May 9, 2022
Jobs Galore - Flexport Weekly Economic Report
By almost any measure, the U.S. labor market looks very strong. Unemployment was low, job creation was high, and there were record levels of job openings and quits. The combination likely means that wages will push upward and stoke inflation, despite weaker wage growth in April.
In Focus - A Strong U.S. Labor Market
Data this week showed the U.S. job market to be strikingly robust. According to the monthly report on the employment situation in April, there were 428K new jobs and the unemployment rate stayed at 3.6%. That makes 12 straight months in which 400K jobs or more were created. The share of the population, aged 25-54, who were employed notched down slightly to 79.9%, which is roughly where it was in the late summer of 2019.
A separate report that covered job market turnover through March showed that the number of job openings hit a series high of 11.5M. The number of people quitting their jobs – usually a sign of confidence in their ability to find another – hit a series high of 4.5M.
The chart above uses the turnover data to show how many unemployed workers there were for each job opening. The latest data point, for March 2022, was 0.54 – in other words, there were roughly two job openings for each unemployed person. This was the lowest number since the series started in December 2000. For perspective, the pre-pandemic low was 0.69 in April 2019.
Normally, a labor market as tight as this would create pressures for wage increases. For those worried about inflation, there was one intriguing figure in the April data that showed average hourly wages increased only 0.3% over March – a relatively tame figure that would extrapolate to a 3.8% annual increase. Yet this should do little to ease inflation concerns for a couple reasons.
First, it’s a volatile series, so one shouldn’t put too much stock in each monthly jag up or down. A smoothed version showing 3-month moving average median wage growth hit 6.0% in March and was rising rapidly.
Second, recent research by former Treasury Secretary Larry Summers and Alex Domash did a comparison between the job openings data and the better-known unemployment rate found that the figures had tracked each other very closely - until the pandemic. Then, the unemployment rate started behaving differently.
The authors compared a “predicted firm-side unemployment rate” that they constructed using job openings and quits data with the actual unemployment rate. They found that the constructed measure was better at predicting wage inflation. Even before this most recent unemployment data, they found that the predicted unemployment rate was more like 1.5%.
Their conclusion was that, in such an extreme case, a soft landing was unlikely. They argued that the inflation problem facing the Fed was “unlikely to be resolved without a significant economic slowdown.”
Latest Flexport Metrics & Research
The Flexport Ocean Timeliness Indicator for Transpacific Eastbound routes dropped to 103 days in the week to May 8, marking the lowest for the series since October 2021. That may simply reflect seasonal volatility linked to the lunar new year holiday. Flexport’s Air Timeliness Indicator for TPEB for the four weeks to May 8 was largely unchanged at 6.7 days.
U.S. goods imports grew rapidly in March. On a census basis, real imports were up by 9.8% over February, and 13.8% over March of 2021. The strongest category was consumer goods, up by 21.9% in real terms over a year before.
- Export growth was more tepid, up 2.6% over February and 1.4% over March of 2021. Comparing January-March of 2022 vs. 2021, real goods imports were up 10.9% and real goods exports were up 2.9%.
U.S. labor productivity fell by 7.5% in Q1'22. That figure combines a 2.4% decrease in output and a 5.5% increase in hours worked. The drop is less dramatic when productivity is compared with Q1 of 2021, showing only a 0.6% drop.
- A related figure, unit labor costs, measures the effect of rising compensation costs combined with productivity. In Q1 unit labor costs were up by 11.6%. The figure over four quarters was a still-hefty 7.2%. Ultimately, such increases in costs pass through to prices.
New orders for manufactured goods in the United States rose 2.2% in March, a rebound from an anemic 0.1% increase in February.
Unemployment in the Euro Area fell to 6.8% in March, down from 6.9% in February and 8.2% a year before. The number is the lowest registered in the series dating back to 2008.
Retail trade volume fell by 0.4% in the Euro Area in March versus February but was up 0.8% compared with a year earlier.
China’s international trade activity increased by just 2.1% year over year in April, marking the slowest rate of growth on that basis since June 2020. The closure of manufacturing activity in Shanghai is a major contributor, resulting in imports that were unchanged and exports that rose by just 3.9%. While representing a slowdown, activity was still 32.9% higher than April 2019.
- China’s services contracted sharply in April, falling at the second-fastest rate on record, according to the Caixin services purchasing manager’s index (PMI). The only lower reading occurred in February 2020 with the onset of the Covid pandemic.
Politics & Regulations
The Federal Reserve hiked the Fed Funds rate by 50 basis points and presented its plan to start working down its nearly-$9tn balance sheet. Under the plan, the balance sheet will shrink as debt matures, with a cap of $47.5bn/month for the first three months, then $95bn/month.
- That combines government bonds and mortgage-backed securities. Fed Chair Jay Powell noted that with current mortgage rates, the mortgage-backed runoff would probably not hit its cap. Whereas the Fed Funds rate is for short-term lending, bond markets sold off and the rate on the benchmark 10-year Treasury rose above 3.1%.
Multiple other central banks hiked rates in the face of inflation. The Bank of England took rates to the highest level in 13 years. The Reserve Bank of India implemented an unscheduled rate hike. Australia substantially increased its inflation forecast and also raised rates.
The U.S. Trade Representative’s office issued an official notice of its mandatory four-year review of the Section 301 tariffs on China. There are reports that Biden administration officials are split over how to proceed with the tariffs.
Supply Chain Update
Against the backdrop of conflict in Ukraine (see below), the OPEC+ group has modestly increased its plan to increase production by 0.432 million barrels per day in June compared to recent monthly increases of 0.400 million barrels per day.
- The U.S. government is also planning to refill its Strategic Petroleum Reserve. The replacement of 60 million barrels of oil equivalent (mboe) will be carried out over “unspecified future years”. That follows the planned release of 180 mboe to offset higher gasoline prices.
A local industry association has noted that apparel factories in Vietnam are facing a shortage of raw materials due to factory closures in China. Two of the major sports apparel manufacturers have also noted the impact of China’s closures on their sales in Q1’22.
Chart of the Week - Russian Oil Under Pressure
The European Commission has proposed a ban on imports of crude oil from Russia, due to take effect within six months subject to EU member states’ agreement, with three countries being provided a derogation until 2024.
The action represents the latest escalation of sanctions against Russia in connection to the conflict in Ukraine. It follows a similar move by the United States and is joined by a G7 declaration to the same effect.
As indicated in the chart above, Russia accounted for 26% of EU imports of crude oil in 2021 which already represented a decline from 31% in 2014. Instead EU importers have increased their shipments from the U.K., Norway and the United States with the latter reaching 24% of the total in the three months to January 31, 2022 compared to 27% for imports from Russia.
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