Turned Tight 

Doug Nolan


U.S. Non-Farm Payrolls increased 559,000 in May, about double April’s 278,000 gain, but still below the 675,000 consensus forecast. 

Average Hourly Earnings rose a stronger-than-expected 0.5% for the month, with back-to-back strong monthly earnings gains (April up 0.7%). 

The Unemployment Rate declined to 5.8% from April’s 6.1%, the lowest level since April 2020. 

It’s worth noting monthly Unemployment averaged 5.9% over the past 30 years (6.2% over 40 yrs and 6.3% over 50 yrs).

June 4 – Bloomberg (Christopher Condon): 

“Federal Reserve policy makers should be ‘deliberately patient’ and wait to see more evidence that the U.S. labor market has made more progress before they consider cutting down their asset-purchase program, Cleveland Fed President Loretta Mester said. 

‘We want to be very deliberately patient here because, you know, this was a huge, huge shock to the economy,’ Mester said… Mester spoke just after a Labor Department report showed U.S. job growth picked up in May… ‘I view it as a solid employment report,’ she said. 

‘But I’d like to see further progress.’ 

Mester noted that the prime-age labor-force participation rate has yet to return to pre-pandemic levels. 

She said she was not overly concerned about inflation because she didn’t see wage increases feeding into higher overall prices.”

The FOMC is clearly in no rush to begin the process of pulling back on massive monetary stimulus. 

I guess May’s somewhat weaker-than-expected jobs gain provides justification for pushing out the talk about talking about tapering – at least that’s the way the bond market traded Friday. 

Ten-year Treasury yields dropped seven bps in post-jobs data trading, with yields ending down four bps for the week. 

The U.S. dollar index dropped 0.4% Friday, reversing most of the gain from earlier in the week - and throwing some cold water on the sickly greenback’s recovery attempt.

Lost in the shuffle was ADP’s stronger-than-expected 978,200 jobs added in May (estimates 650k), the strongest showing since June 2020. 

ADP reported a booming 850,000 Service-Provider jobs added. 

Curiously, ADP reported 65,000 new construction jobs, in contrast to Friday’s Department of Labor data posting a 20,000 decline. 

ADP had 128,000 Goods Producing jobs added, versus the Labor Department’s 3,000. 

Moreover, ADP reported pervasive strong employment gains at small, medium and large companies. 

Examining weekly jobless claims data, applications for unemployment benefits dropped to 385,000, the lowest level since March 2020. 

Weekly Initial Jobless Claims averaged 940,000 over the past year.

June 2 – Business Insider (Grace Dean): 

“The US labor shortage, which is hitting industries from education and healthcare to hospitality and ride-hailing apps, is holding back the nation's economic recovery from the pandemic, the US Chamber of Commerce said… 

In some states and some industries, there are fewer available workers than there are vacancies, a new report by the Chamber said. 

‘The worker shortage is real - and it’s getting worse by the day,’ Suzanne Clark, the president and CEO of the Chamber, said… 

‘The worker shortage is a national economic emergency, and it poses an imminent threat to our fragile recovery and America's great resurgence,’ she said.”

June 1 – The Hill (Joseph Choi): 

“The worker shortage crisis in the U.S. has continued to worsen in the past months according to… the U.S. Chamber of Commerce. 

The Chamber stated in its reports that in March there were a record 8.1 million vacant jobs in the U.S., showing an increase of 600,000 positions from February. 

However, the number of available workers per job, 1.4 workers per job, has become half of what the national average has been for the past 20 years… 

The business group notes that in some industries, there are fewer available workers than the number of vacant jobs, such as education, health services and government jobs. 

‘More than 90% of state and local chambers of commerce say worker shortages are holding back their economies, and more than 90% of industry association economists say employers in their sectors are struggling to find qualified workers for open jobs,’ the Chamber wrote…”

Chamber of Commerce data and comments corroborate myriad anecdotes of an increasingly unbalanced and overheated economy suffering from bottlenecks, supply chain issues and shortages (including labor).

