MainStreet Macro: How are we doing? Unpacking the economy in five easy steps

Fourteen months after the pandemic’s initial assault, Main Streeters want to know how we’re doing.

The answer isn’t simple. There’s a deluge of data, but depending on where you look, you could find different answers.

So how are we doing – really?  Here are five things to watch to get a sense of the economy’s overall well-being, ranked from important to very important.

5: Watch policy

With more than $5 trillion in federal funds appropriated–so far–fiscal policy has been a huge driver of the economic recovery. The U.S. is projected to exceed its pre-pandemic growth trajectory later this year largely because of that spending, according to International Monetary Fund projections.

As we’ve noted before, that spending has a price – growing federal debt and larger deficits. 

Yet the Biden administration isn’t done yet. The White House has proposed $1.9 trillion in new infrastructure spending and another $1.8 trillion to support children and families. Even if these proposals–which are still being drafted–pass Congress with the spending completely intact, it’s unlikely they’ll provide the same boost to the economy as earlier outlays.

Rather, these new spending plans are intended to reap economic benefits in the long term.

4: Watch inflation and interest rates

Some might quibble that this indicator is ranked near the bottom. Core inflation, stripped of volatile energy and food prices, hit a 25-year high of 3% in April, triggering a selloff in the stock market. Fortunately, Wall Street’s frenzy was temporary and the share prices rebounded the very next day.

Why? First, inflation was up from very low levels. Here’s a gentle reminder of what inflation used to look like, for those who weren’t around (or choose not to remember) the 1980s.

Source: St. Louis Fred

Second, the Federal Reserve believes, as do I, that recent price jumps are temporary. Sectors currently experiencing steep inflation saw prices plunge dramatically as the pandemic took hold. April’s jump was, in a sense, a healthy sign of normalcy.

And the biggest price volatility was in sectors that remind me to book my beach rental for the summer.  Car rentals (up 16.2%), air fares (10.2%), and hotels (7.5%) all saw big price increases as coronavirus restrictions eased.

The Fed, the country’s top inflation cop, last year cut interest rates to near zero to help the economy weather the pandemic. With growth improving and prices rebounding, there’s concern the central bank will raise rates again and possibly slow the recovery.

Let me remind you, dear Main Streeter, that the Fed has a second mission – full employment. Until we see sustained and robust job growth, the Fed is unlikely to raise rates, even from the very low levels they’re at now.  When the time does come for a rate hike, the Fed’s modus operandi is to take it slow and easy.  Think of rate increases as gentle speed humps, not road closures.

3: Watch supply

Supply shortages — from semiconductors to restaurant workers — have raised concern that business lacks the crucial inputs it needs to keep up with rising demand as the economy reopens.

This reminds me of my own personal experience. Like so many families, mine wanted to make the most of our time at home, so last fall we decided to adopt a puppy. 

Lots of families had the same idea, leading to — you guessed it — a puppy shortage. I looked everywhere for bulldogs, bullmastiffs, and any breed in between. No go.

By January, overwhelmed by puppy demands, I settled on this lovely lady, Lavender.

Now, I know that the production cycle for a semiconductor is much longer than it is for a puppy.  But for most sectors, supply shortages are short-term bottlenecks, not chronic impediments to growth.

2. Watch the three-month job trend

Economists expected a hiring surge in April. Instead, job gains for the month topped out at 266,000. It was an epic miss for forecasters, many of whom had predicted April would deliver a million or more new jobs. 

The ADP Research Institute reported 742,000 new private-sector jobs for April – a robust-enough number, but about 100,000 shy of the consensus estimate at the time.

We’re still missing 8 million jobs from this time a year ago, and they’ll be difficult to recover. Still, despite April’s disappointing number, the labor recovery probably isn’t screeching backward. Rather, the economy’s reopening will be bumpy. Some months will underwhelm, but we should stay on an upward trajectory.

To avoid whiplash, instead of looking at the monthly payroll number, which is prone to revisions, look at the three-month trend. Over the last three months, the economy produced over 1.57 million jobs, compared to 191 thousand jobs in the prior three months. Hiring momentum has increased with the wider vaccine rollout.

1. Watch the consumer

Time constrained? This indicator is for you. Consumer spending accounts for 70% of the economy. So if you have to choose only one indicator to watch, watch consumers. How everyday people respond to economic change will reverberate across sectors, from tourism to retail to manufacturing.

Here are four consumer behaviors to pay attention to:

• Watch what consumers owe. Strong household balance sheets are the unsung heroes of the economy.  Aided by government relief spending over the past year, households have been paying down debt and are now freer to spend.  Disposable debt to disposable personal income currently is 9.4%. Historically, that number has been closer to 11%.
• Watch how consumers feel. Confident consumers tend to spend instead of save. Before the pandemic, a key measure of consumer sentiment tracked by the University of Michigan hit a sky high 101, before plunging to 72 in April 2020.  It’s been a bumpy clip back, but sentiment as of April was just shy of 85.
• Watch how consumers behave. You don’t have to go too far or even look at a number to measure this metric. Evidence might be just outside your door.  Are restaurants open and grocery stores less crowded? Are you getting word that summer camps, sports clinics, and after-school clubs are meeting in person? Have you reached out to a neighbor to confirm your weekly socially-distanced walk, only to learn she’s on vacation with her family–and traveled there by plane? (Gasp!) Look for signs that people are resuming normal activities.
• Watch what consumers buy: Retail sales was one of the first economic indicators to recover during the pandemic. Boosted by government stimulus, consumers have outdone themselves this year. With the stimulus checks in the review mirror, will consumer spending now slow? And as normalcy returns, will consumers rebalance their spending, shifting from goods to services such as travel and tourism.

My Take

The Main Street Macro blog periodically will return to these five indicators to assess the economy’s strength. For now, by all of these measures, the economy is recovering at a healthy clip.

Still, the pandemic has had an uneven impact, with some people, companies, places and industries hit harder than others. Despite the whirlwind topline growth we’re likely to see in the next two quarters, there will be losers in the post-Covid recovery.

For that reason, surging growth could be a short-term phenomenon. After the sprint of the next few quarters, I expect a return to a more plodding pace, one that’s even less inclusive and has more inequality than it did before the pandemic. Even if the economy writ large is doing well, we’ll need to ensure that all of its parts are as healthy as the whole.