Econ Weekly (June 28, 2021)

Featured Place: Dallas-Fort Worth

Inside this Issue:

• Another Slice of Price Pressure: PCE index up about 2x Fed’s target

• Building Bridges: Senate Reaches Infrastructure Deal

• But is Biden Signin’? Only if he also gets his Family Plan

• The Childcare Challenge: Who Will Watch the Kiddies in America’s Costly Cities?   

• How’s Boeing Going? Demand Not Yet Growing, Finances Hardly Glowing    

• Pain in the Class: Essentials of the American Middle Class Increasingly Out of Reach  

• The Debt Threat: Treasury Pleads with Congress for Permission to Pay its Bills

• The Dawn of Detroit: Henry Ford and the Height of U.S. Industrialization

• And This Week’s Featured Place: Dallas-Fort Worth, Texas, A 21st Century Star

Quote of the Week

“Housing, education, and health care are each ferociously complex, but what they have in common is skyrocketing prices in a world where technology is driving down prices of most other products and services… I think we should build in the next decade new technologies, businesses, and industries that break these price curves—and in fact reverse them, and make these three primary markers of the American dream easier and easier for regular people to attain."

–Marc Andreessen (speaking with economics blogger Noah Smith)

Market QuickLook

The Latest

Since everyone’s talking about inflation, let’s talk about inflation. As you may recall, the Bureau of Labor Statistics said earlier this month that its consumer price index (CPI) rose 0.6% from April to May and 5.0% from last May to this May. Those would be uncomfortably high figures if sustained for a lengthy period. Well, the Bureau of Economic Analysis has its own consumer inflation measure (the PCE price index), and it’s signaling the same trend, if a bit less pronounced. Prices rose 0.4% from April to May, and 3.9% versus a year ago. The Fed, by the way, looks more closely at the PCE.  

And so, the debate rages on. Does inflation running at 4% to 5% annually call for an immediate rollback of the Fed’s ultra-loose crisis-time policies? Those increases, after all, are way above its 2% longterm target. Or is Fed Chair Powell correct in expecting the high inflation readings to be just transitory. They do, after all, reflect in part a comparison with extremely depressed prices at the start of the pandemic last spring.

The high inflation readings, of course, also reflect a shortage in goods, services, labor and commodities (not to mention water for western farms), constraining the supply side of the economy. That’s concurrent with a demand surge triggered by Covid’s retreat and a big increase in household income thanks to government stimulus spending. The Fed’s easy money measures help stoke demand as well.

Demand, however, is shifting some from goods to in-person services like restaurant dining and air travel. The latest BEA consumer spending data makes that clear. Keep in mind: The leisure and hospitality sector isn’t huge when it comes to contributions to America’s GDP. But it punches way above its weight in providing jobs, and it’s first and foremost a big jobs deficit that’s holding back the Fed from tightening. As the sector recovers, job openings are increasingly there. But thus far, large numbers of non-employed Americans aren’t taking them. Ongoing Covid fears among the unvaccinated? Caregiving obligations? A wave of early retirements? Generous unemployment benefits? The reasons people aren't taking open jobs aren’t completely clear. But watch for changes this fall: Schools will reopen, and unemployment bonuses will expire.

Something else to watch: A federal ban on mortgage foreclosures and landlord evictions, scheduled to expire at the end of this month, will now expire at the end of July—it’s the final extension, the government says. This will perhaps drive more low-income Americans back into the workforce later this summer. It could also, more worryingly, increase homelessness, already a big structural problem that pre-dates the pandemic. It’s tied to a major shortage of housing across the U.S. The builder KB Home, in its earnings call last week, spoke of “an acute shortage of supply stemming not only from limited resale inventory, but also from the under production of new homes over the past 15 years.”

As Marc Andreessen says (see the Looking Ahead section below), an economy that doesn’t deliver affordable housing is an economy that’s not delivering for its middle class. Same for an economy that doesn’t provide affordable education, health care and childcare. And therein lies the great contradiction of the modern American economy, one that produces high-paying jobs, world-class technologies, great universities and medical centers, a wealth of entrepreneurial opportunities… But one that simultaneously leaves a large swath of citizens in a constant state of anxiety about where they’ll live, how they’ll pay the hospital bill and how they’ll manage their student debt. All are major roadblocks, alas, in the pursuit of happiness championed by Thomas Jefferson. 

Is more government spending the answer? The Biden Administration thinks so. It continues to push for passage of its American Families plan, focused mostly on matters of education, health and childcare. As for infrastructure, the Senate last week produced a compromise that calls for nearly $600b in new spending (for roads, bridges, railways, energy, broadband, water, public transit, airports, etc.). But President Biden said subsequently that he’ll only sign off if he gets a bill—via the legislative process of reconciliation—that covers his other priorities as well. Besides education, health and childcare, they include housing, climate change mitigation and tax reform. “There won't be an infrastructure bill unless we have a reconciliation bill,” said House Speaker Nancy Pelosi.

We’ll see what if anything gets passed. In the meantime, the economy’s private sector will end the first half of 2021 in an unequivocally healthy state, supply chain and labor scarcity frustrations notwithstanding. Last week, results from a Fed stress test on banks underscored the health of the financial sector. The health care sector is returning to normal. As mentioned, the leisure and hospitality sector is on the mend. So is the energy sector. Other high-impact sectors like housing, manufacturing, technology, agriculture, telecom and retail are enjoying some of their flushest times ever. Rare are the sectors still struggling—commercial real estate, perhaps, and export-dependent manufacturing, i.e., Boeing’s airplane sales.  

Which brings us back to the original question: Will inflation crash the party? Corporate America will have a lot more to say during Q2 earnings season, now just weeks away. Last week, FedEx reported another quarter of record revenues and profits—it’s a big winner from the surge in e-commerce. Nike’s earnings too, were a slam dunk. Darden, owner of restaurant chains like the Olive Garden, spoke of resiliency in the full-service dining segment. Netflix struck a partnership with filmmaking legend Steven Spielberg. Shoppers took advantage of Amazon Prime Day. Microsoft unveiled a new Windows update. Walmart, the Wall Street Journal reports, is working with Comcast to develop new Smart TVs. Carnival is getting ready to sail again. And the Supreme Court issued a consequential ruling on Fannie Mae and Freddie Mac, two housing finance entities straddling both the government and private sectors. Stocks rose last week. So did oil. So did 10-year Treasury yields.