June 1 – Reuters (Lucia Mutikani): 

“U.S. manufacturing activity picked up in May as pent-up demand amid a reopening economy boosted orders, but unfinished work piled up because of shortages of raw materials and labor. 

The Institute for Supply Management (ISM) survey on Tuesday found companies and their suppliers ‘continue to struggle to meet increasing levels of demand,’ noting that ‘record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments’ of manufacturing. 

According to the ISM, worker absenteeism and short-term shutdowns because of shortages of parts and workers continued to limit manufacturing's growth potential.”

According to the ISM survey, Average Delivery Times jumped to a record 85 days. 

At 78.8, the Supplier Delivery Index rose to the highest level since 1974. 

The Backlog Index advanced to a record high 70.6, while Factory Orders rose to 67 (“just below a more than 17-year high”). 

Separately, the IHS Market Manufacturing PMI index rose to 62.1%, with New Orders up almost four points to 65.6, both at record highs in survey data back to 2007.

Meanwhile, the ISM Services Index gained to 64 (up from 62.7) in May, the highest reading in survey data that goes back to 1997. 

Services Prices Paid surged almost four points to 80.6, second only to the September 2005 price spike. 

Growth was notably broad-based, with all 18 industry components registering growth in May. 

Meanwhile, both the IHS Markit Services PMI Index and Prices component rose to survey record highs. 

The ISM Manufacturing and Services Surveys each posted declines in Employment components. 

The Services Employment Index declined more than three points to 55.3. 

Bloomberg quoted Anthony Nieves, chair of the ISM’s Services Business Survey Committee: 

“Even if all the businesses right now tried to reopen everything tomorrow, they couldn’t do it because they have capacity issues. 

They don’t have the labor. 

They don’t have the production capabilities.” 

June 3 – Reuters (Evan Sully): 

“Nearly half of U.S. small business owners reported unfilled job openings in May, marking the fourth consecutive month of record-high readings as finding qualified applicants remains a lingering challenge… 

The National Federation of Independent Business (NFIB) said in its monthly jobs report that 48% of small business owners reported unfilled job openings in May on a seasonally adjusted basis, up from 44% in April. 

May's reading is 26 points higher than the 48-year average of 22%. 

Furthermore, the report showed that 93% of owners looking to hire reported few or no ‘qualified’ applications for the positions they were trying to fill last month.”

If the ISMs, PMIs, NFIB and the Chamber of Commerce aren’t convincing, Fed officials need to look no further than their most recent “Beige Book” (released Wednesday) for evidence of tight labor markets. 

“Labor demand strengthened, but hiring was held back by widespread labor shortages.” 

“Manufacturers reported that widespread shortages of materials and labor along with delivery delays made it difficult to get products to customers. 

Similar challenges persisted in construction. 

Homebuilders often noted that strong demand, buoyed by low mortgage interest rates, outpaced their capacity to build, leading some to limit sales.”

“Staffing levels increased at a relatively steady pace, with two-thirds of Districts reporting modest employment growth over the reporting period… 

It remained difficult for many firms to hire new workers, especially low-wage hourly workers, truck drivers, and skilled tradespeople. 

The lack of job candidates prevented some firms from increasing output…”

And by region: 

Boston “Labor demand strengthened, but hiring was held back by labor shortages.” 

New York: “Hiring picked up and wages continued to grow moderately, with availability of workers cited as a top concern.” 

Cleveland: “Hiring activity was reportedly modest because of a dearth of job applicants. 

A greater share of firms boosted wages, especially for hourly workers.” 

Dallas: “Reports of labor shortages were more widespread across sectors and skill levels than the last report.” 

Atlanta: “Labor markets improved and wage pressures picked up for some positions.” 

San Francisco: “Economic activity in the District expanded significantly, and labor market conditions continued to improve modestly. 

Wages and inflation picked up further.” 

Chicago: “Employment, consumer spending, business spending, and manufacturing production all increased moderately…”

Prior to Friday’s jobs data, there appeared to be some momentum building for beginning to talk about talking about tapering. 

