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Key Points for the Week

  • U.S. nonfarm payrolls rose 559,000. For the second month in a row, this missed expectations which were for 650,000.
  • Unemployment fell to 5.8% from 6.1% as individuals who had stopped looking for work have been slow to return to the labor force.
  • The slow return pushed average hourly earnings 0.5% higher than the previous month.

Economic growth in the United States is on the rebound. The latest report shows real gross domestic product, which is the value of all goods and services produced in our country, was up 6.4 percent annualized during the first quarter of 2021, an improvement from 4.3 percent in the fourth quarter of 2020. Also, pandemic restrictions have been lifted in many areas. Americans have begun to spend more and save less, and there is high demand for goods and services.

The economy appears to be primed for stronger growth, but there are some glitches in the system – namely labor and supply chains.

For the second month in a row, the May U.S. employment report showed fewer job gains than anticipated, although the unemployment rate dropped from 6.1 percent to 5.8 percent during the month as more people dropped out of the labor market. Then, last week, the Institute for Supply Management (ISM) reported its Manufacturing Business Survey found new orders were up and production was down.

PR Newswire reported:

Record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices, and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.

PR Newswire

Concern about these issues may explain, in part, why U.S. stocks have been “trading sideways” for the last few weeks. Ben Levisohn of Barron’s reported:

The S&P 500 has gone almost nowhere since the middle of April. Yes, there have been weekly moves of more than 1 percent, up or down – two of the former, one of the latter – but the index itself has gained just 0.9 percent since then. Even recent daily moves have been relatively muted.

Ben Levisohn, Barron's

Yields on 10-year Treasuries retreated last week, which may reflect investors’ concerns about the economy, too. Rates tend to move higher as the economy strengthens. Major U.S. stock indices moved higher.

This Week in the Markets

U.S. nonfarm payrolls rose 559,000 last month. This is much better than April’s 278,000, but much lower than March’s 785,000 gain. Workers are returning to the labor force more slowly than expected. Businesses are reporting challenges in finding workers. Leisure and hospitality employment accounted for more than 50% of the job gains in May. Auto industry employment dropped 27,000 last month as semiconductor shortages forced plant shutdowns.

Unemployment fell to 5.8% due to job gains combined with a drop in the number of people looking for work. Average hourly earnings rose 0.5% as the labor shortage boosted salaries.

Markets saw the gains as good enough to feel confident about the economy and weak enough that interest rate hikes remain far off. The S&P 500 and MSCI ACWI indexes both gained. The Bloomberg BarCap Aggregate Bond Index inched up slightly.

Next week, the focus returns to inflation. The U.S. and China will release their Consumer Price Index data. China will also publish its Producer Price Index report, which reflects the cost of goods from manufacturers. Additional price increases from manufacturers could be a warning sign of future price hikes for consumers.

Our Furry Friends

Prior to the pandemic, The Economist reported Euromonitor anticipated, “…the number of pet cats worldwide to grow by 22 percent between 2018 and 2024, compared with 18 percent for dogs. Cats are better suited to apartment living than dogs, so they are more at home in the densely populated, fast-growing cities of Asia.”

Then, the pandemic spurred a global pet and pet industry boom. In 2020, Americans spent $103.6 billion on their pets, reported the American Pet Products Association:

  • Food and treats: $42.0 billion
  • Veterinarian care and products: $31.4 billion
  • Supplies and medicines: $22.1 billion
  • Other services: $8.1 billion

Spending is expected to rise to $109.6 billion in 2021.

Some tenacious pet owners have become “pet-fluencers” to offset the costs of pet ownership. They post pictures of their pets on social media. If the pet gains a following, brands will pay for the pet to pose with products. One popular Pomeranian, with more than 10 million followers, earned about $23,900 in 2020, reported Inverse.com.

The pandemic pet boom also triggered a new naming convention: pandemic-inspired names. The most popular 2020 pet names were mainstream choices, such as Bella, Luna, Lucy, Max, Charlie, and Cooper. However, Covi (up 1,159 percent, possibly from zero), Rona (up 69 percent), and Corona (up 24 percent) were trending, too, per Rover.com.

Here’s the really important news: Dogs remain more popular than cats in the United States. About 63 percent of American households own dogs, while just about 43 percent have cats.

Better, But Not Good Enough

The U.S. jobs market isn’t recovering as quickly as anticipated. The initial report for March indicated 916,000 jobs were created. Expectations for April were for more than a million; yet, the report fell far short. March has since been revised down to 785,000 jobs, and April’s revised gains remain below 300,000. Adding 559,000 jobs in May reflects an economy recovering at a slower pace than many expected and there appears to be many possible reasons for this slow expansion of the labor force.

