Three massive economic tailwinds I can't stop thinking about 📈📈📈
The forces keeping a recession at bay 💪
There were a total of 150.5 million people employed as of February, up 19.9 million from the pandemic-era low in April 2020.
February’s strong report follows January’s blowout jobs report.
All of this data comes as some analysts warn about the rising risk of an economic recession.
Yes, the economy faces a handful of headwinds. Inflation is high, and it threatens consumer purchasing power and corporate profit margins. The Fed says it will fight inflation by raising interest rates, but this tighter monetary policy means it’s going to be more expensive to finance stuff. Meanwhile, Russia’s war with Ukraine threatens to send negative shockwaves through the global economy by sending commodity prices higher, among other things.
But there are also plenty of tailwinds. Some incredibly powerful and persistent bullish forces out there are fueling stronger economic data like Friday’s jobs report and last week’s record consumer spending report.
Below are three, which will look familiar to long-time TKer subscribers.
1. Excess saving: $2.4 trillion
Something I’ve been talking about for a while1 is excess savings — the extra cash that consumers have piled up since February 2020, thanks to a combination of government financial support and limited spending options during the pandemic.
These excess savings have helped consumers more than cover the incremental costs that have come with inflation. And they’re expected to help blunt the possible effect of even more inflation up the road.
“Households in the aggregate have accumulated about $2.6 trillion of ‘excess saving’ in recent years relative to the pre-pandemic trend, which all else equal could be enough to cover even a sustained 50% surge in oil and natural gas prices for many years to come,” Daniel Silver, an economist at JPMorgan, wrote in a February 25 research note.
Bank of America economists estimate that consumers and corporations combined are sitting on about $19 trillion worth of cash, up 35% from 2019.
This helps explain why consumer and business spending has been so resilient, even as sentiment has deteriorated.
By the way, excess saving has given some Americans the option to not work during the pandemic. Without income, more and more of these folks will see their savings deplete if they haven’t already. Fortunately, there is no shortage of job openings…
2. Jobs openings: 10.9 million
Most employers don’t post jobs haphazardly. Especially with wages on the rise, you can bet many employers have done all they can to extract more productivity out of their existing workforce. Many companies have tedious processes for opening new positions. And you can’t blame them — employees are expensive to hire, train, and retain.
But as many business executives will tell you, there’s just not enough labor to meet the booming demand.
Assuming economic growth slows and some businesses are forced to layoff employees, it’s not crazy to see employment rates at the national level hold steady as these laid-off workers quickly fill some of these 10.9 million open jobs.
In case you’re wondering, layoffs and firings were at record-low rates as of the BLS’s December report. So, there’s no indication that companies are looking to cut back.
If you’re still skeptical because the BLS’s current data only goes through December, Indeed — one of the largest job listing sites in the world — observed that job postings as of February 18 were holding at sky-high levels. Also, S&P Dow Jones Indices reported that job listings at S&P 500 companies were up 3.8% year-to-date through February 21.
3. Core capex orders: $80.1 billion
Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — climbed to a record $80.1 billion in January.
What exactly is this stuff? It’s all the expensive equipment your company buys so that you and your coworkers can produce the goods and services you sell.
Here’s a sampling, according to the Census: “…farm machinery and equipment; construction machinery; mining, oil, and gas field machinery; industrial machinery; vending, laundry, and other machinery; photographic equipment; metalworking machinery; turbines and generators; other power transmission equipment; pumps and compressors; material handling equipment; all other machinery; electronic computers; computer storage devices; other computer peripheral equipment; communications equipment…”
Like the hiring and employment process, this equipment is incredibly expensive stuff that has to go through all sorts of red tape before a purchasing manager gets approval to place an order.
And to be clear, these are orders. This stuff hasn’t even shipped yet. If the economy were on the precipice of a recession, these numbers would not be this high.
But as many executives have been saying, there’s just not enough equipment to enable their companies to meet demand. This relates to what’s driving the supply chain nightmare: Demand for equipment is unusually high. Indeed, the value of the backlog of unfilled core capex orders sits at a record-high $244 billion.
“Solid goods demand and plenty of backorders will keep manufacturing on a very healthy course even as spending tilts in favor of in-person services,” Nancy Vanden Houten, lead U.S. economist at Oxford Economics, wrote in a February 25 note. “And we should see better supply-side news as shipping bottlenecks slowly clear, input shortages diminish, and Americans return to the job market.”
The big picture
There are a lot of reasons to be concerned about the outlook for the economy. But any economic headwind is up against the three massive tailwinds we just discussed.
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