Philadelphia Fed President Patrick Harker on Wednesday commented, “We’re planning to keep the federal-funds rate low for long, but it may be time to at least think about thinking about tapering our $120 billion in monthly Treasury bond and mortgage-backed securities purchases.” 

He added it’s “not something we are going to do suddenly, though.” 

“I think it is appropriate for us to slowly, carefully move back on our purchases at the appropriate time.”

Dallas Fed President Robert Kaplan this week reiterated his view that he’d prefer to “talk taper sooner rather than later.” 

“I think it would be wiser sooner rather than later to begin discussions about adjusting our purchases with a view to taking the foot off the accelerator gently, gradually, so we can avoid having to depress the brake down the road… 

At this stage, as it’s clear we are weathering the pandemic and making progress, I don’t think the housing market needs the level of support that the Fed is currently providing, and I would love to see sooner rather than later a discussion of the efficacy, for example, of those mortgage purchases.” 

Kaplan also shared his view that labor markets are tighter than some of the data may suggest.

It’s not as if Harker and Kaplan are espousing hawkish views. 

“Slowly, carefully…” and “gently, gradually” certainly do not imply a forceful tightening of monetary policy. Indeed, the plan is to withdraw stimulus cautiously, to ensure markets don’t tighten financial conditions. 

But with major imbalances and mounting inflationary pressures, it seems rather obvious the Fed should be preparing markets for a pullback from the most extreme crisis-era monetary stimulus imaginable. 

The old, “what are they afraid of?” comes to mind. 

Fed officials can continue to use millions of unemployed workers as justification and rationalization for crazy inflationist policies. 

Yet the Fed’s prevailing worries center around asset Bubbles and the likelihood of a destabilizing “taper tantrum” when it eventually moves to rein in stimulus measures. 

Market expectations have the Fed beginning the taper discussion over the coming months, but not actually commencing balance sheet reduction until early next year. 

This would likely push the initial little baby-step rate increase out to 2023. 

It is frightening to contemplate the depth of structural damage that could be inflicted from prolonging “Terminal Phase” excess for a couple additional years.

AMC Entertainment gained 95% in a wild Wednesday trading session (up 83% for the week), pushing year-to-date gains to 2,160%. 

The Goldman Sachs Most Short Index surged 7.6% Wednesday, capping an eight-session run of 17.8%. 

Koss was up 77% on Tuesday and Wednesday, before an abrupt selloff cut the week’s gain to about 17%. 

Blackberry as much as doubled in two sessions, ending the week up 38%. 

GameStop rose a third before closing Friday with a 12% weekly advance. 

PetMed Express jumped 58% during Wednesday’s session and ended the week up 13%. 

Bed Bath and Beyond rose 62% Wednesday, but the week’s gains were cut to about 13% by Friday. 

Express gained 36% Wednesday (up 15% for the week); Naked Brands 29% (up 13%); Workhorse 20% (up 36%); and GTT Communications 57% (up 110%) - as so-called “meme stocks” sprang back to life with a vengeance. 

It’s worth noting the “average stock” Value Line Arithmetic Index traded Friday to an all-time high, with a year-to-date gain of 22.7%. 

The Philadelphia Oil Services Index ended the week with 2021 gains of 57.4%; the KBW Bank Index 36.9%; the Nasdaq Bank Index 35.7%; the Dow Transports 23.7%; the S&P600 Small Cap Index 23.4%; the NYSE Financial Index 23.4%; the Bloomberg REIT Index 19.8%; and the S&P400 Midcaps 18.3%. 

The Goldman Sachs Most Short Index has gained 41%. Not bad for a little more than five months.

June 3 – Bloomberg (Katherine Doherty): 

“AMC Entertainment Holdings Inc.’s debt is also getting a blockbuster boost from retail stock trading mania. 

AMC’s 12% second-lien bonds rose above their face value of 100 cents on the dollar Thursday, a stunning comeback from their low of just 5 cents on the dollar last November. 

The company’s debt rallied this week as credit investors cheered the latest rounds of equity financing… 

Proceeds from the 11.6 million of new shares AMC sold Thursday -- worth $587 million -- are earmarked for general corporate purposes, a catch-all term that can include activities like paying down debt or funding acquisitions.”

