One of things I will always associate with the transition from spring to summer is the return of the fresh aroma of blooming flowers. That may also mean a return to sneezing season for some of us, but nonetheless, it is a welcome change. We have a lilac tree outside the front door of our home that is now in full bloom, and the fresh scent has recently permeated the air. It is certainly that time of year.
For the past several months, we have been writing about the impact of transitioning from the COVID economy to a more “normal” environment. Economic data has been strong (as expected), and we expect that will continue throughout the year. However, current data suggests that key growth drivers may be shifting back to more normal sectors of the economy from those that got a COVID-boost.
The housing market has certainly experienced a V-shaped recovery. The Case-Shiller U.S. National Home Price Index was up roughly 13% over the past 12 months. Two indicators of housing market health – median days on the market, and number of homes listed – have been down significantly. The strong market eventually led to significantly inflated input prices and backlogged lead times for housing supplies. How long can this last? While the market is still strong by many measures, recent data points to the beginning of a turn. Lumber prices (spot and futures) have come down from their recent peaks. In addition, the University of Michigan’s “Good Time to Buy a House” index dropped significantly in the month of May. These data points could be an early indication that consumers are at a turning point, and the market is trending towards a return to more normal levels.
On the flip side, we’re seeing significant signs of improvement in other discretionary consumer spending. It is nice to see stadiums full of people again, and the data on department store foot traffic, travel, and gaming are all nearing pre-pandemic levels. The following chart illustrates just how closely air travel, as an example metric, follows the trends in the virus; essentially, improvements in virus numbers are followed shortly thereafter by increased traveler numbers.
The return to normalcy has increased pressures on the labor market, as noted in Brian Andrew’s commentary (Now Hiring!) about the impacts of the April employment report. We expect the May employment report, due out later this week, to be telling as well. One of the consistent themes we hear from business clients is they are struggling to recruit and hire. In fact, the level of current job openings and firms reporting they are unable to fill posted positions have both reached record highs, as shown in the following chart.
Several pandemic-related factors have contributed to the current labor shortage, including travel restrictions on seasonal immigrant workers, working parents with childcare responsibilities/restrictions, direct stimulus support payments to individuals, fears of catching the virus and many others. Given that backdrop, these labor issues will continue to have an outsize influence as the economy recovers, particularly on wage levels. And as a result, one of the biggest risk factors to watch during this recovery will be inflation. Will it be just “transitory” as the Fed suggests, or will inflation become a more intractable systemic issue? The story is one we will certainly continue to watch.
For now, please enjoy the fresh smell of the lilacs, a return to the stadium, and all the good things we get to enjoy during the summer.