The pace of job gains matters a lot. If the economy were to add 900,000 jobs, employment would reach its February 2020 peak in early 2022. If gains average 500,000 per month, the economy would not reach the February 2020 employment level for two years. Our expectation is job growth will gradually slow as more of the previous jobs are recovered.

The decline in unemployment from 6.1% to 5.8% was driven by more workers being hired combined with a reduction in the number of people working or seeking jobs. The labor force now includes 3.5 million people fewer than it did in February 2020, meaning that 3.5 million people have given up looking for work. This is a sharp reversal from recent years.

Efforts are expanding to increase the number of available workers. Many states have eliminated the $300 per week additional unemployment benefit. Some states are offering bonuses to lure people back to work. Other states are yet to reopen fully. Large cities, such as New York, Chicago, and Los Angeles, are planning to reopen more fully this month.

Employers are raising wages to encourage people to get back to work. Average hourly earnings jumped 0.5% in one month. Some question why employers don’t raise rates faster, but employers are looking for a certain profit level and raising wages faster than they can boost sales eats into that margin. Companies have organized the business around wages and are reluctant to raise them for a short-term gain that may have a negative long-term impact. It is harder to cut wages once they have been raised. Larger forces are also at work. COVID forced people to reassess their lives. Some are making choices to scale back on spending to emphasize different values.

The likely result is a new balance will gradually be attained. Wages seem poised to increase faster than in previous years. The elimination of additional unemployment support will also push people back into the job market as those payments subside and the money from government checks is used up. Businesses will rework their operations to use fewer employees, and unvaccinated people getting vaccinated will help people feel safe returning to work.

In the end, the recovery seems likely to march on as long as the virus remains under control. The data indicates the march will be longer and at a slower pace than many had hoped.

Budget Proposal

President Biden presented his $6 TRILLION budget. There are a slew of spending priorities and proposed tax law changes. This has generated multiple articles and commentaries. Please note that this budget proposal is aspirational and the future budget is in the hands of Congress. Between now and the final bill, there are certain to be numerous changes. We will monitor the progress of the Budget and provide insight and updates, as appropriate.

Delays in Tax Refunds

The Taxpayer Advocate Service (TAS) has stated that it is aware that taxpayers are experiencing more refund delays this year than usual. Typically, the IRS processes electronic returns and pays refunds within 21 days of receipt. However, the high-volume of 2020 tax returns being filed daily, backlog of unprocessed 2019 paper tax returns, IRS resource issues, and technology problems are causing delays. Once a return is processed by the IRS and loaded onto the agency's systems, TAS may be able to assist with delayed refunds if taxpayers meet case acceptance criteria. TAS has a case criteria tool that can be used to determine if TAS may be able to offer assistance. www.taxpayeradvocate.irs.gov/can-tas-help-me-with-my-tax-issue/.

Be Aware of Text Message Scam

The IRS and Security Summit have issued a warning regarding a new text message scam which cites the availability of an economic impact payment. The goal is to have the recipient reveal bank account details. If you have any questions about this scam, please contact us.

Did you Know? This Week in History

June 7, 1913: First Successful Ascent of Denali

On June 7, 1913, Hudson Stuck, an Alaskan missionary, led the first successful ascent of Denali (formerly known as Mt. McKinley), the highest point on the American continent at 20,320 feet.

Stuck, an accomplished amateur mountaineer, was born in London in 1863. After moving to the United States, in 1905 he became archdeacon of the Episcopal Church in Yukon, Alaska. Stuck traveled Alaska’s difficult terrain to preach to villagers and establish schools.

Stuck referred to the mountain by its Athabascan Indian name, Denali, meaning “The High One.” In 1889, the mountain, over half of which is covered with permanent snowfields, was dubbed Densmores Peak, after a prospector named Frank Densmore. In 1896, it was renamed in honor of Senator William McKinley, who became president that year.

Mount McKinley National Park was established as a wildlife refuge in 1917. Harry Karstens served as the park’s first superintendent. In 1980, the park was expanded and renamed Denali National Park and Preserve. Encompassing 6 million acres, the park is larger than Massachusetts. In 2015, the mountain was officially renamed Denali.

Hudson Stuck died in Alaska on October 10, 1920. Today, over 1,000 hopeful climbers attempt to scale Denali each year, with about half of them successfully reaching their goal.

Weekly Focus

Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world.

Albert Einstein, Theoretical Physicist

Experience is not what happens to a man, it is what a man does with what happens to him.

Aldous Huxley, Writer and Philosopher