It’s clearly not only equities securities benefiting from the loosest financial conditions imaginable. 

Junk bond Credit default swap (CDS) prices dropped four bps this week to a 2021 low 283 bps – and are now only about eight bps above January 2020’s decade low 275 bps. 

At $270 billion, U.S. junk bond issuance in five months has already surpassed 2020’s record first-half issuance. 

Investment-grade CDS declined marginally this week to near-2020 lows.

June 3 – Bloomberg (Caleb Mutua, Paula Seligson and Craig Torres): 

“The Federal Reserve’s plan to begin unwinding its unprecedented backstop of corporate debt is rekindling an idea that many have warned about: that investors are now convinced that the central bank will bail them out again if needed. 

From Neuberger Berman to Invesco Ltd., investors say that the Fed’s intervention at the depths of the Covid-19 pandemic provides a model to follow for future crises, which isn’t necessarily what the central bank wanted to communicate. 

Chairman Jerome Powell has said the Fed would only act as a backstop in once-in-a-generation type emergencies. 

Yet risk premiums barely moved after the central bank said it’s going to gradually shed those investments, and companies are still selling bonds after a relentless rally over the past 14 months that’s driven borrowing costs to all-time lows and debt issuance to record highs.”

While the Fed stated its intention to unwind its corporate bond portfolio was unrelated to monetary policy, I have to wonder if they had hoped this move might throw a bit of cold water on speculative excess. 

A couple of cogent Bloomberg headlines: Thursday: “As Fed Exits Credit, Investors See ‘Helicopter Parent’ Close By.” 

And Friday afternoon: “Fed to Keep ‘Invisible Presence’ in Bond Market, Citigroup Says.” 

The Fed in March 2020 opened Pandora’s box - and no one believes the Fed’s corporate bond market backstop will be relegated to “once-in-a-generation emergencies”. 

I am reminded of when the GSEs aggressively intervened in the MBS marketplace for the first time in 1994 (expanding balance sheets by a then unprecedented $150bn). 

This backstop momentously altered market risk perceptions and debt securities prices, incentivizing leveraged speculation and Bubble excess. 

The GSE backstop returned in crisis year 1998 to the tune of $305 billion – and then these quasi-central banks expanded balance sheets another $317 billion in 1999, $242 billion in 2000, $345 billion in 2001, $242 billion in 2002, and $246 billion in 2003. 

Huge – history altering – numbers, but rather small potatoes compared to what will play out with the inflation of the Fed’s balance sheet. 

June 4 – Bloomberg (Alex Wittenberg): 

“The Federal Reserve will keep its ‘invisible presence’ in the corporate-bond market even after unwinding a program that sent borrowing costs for companies plummeting while spurring a rally in credit, according to Citigroup… 

The Fed couldn’t credibly exit the debt market because ‘it cannot tolerate the catastrophic consequences of bond origination and secondary trading snapping shut,’ Citigroup strategists led by Daniel Sorid wrote… 

As long as corporate bonds remain important to the financial system, the Fed’s program will ‘continue to exert power over the market,’ according to Citigroup.”

Snake down the path of activist/interventionist central banking and inflationism, and there will be no turning back. 

That’s especially the case in this age of unfettered “money” and Credit, speculative excess and myriad asset Bubbles. 

It’s kind of crazy the Fed is using the unemployed to justify $120 billion market liquidity injections. 

To our central bankers’ great surprise, much of our nation’s labor market has Turned Tight. 

And it’s not at this point easy to pinpoint the benefits of prolonging egregious monetary inflation. 

Meanwhile, myriad risks – certainly including unleashing an inflationary spiral and stoking perilous asset Bubbles – are increasingly obvious.

Global passive assets hit $15tn as ETF boom heats up

Exchange traded funds close to eclipsing traditional index trackers for first time

Robin Wigglesworth

    ETFs trade like stocks on an exchange. © AFP via Getty Images


Assets under management in exchange traded funds are eclipsing traditional index-tracking mutual funds for the first time, after the global passive investment industry vaulted past $15tn in assets last year.

