The S&P 500 index rose just over 0.5 percent in May and recorded a new all-time high despite a pick-up in volatility due to rising tensions in the Middle East, a computer hack of a major oil pipeline, a meaningful jump in inflation figures, and a significant selloff in cryptocurrencies, including Bitcoin.
The Consumer Price Index (CPI), excluding food and energy prices, increased 4.2 percent year-over-year, the fastest increase since 2008. The Federal Reserve’s preferred inflation gauge, Personal Consumption Expenditures (PCE) excluding food and energy, increased 3.1 percent year-over-year.
And while oil prices are excluded, they have risen from well below $40 a barrel one-year ago to more than $66 a barrel at the end of May. Regardless of any inflation index, higher food and energy prices act as a tax and are creating some headwinds.
While housing has been strong over the past year, it has cooled a bit as both new single-family houses sold and pending home sales have declined over the past one-month and three-month time frames. Moreover, consumer confidence has slipped over the past few weeks.
When the employment report was released on May 7, 2021, the consensus was for 950,000 to 1 million new jobs. The number of new jobs came in at 266,000 and the unemployment rate actually rose from 6.0 percent to 6.1 percent, a big disappointment. Moreover, the number of new jobs initially reported in April were reduced by 78,000. When asked if the exceptionally generous unemployment benefits had something to do with the low new jobs’ figures, Treasury Secretary Janet Yellen said “I don’t think that the addition to unemployment benefits is really the factor that’s making a difference.”
It seems as though Janet Yellen, whose specialty is labor economics, is at best being intellectually naive and at worst less than honest. We say that because the next business day President Joe Biden threatened to take away unemployment benefits when he said “We’re going to make it clear that anyone collecting unemployment, who is offered a suitable job must take the job or lose their unemployment benefits.”
Moreover, the Federal Open Market Committee minutes from the April 2021 meeting stated that businesses were having trouble hiring workers because of factors such as “expanded unemployment insurance benefits.” The reality is that some states offer weekly unemployment benefits of as much as $855 before the additional $300 in Federal assistance, which equates to being paid more than $45,000 a year not to work.
However well-intentioned the relief programs have been, we are seeing second and third order effects. While Joe Biden has been very careful to follow the script – not a political comment but an observation – occasionally he improvises. Following the employment report, he said “I know there has been a lot of discussion since Friday’s since Friday’s report (SIC) that people are being paid to stay home rather than go to work. Well, we don’t see much evidence of that. That is a major factor.” (Emphasis added)
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