The speed of the US rebound from the Covid-19 crisis has left executives, investors and economists scrambling to interpret whether labour shortages and rising prices point to a short-term economic summer heatwave or a longer period of dangerous inflation.
Some of the country’s largest companies have hailed the strength of the recovery in recent earnings announcements while declining to predict whether the swift vaccination rollout and massive fiscal stimulus will cause problems for corporate America.
“The second half will likely have more uncertainty than a normal year,” Doug McMillon, chief executive of Walmart, cautioned this week, even as he and his contemporaries noted the strength of consumer spending and the prospect that elevated savings rates indicated continuing pent-up demand.
3M, the manufacturer, was among an array of companies highlighting “tremendous inflation” in the costs of labour, freight and some raw materials last week, although it said it had raised prices for customers in response.
Some recent economic data has raised red flags, such as a jump in consumer prices, although it was driven by factors that might be transitory. These included a sharp rise in the price of airfares as Americans started travelling again, and higher demand for used cars sparked by a chip shortage that has dented production of new vehicles.
Unexpectedly weak job creation last month also masked a more muddled picture, and was driven by a drop in employment in temporary jobs, transportation and warehousing, and manufacturing.
“The pandemic . . . sliced through the market and picked certain industries and demolished them like a hurricane [but] skipped over other industries and left them intact,” said Nela Richardson, chief economist of ADP.
Those disparities have been evident in companies’ earnings. A sharp increase in lumber prices has hurt home builders and DIY retailers, while clothing chains such as TJX have warned that driver shortages might keep freight costs “stubbornly high” all year.
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Gershon Distenfeld, co-head of fixed income at AllianceBernstein, said: “It has long been evident there would be a spike in prices in spring and summer this year. The question is not whether prices are going to rise in the short run — they are. It is whether this is going to be persistent.”
Despite widespread evidence of worker shortages, companies including Disney and Home Depot have expressed confidence that they can staff up to meet a revival in consumer demand while also passing on higher costs to customers.
A tighter labour market is concerning some employers, however, as a combination of factors make it harder to find staff, including higher unemployment benefits, a childcare shortage, and the fact that some workers remain worried about taking a job while the virus is still spreading.
One McDonald’s franchisee in Florida made headlines last month for offering $50 to anybody showing up for a job interview, and the parent company announced plans to increase wages by an average of 10 per cent at the 650 US restaurants it directly manages. Under Armour, the athletic apparel group, on Wednesday announced broad increases in its minimum hourly wages.
Cost increases and “simply lacking workers to fill plants” were challenges “that we are going to have to navigate through this long, hot summer”, Robert Vitale, chief executive of cereal group Post Holdings, warned earlier this month. But he said he hoped that more people would return to work when extended unemployment benefits expire in September.
Analysts and policymakers are split on how long investors can expect cost and labour pressures to last due to the unique circumstances of the Covid-19 pandemic and the resultant response from policymakers
“We’ve never shut down for this long [and] we’ve never had fiscal support of this size during a recession. The opening is going to be . . . bumpy,” said Louise Sheiner, policy director at the Hutchins Center on Fiscal and Monetary Policy, an economic think-tank.
“There’s a whole bunch of demand in some areas, but . . . you don’t know how [long] it’s going to last,” she said.
Ellen Zentner, chief US economist at Morgan Stanley, agreed that a short-term surge in prices was always foreseen, but warned that inflation data was “running even higher than expected”.
“I see a multitude of risks here: the risk of higher inflation that is sustained, the risk that we can’t get enough jobs back as quickly as we would like to, and the risk that some of these supply chain disruptions go on for longer and depress production.”
Morgan Stanley still expects 8 per cent growth for the US economy this year, but if disappointing job growth persists through the summer “that would raise a lot of concern”, Zentner said.
Recent market moves, however, suggest investors are not too fearful that today’s higher consumer prices herald a more prolonged bout of inflation.
A sell-off in US government debt has moderated following a tumultuous first quarter. After yielding nearly 1.8 per cent in March, the benchmark 10-year bond now trades below 1.7 per cent. Inflation hurts these bondholders because it erodes the value of their interest payments.
Short-term gauges of inflation still sit above their long-term counterparts, indicating that investors largely subscribe to the Federal Reserve’s view that the current bout of inflation is “transitory”.
ADP’s Richardson said many of the current cost pressures were the product of temporary bottlenecks, and expects September to be “a turning point for employment” as children return to schools and their parents go back to work.
But part of the challenge for those trying to read the mixed messages from the US economy is that the pandemic has resulted in swift structural changes, she says: “There’s nothing in history that can mimic this and even if there was, the economy shifted in a different direction.”