ETFs stood at $7.71tn under management at the end of last year — narrowly behind index mutual funds at $7.76tn — according to data compiled for the FT by the Investment Company Institute.

Since then, ETFs are likely to have nosed ahead thanks to powerful inflows this year. 

Comprehensive global data comes with a lag, but consultancy ETFGI calculates that assets under management in ETFs stood at $8.33tn at the end of March. 

The ascent of ETFs past their older cousins reflects the speed at which they have reshaped the investment industry.

“People are increasingly building entire investment strategies using only ETFs. 

The choices you have vastly outstrip what you have in traditional index funds,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA.

Traditional passive mutual funds accept investor money or redemptions at the end of each day, whereas ETFs, first invented two decades later in the 1990s, trade like stocks on an exchange, letting investors hop in and out whenever they want. 

The pandemic-triggered market upheaval of March 2020 failed to dent their growth, with bond ETFs now also quickly gaining ground among investors who were pleasantly surprised by their resilience in the turmoil.


“We’ve seen record inflows over the past quarter, and largely into ETFs,” said Inigo Fraser-Jenkins, a strategist at Bernstein. 

“There’s an ongoing desire to reduce fees — and that favours the shift from active to passive funds.” 

The shift towards ETFs has been particularly powerful in the US, where they enjoy tax advantages over traditional mutual funds. Sean Collins, chief economist at the ICI, noted that US ETFs held $5.58tn at the end of March, compared with the $5tn in traditional index funds. 

Actively-managed mutual funds held about $15tn, he said.

Not everyone in the industry has been thrilled by the dramatic rise of ETFs. 

Some critics worry they lead investors to overtrade, which harms returns and exacerbates the volatility of markets. 

Jack Bogle, the founder of Vanguard, introduced the first index mutual fund for ordinary savers, but was infamously hostile to ETFs and disliked when his old company entered the industry after he retired. 

However, he conceded before he died in 2019 that ETFs had changed “not only the nature of indexing, but also the entire field of investing”.


Others argue that the flexibility of ETFs means securities that would normally be unavailable to ordinary investors — such as complex derivatives — can be easily packaged and sold to everyone without any restrictions. 

Leveraged ETFs — which use derivatives to deliver enhanced returns, or the inverse returns of an underlying index — have swelled in popularity over the past year, thanks to the retail trading boom.

Assets in products like this fluctuated between $50bn and $70bn over the past decade, but they had grown to almost $135bn by the end of March, according to Morningstar data.

In numbers of funds, ETFs greatly outstrip their predecessors. 

At the end of last year, there were 6,725 ETFs globally, and just 3,196 traditional index funds, according to the ICI data.


The publicly reported index fund industry is not the entire passive investing universe. 

Many big institutional investors, such as sovereign wealth funds, manage index-tracking strategies internally, or give bespoke mandates to the likes of BlackRock or State Street Global Advisors. 

BlackRock estimated in 2017 that these non-public indexed strategies amounted to another $6.8tn — split between $5.4tn in tailored mandates and $1.4tn in internal strategies — just in equities. 

Assuming a similar growth rate to the public index fund universe, that means that there is now likely well over $25tn in benchmark-tracking strategies, index funds and ETFs in total.

“The shift from active to passive investment strategies has profoundly affected the asset management industry in the past couple of decades, and the ongoing nature of the shift suggests that its effects will continue to ripple through the financial system for years to come,” the Federal Reserve noted in a 2019 paper.

Abdulaziz bin Salman, the prince in charge of Saudi oil

The kingdom’s mercurial energy minister has had to deal with a series of daunting challenges

Anjli Raval and David Sheppard

© Joe Cummings

Prince Abdulaziz bin Salman of Saudi Arabia spent most of his adult life as energy-minister-in-waiting. 

But just six days after becoming the first royal to take on the role, the kingdom’s oil production was cut in half by a series of drone and missile attacks that set the world’s largest crude processing facility ablaze.

