Economic data for the US Q1, and monthly data for May came in today. First quarter GDP came in at 6.4% as against estimates of 6.5%. Weekly jobless claims came in at 406,000, the lowest in the post lockout period, and down significantly from the 430,000 of the previous week. The data shows continued rapid upward pressure on inflation. Durable goods orders were also up by 1% ex autos, though down 1.3% including autos, which fell by 6.7%, whilst capital goods orders, fuelled by rising demand from businesses facing rapidly expanding monetary demand, rose by 2.3%, way above expectations.
The data showed that the economy is growing rapidly fuelled by monetary demand, resulting from large injections of liquidity directly into people's pockets, which was burning a hole in them, as soon as they were let out to be able to spend it. Durable goods orders were expected to rise by 0.8%, but fell by 1.3%, due to a large drop in car sales. That drop is due to the fact that car makers had to shut down production, because surging global demand has created a shortage of microchips. Given the temporary shutdown of car makers due to the microchip shortage, it is likely also to have had an impact on the jobless claims data too. Without those shutdowns, jobless claims could have been back to the pre-lockout levels of 200,000, which was a sign of growing labour shortages.
The GDP data was also weakened by a sharp drop in inventories, which is an indication that retailers, in particular, have cleared their stocks, without yet having been able to replace them from suppliers. The consequence will be a stronger upsurge in production in Q2, as suppliers ramp up production to meet those demands from retailers and wholesalers for restocking, alongside rapidly rising growth in sales.
At the same time, Joe Biden has announced a new fiscal stimulus package, promising to bring a $6 Trillion budget to Congress for infrastructure spending. That is on top of all the other fiscal stimulus measures previously proposed. All of this spending now promises to increase US debt to around 117% of GDP. The US is projected to have a budget deficit of over $1 Trillion in each year for the next decade. So far, bond markets seem to doubt that such spending will ever get through, and, together with the fact that the US Federal Reserve, which already owns a large mass of US Treasury Bills that no one else would, otherwise, want to own, continues to keep its knee heavily pressed down on the neck of the bond markets, means they have still not crashed, thereby, suspending disbelief for a while longer.
Tightening labour markets, as lockouts are lifted, rapidly rising inflation with huge oceans of liquidity, with rampant government spending fuelling huge levels of debt on top of existing high levels of household and company debt, is reminiscent of the conditions of the 1970's, when wages were rising due to a long period in which labour supplies were run down, when governments ran up large deficits to fund public spending on welfare programmes, on the Vietnam War, and on counter-cyclical measures, as economic growth began to falter, and suffer sharp contractions as with the 1973 Oil Crisis, that also saw primary product prices rising. That led quickly to inflation at over 20% in Britain, and over 15% in the US, despite it becoming a period of stagflation, in the late 1970's.
The difference today, is only that we are at a different point in the long wave cycle, that would be closer to the equivalent of the early 1960's. But, given current conditions that simply means that we are likely to see even sharper increases in growth, and pressure on inflation, wages and interest rates. We are, after all, a long, long way from the kinds of interest rates of the 1960's. In 1962, homebuyers in the UK faced interest rates of 5.50%, which rose to 15% in 1976, and 16% in 1981.
In the US, 3 Month Treasury Bills rose steadily from under 0.5% in the 1940's, to 4.5% in 1960.
Monetary authorities will have some rapid catching up to do.
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