The two prior months had a net upward revision of 17,000. The May rise in private payrolls is also the fifth in a row and 12th in the last 13 months. May brings the five-month gain to 2.179 million and the 13-month recovery to 14.891 million versus a loss of 21.353 million in March and April of 2020, leaving private payrolls 6.462 million below the February 2020 peak.
Breadth of gains for May was positive. Within the 492,000 gain in private payrolls, private services added 489,000 while goods-producing industries added 3,000. For private service-producing industries, the gains were led by a 292,000 surge in leisure and hospitality (following gains of 328,000 in April, 227,000 in March, and 413,000 in February), a 46,000 gain in health care and social assistance, 41,000 in education, a 35,000 rise in business and professional services, 29,000 new employees in information services, and 23,000 additional transportation and warehousing employees.
Within the 3,000 gain in goods-producing industries, construction was down 20,000, durable-goods manufacturing increased by 18,000, nondurable-goods manufacturing rose by 5,000, and mining and logging industries were unchanged.
Despite the ongoing recovery, every private industry group still has fewer employees than before the government lockdowns. Leisure and hospitality leads with a loss of 1.756 million jobs followed by health care, down 628,500, and professional and business services with a drop of 557,000.
On a percentage basis, the losses are more evenly distributed. Leisure and hospitality still leads with a 15.0 percent drop since February 2020, mining and logging comes in second with an 11.0 percent loss followed by education services at 7.8 percent and information services at 7.0 percent. Five of the 14 private industries shown in the report have declines of 4 percent or more since February 2020. For the labor market as a whole, total nonfarm payrolls and private payrolls are down 5 percent since February 2020.
The government sector added 67,000 employees in May, with local government payrolls rising by 33,000, state government payrolls up 45,000, and the federal government cutting 11,000 workers.
The total number of officially unemployed fell to 9.316 million in May, a drop of 496,000 from April. The unemployment rate dropped to 5.8 percent while the underemployed rate, referred to as the U-6 rate, fell to 10.2 percent in May. In February 2020, the unemployment rate was 3.5 percent while the underemployment rate was 7.0 percent.
The participation rate declined in May, coming in at 61.6 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 58.0 for May, above the 57.9 ratio in April 2021 but well below the 61.1 percent in February 2020.
Weekly Initial Claims for Unemployment Benefits Post Fifth Straight Drop
Initial claims for regular state unemployment insurance totaled 385,000 for the week ending May 29, a decrease of 20,000 from the previous week’s tally of 405,000. The current result is the fifth consecutive decline and the seventh in the last eight weeks. Weekly initial claims are now less than half the number just 11 weeks ago, on March 13. The favorable results are a further indication of the strengthening labor market and overall economy.
The four-week average fell 30,500 to 428,000, the eighth consecutive decline and the 16th drop over the last 17 weeks. Initial claims are likely to continue trending lower as the combination of vaccine distribution and easing government restrictions on consumers and businesses support rising economic activity.
Job Openings Hit a Record High in March
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 8.123 million in March, up from 7.526 million in February. The number of open positions in the private sector increased to 7.290 million in March, up from 6.868 million in February.
The total job openings rate, openings divided by the sum of jobs plus openings, reached 5.3 percent in March while the private-sector job-openings rate increased to 5.6 percent, up from 5.3 percent in February. All four measures are at new highs since these data began in 2000.
The industries with the largest number of openings were trade, transportation, and utilities (1.475 million), education and health care (1.425 million), professional and business services (1.374 million), and leisure and hospitality (1.209 million).
The highest openings rates were in leisure and hospitality (8.1 percent), professional and business services (6.2 percent), education and health care (5.7 percent), manufacturing (5.4 percent) and trade, transportation, and utilities (5.1 percent; see third chart).
The rise in private job openings was a function of hires, separations and changing labor requirements. Private hires in March rose to 5.632 million from 5.490 million in February. At the same time, the number of private-sector separations fell to 4.998 million in March, down from February’s 5.078 million. Within separations, private quits were 3.331 million (versus 3.184 million in February) and layoffs were 1.394 million, down from 1.636 million in the prior month.
The total separations rate fell to 3.7 percent from 3.8 percent in the prior month with the private sector experiencing a rate of 4.1 percent, down 0.1 percentage points from 4.2 percent in February.
