The Conference Board’s Leading Economic Index and CEO Confidence Index, Markit’s preliminary May business surveys, and jobless claims all sent positive signals for the strong economic recovery.
We remain bullish on housing, despite April’s pullback in new and existing home sales. We also view near-term inflation pressures as temporary, driven by transient factors that should fade. All of this is discussed below and supports our favorable outlook for cyclical sectors, including Financials, Industrials, Energy and Materials.
Business Surveys Hit Record Highs
Private business activity soared in May, as more vaccinations led to a further reopening of the economy. The Markit Flash U.S. Services PMI (a timely business survey) surged to a record high, and well above expectations. It was the fifth gain in a row, and the most in nearly a year, which firms attributed to stronger client demand and the return of non-essential businesses. New orders grew at a record pace, and business confidence continued to improve on expectations of more vaccinations and return to normalcy by the end of 2021.
The Flash Manufacturing PMI also reached a record high. Output expanded at the fastest pace in four months, while new orders grew at a record rate. However, supplier deliveries remain challenged amid continued supply chain disruptions. With shortages impeding production, order backlogs accumulated at the quickest rate since data started 14 years ago. Manufacturers expect input shortages to last through 2021 and put a strain on capacity.
While these business surveys show price pressures continue to mount, we see several important factors that suggest these price pressures should be transient. Base effects (last year saw very low inflation during the lockdowns), a strong economic reopening with pent-up demand, massive fiscal stimulus, and supply chain disruptions are all transitory factors that will likely fade over time—ultimately reducing inflationary pressures.
Leading Indicator Points to Further Strong Growth
The Conference Board’s Leading Economic Index (LEI) jumped 1.6% in April, the most since last July, and consistent with an above-trend economic expansion. Eight of its 10 components increased, led by a steady improvement in initial jobless claims and stock market gains.
CEO Confidence Surges to Record High
The Conference Board’s CEO Confidence Index jumped for the fifth consecutive time and to a record-high level in the second quarter. Both current conditions and expectations for own industry and the broad economy reached unprecedented levels. The surge in confidence implies faster investment spending growth for the rest of this year and into 2022. Hiring plans strengthened, and there were more reports of difficulty finding qualified workers.
Further Improvement in Jobless Claims
Initial claims for unemployment insurance decreased 34,000 last week to 444,000, the lowest level since March 2020. In the 19 weeks since the start of this year, initial claims have declined in 11 of those weeks, and have been down in five of the past six weeks. The steady decline in claims reflects the continued improvement in the labor market, although conditions are not yet back to pre-recession.
Remaining Bullish on Housing
While existing home sales fell 2.7% in April, they are up 34% on a year/year basis with the National Association of Realtors attributing the deterioration in sales squarely on the lack of housing inventory. While housing starts declined 9.5% in April, starts and permits are still near their highest level since 2006 and builder confidence remains near the all-time high. Homebuilders remain optimistic that low housing inventory, low mortgage rates, and favorable demographics will continue to create tailwinds for new construction. There has also been a long-running deficit in new home construction. Estimates show the U.S. needs roughly 1.5 million housing starts a year based on population growth and scrappage (voluntary knockdowns, natural disasters, etc.), but we haven't built that many new homes in any calendar year since 2006.
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