by Greg Valliere, AGF Management Ltd.
Insights and Market Perspectives
Author: Greg Valliere
May 7, 2021
THIS MORNING’S JOBS REPORT, due at 8:30 ET, should intensify the national debate over labor shortages, which have been fueled by generous unemployment benefits from Washington.
IT’S LIKELY THAT THE JOBLESS RATE will fall below 6%, but the headline this weekend may be that 1 million jobs were added in April as the post-pandemic economy sizzles.
REGARDLESS OF THE EXACT NUMBERS at 8:30, an over-heating economy is now a serious threat, even prompting Janet Yellen to speculate about a pre-emptive Fed strike to cool it off.
WE HAVE WARNED SINCE WINTER about the “shortage economy,” which is now obvious everywhere — semiconductor chips, lumber, gasoline, copper, rental cars, etc. But nowhere is it more apparent than labor, where shortages are widespread.
THE POLICY IMPLICATIONS: These shortages will ignite inflation, at least for a few months, perhaps longer. The inevitable reaction in Washington will be whether politicians have over-done the economic medicine.
A MAJOR SENTIMENT SHIFT ON CAPITOL HILL is now underway; lawmakers are hearing from constituents about the shortages, and there’s scant support for any further stimulus checks or unemployment benefits. In fact, there’s a growing sense that the unemployment checks shouldn’t have been locked in through early fall.
VIRTUALLY EVERY REPUBLICAN IN CONGRESS, along with a handful of Democrats, are openly questioning whether more stimulus is required. There’s solid support for repairs to highways, bridges, dams, water infrastructure, etc., but President Biden’s request for $4 trillion in new spending has no chance of enactment.
WE CONTINUE TO BELIEVE there will be a vigorous debate by year-end over what constitutes full employment; the jobless rate could fall to 5% or lower by Christmas.
POLITICS THEN ENTERS THE PICTURE: A labor shortage and percolating inflation could produce this irony for President Biden as the 2022 elections approach — instead of getting credit for a strong economy, he could get blamed for gasoline shortages and an inflation surge that makes housing far less affordable.
THE BIG ECONOMIC THEME THIS SPRING is that Washington is over-doing the medicine, and that theme will persist this summer. Biden got $1.9 trillion in covid relief spending a few weeks ago, but the rest of his agenda faces a significant haircut.
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This post was first published at the AGF Perspectives Blog.
