Anirban has given eight presentations in five states over the past week, so I (Zack) am giving him a much-needed breather on this Week in Review. A lot of economic data came out this week—taking it all in kind of felt like drinking out of a firehose (that occasionally shot out boiling water)—so lets get to it.
Construction spending inched 0.1% higher in March 2022 and is up 11.7% year over year. These gains are mostly attributable to the residential sector. Spending on home construction rose 1% in March and is up 18.2% year over year and 44% since the start of the pandemic. There are currently more than 1.6 million housing units under construction, the most since May 1973. We talked about how developers are racing to meet demand for housing two weeks ago (link here), if you want more on this topic.
The nonresidential sector, which has fared less well since the start of the pandemic, declined 0.8% in March and is up just 5.6% year over year. Construction spending data isn’t adjusted for inflation, so in real terms, nonresidential spending is down over the past year (construction input prices are up 24.4% over that span). Some segments, like manufacturing (+31.9% year over year) are doing well. Most, unfortunately, aren’t. You can read what Anirban had to say on the nonresidential sector over at Associated Builders and Contractors.
S&P Global Manufacturing PMI
This index shows that, despite inflation, operating conditions improved significantly in April for U.S. manufacturers. There are a lot of headwinds at the moment, but consumer and business demand is so far unaffected. Perhaps the best news in this release is that exports (which were weak in the first quarter and contributed to negative GDP growth) picked up in April.
Despite current operating conditions, confidence regarding the coming year fell to its lowest level since 2021. That should surprise absolutely no one given inflation and geopolitical tensions. Overall, this index is largely in line with the other manufacturing PMI that came out on Monday…
ISM Manufacturing PMI
Economic activity in the manufacturing sector expanded for the 23 straight month in April but at a slower pace than in March (and at the slowest pace since July 2020). There are a lot of components of this index (new orders, production, employment, backlog, prices, etc.), and virtually all of them showed a similar dynamic: expansion but at a slower pace than in March.
Job Openings and Labor Turnover Survey (JOLTS)
The JOLTS data for March show an all-time high number of job openings (11.5 million), an all-time high quits rate (3%), and nearly an all-time low rate of layoffs/discharges (0.9%, just above December’s 0.8%). What do we take from this? The demand for labor is historically high, the supply of labor is historically low, workers feel empowered to leave their jobs in search of new ones, and employers are scared to death of firing people.
The Fed didn’t start raising rates until March, so this release isn’t particularly instructive. We’ll learn a lot more from April’s JOLTS data. So, instead of diving too deep into this report, I’m going to talk about the idea that no one wants to work anymore.
That’s been a popular explanation for labor shortages over the past year+, and while it might be true that people don’t want to work (I certainly don’t), the data show that they are. The prime age (25-54) employment to population ratio rose to 79.9% in March, about half a percentage point below February 2020 levels but higher than at any point from 2008 to July 2019, while the prime age labor force participation rate is back at 2019 levels.
So why are there so few workers? In classic millennial fashion, I’m going to blame this on just about every generation but my own. Let’s start with Baby Boomers. The employment-to-population ratio for 55+ is at 37.7%, well below the prevailing level of the past decade. We can mostly chalk this one up to retirements (I don’t think Boomers are smoking pot and playing video games in their parents’ basements).
We can also heap a little blame on Gen Z, albeit less than I’d like. The labor force participation rate for the 20-24 age range is modestly below 2018-2019 levels but above 2014-2017 levels, so they’re participating in the labor market at a decent rate.
Even in the aggregate, the employment-to-population ratio is above 2009-2016 levels and right on par with 2017. The worker shortages are (if you ask me) a function of low immigration rates (due to both pandemic and policy, though more ideas like this would help), the long-term decline in fertility rates, and covid-induced early retirements. The notion that people don’t want to work anymore is a convenient and popular explaination, but one that I don’t really buy.
New orders for manufactured goods increased 2.2%, or $11.8 billion, in March. Orders for durable goods rebounded after falling in February (+1.1% in March). While it’s nice to see the demand side of the economy keep chugging along, outsized demand for durable goods is one of the main drivers of inflation, and it looks like orders continued to increase faster than supply chains can adjust, at least through March. Because this is March data, we don’t really see the impact of higher interest rates, so we’ll learn more when April’s data comes out.
Logistics Managers’ Index
This index, which measures the sentiments of supply chain executives, found that growth continued in April, but at a slower rate than in March. The biggest takeaway here seems to be that transportation prices fell in April while transportation capacity increased and is at its highest level since before the pandemic. This hopefully bodes well for supply chains and inflation, though diesel shortages and prices might reverse that trend. Speaking of…