From the worker perspective, labor market conditions improved again in March. The number of openings per job seeker (unemployed plus those not in the labor force but who want a job) rose to 0.497 in March, up sharply from 0.430 in February, and well above the April 2020 low of 0.156 but still well below the 0.721 peak in October 2019. In the economic expansion of the 2000s, the number of openings per workers peaked at 0.450.
Overall, the data relating to the labor market have improved significantly in recent months. Data on job openings and turnover along with a declining trend in the number of weekly initial claims for unemployment insurance provide a strong basis for optimism.
Job Market Strength Offsets Falling Expectations for Consumer Confidence
The Consumer Confidence Index from The Conference Board was little changed in May, falling just 0.3 points to 117.2 from 117.5 in April. The two major components of the index both had sharply differing results with the index for the present situation jumping while the future expectations component posted a loss.
The present-situation component rose 12.4 points to 144.3, the highest level since March 2020. This measure has posted four consecutive increases from a weak 85.5 reading in January 2021. The expectations component fell 8.8 points, taking it to 99.1 from 107.9 in the prior month. The details of the report suggest that consumers are significantly more optimistic with regard to current labor market conditions as widening vaccine distribution leads to less government restrictions on economic activity.
For the labor market, the net percentage of consumers saying jobs were plentiful jumped 10.5 points to 46.8 while those saying jobs were hard to get fell 2.5 points to 12.2. The net percentage for current labor conditions comes in at 34.6 for May, up from 21.6 in April, the highest since January 2020, and well above the -15.7 in April 2020.
Consumers were only marginally more optimistic (or less pessimistic) regarding current general business conditions with the net percentage of consumers saying business conditions were good falling 0.7 points to 18.7 while those saying business conditions were bad fell 2.7 points to 21.8 in May. Those results put the net business conditions percentage at -3.1 for May versus -5.1 in April.
Consumer expectation for the labor market also pulled back as the percentage expecting more jobs fell 4.5 points to 27.2 while the percentage expecting fewer jobs rose 2.9 points to 17.3. The net percentage for the outlook for jobs came in at 9.9, a decrease of 7.4 points from April.
Consumers’ expectations for business conditions in six months deteriorated with the percentage expecting good conditions falling 2.8 points to 30.3 while the net percentage expecting bad conditions rose 2.7 points to 14.8. The net percentage for business conditions six months ahead fell 5.5 points to 15.5.
Fears of Price Instability Pull Down Consumer Sentiment in May
The results from the University of Michigan Surveys of Consumers show overall consumer sentiment fell in May and remains well below pre-lockdown levels. Fears over rising prices were the primary cause.
Overall consumer sentiment decreased to 82.9 in May, down from 88.3 in April, a 6.1 percent decline. From a year ago, the index is up 14.7 percent. The sub-indexes both fell in May. The current-economic-conditions index dropped to 89.4 from 97.2 in April. That is an 8.0 percent decline but leaves the index with an 8.6 percent increase from May 2020. The second sub-index — that of consumer expectations, one of the AIER leading indicators — sank 3.9 points or 4.7 percent for the month to 78.8 but is 19.6 percent above the prior year. All three indexes remain well below the pre-pandemic levels.
A resurgence in consumer demand as the economy reopens coming at the same time as a confluence of events including a semiconductor chip shortage, gasoline pipeline ransom hack, logistical and labor issues, and dramatic shift in consumer spending habits, are combining to push up prices. The pressures may continue for a time but are likely to fade as market forces redirect productive capacity.
Outlook Remains Positive
The U.S economy continues to show significant progress on the path to recovery. The AIER Leading Indicators index posted its ninth consecutive month above the neutral 50 threshold, suggesting continued expansion in coming months. The Roughly Coincident Indicators index posted a third consecutive 100 reading, confirming the strengthening economic recovery.
Fading government restrictions are leading to increasing economic activity. However, the rebound in demand is outpacing the recovery in supply as ongoing labor difficulties including a lack of qualified workers, absenteeism, temporary shutdowns, and inability to retain talent, have led to production shortages and logistical and transportation problems. These shortages are putting upward pressure on prices.
As price aggregates increase more quickly, consumers are growing more concerned about future prospects for employment and income growth. The accelerating gains in aggregate price measures are also putting greater attention on Fed monetary policy and intensifying the debate over fiscal stimulus spending. Despite the challenges, the outlook remains tilted to the upside.
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