The attack on Abqaiq in September 2019, which Riyadh and Washington blame on Iran, was an early test of Prince Abdulaziz, the son of King Salman and half brother of the kingdom’s notorious crown prince, Mohammed bin Salman.

As oil prices surged 20 per cent the prince was whisked by private jet from London to Saudi Arabia’s eastern province, after which he soon announced the kingdom would be able to maintain oil supplies while it repaired the damage.

Oil traders watched prices reverse. 

But while Prince Abdulaziz might have been lucky in this instance, the tests have barely stopped since. 

In less than two years he has had to navigate the controversial public listing of Saudi Aramco in late 2019; the start of the Covid-19 pandemic; a subsequent shortlived price war with Russia; and then calls from President Donald Trump for the kingdom to reverse course and lead a record cut in global oil production.

His supporters say the 61-year-old prince, who has been married for 34 years and has three children in their twenties, has proved equal to the task. 

“If it wasn’t for his experience any one of these events would have overwhelmed an energy minister,” says Bassam Fattouh at the Oxford Institute for Energy Studies, where Prince Abdulaziz sits on the board.

But to his critics, Prince Abdulaziz has his flaws, including playing down two of the biggest tests lurking in the background.

Rising oil prices — Brent crude climbed above $70 a barrel this week — are not universally welcomed when inflation fears have resurfaced on the horizon. 

And his dismissal this week of the International Energy Agency’s “road map” for a net zero future as being from La La Land has put him at odds with shifting sentiment in an industry finally taking climate change seriously.

His softly spoken diplomatic veneer often slips in such moments to reveal an altogether haughtier, sharp-tongued response to criticism or doubt more in line with his royal status. 

“You never know which kind of Abdulaziz you’re going to get,” says one veteran Opec delegate. 

“There are some meetings where he is on a big high and congenial and others where he just loses the plot against certain countries.”

Slim and bespectacled with an academic air, Prince Abdulaziz presents himself as a low-key but shrewd negotiator who wants to build consensus. 

Years working for technocrats such as former ministers Ali Al Naimi and Khalid Al Falih, people close to him say, is a sign of his temperament despite being a prince bestowed with immense privilege. 

Yet he relishes the limelight at press conferences and wields his status as the de facto head of Opec and a direct line into the House of Saud to get his way.

Last year he warned traders daring to bet against Saudi oil policy that they would be “ouching like hell”. This week he said he wanted to bring “speculators” in the oil market “to their knees”.

He has pushed other Opec members to increase compliance with supply deals. But he also lavishes praise on those who do, leading one Opec meeting in a round of applause for Iraq, a frequent laggard, after it came close to hitting its targets.

“He likes to be unpredictable — to some extent it’s calculated unpredictability,” says Christyan Malek, head of oil research at JPMorgan.

Things become trickier when he is asked to respond to political actions taken by the kingdom, often by Prince Mohammed, who is his effective boss. 

At the Davos summit last year, a UK television crew sought reaction to claims that Prince Mohammed had been involved in the hacking of Amazon founder Jeff Bezos’ phone. 

As he was pursued down a corridor, Prince Abdulaziz called the line of questioning “a mockery” and the reporter “stupid” before briefly yanking away his microphone.

He has made little comment on the killing of journalist Jamal Khashoggi, which the US concluded was approved by Prince Mohammed, though their relationship is not thought to be close according to people who know Prince Abdulaziz.

His allies would rather focus on his role in overhauling the domestic electricity sector and professionalising the relationship between Saudi Aramco and the energy ministry. 

But while western oil companies pull back on fossil fuel investment under climate change pressure, the kingdom is barely hedging its bets.

Prince Mohammed wants to wean the Saudi Arabian economy off its oil dependence, but Prince Abdulaziz sees an opportunity to increase production capacity, believing the world will always need a cheap source of plentiful fuel.

Amrita Sen, analyst at Energy Aspects, says that Prince Abdulaziz “thinks deeply” about the challenges facing the world. “He does care a lot about the energy sector. 

He reflects on a lot of these issues.”

But any push to curb new oil projects, as proposed in the IEA net zero road map, is unlikely.

“Whoever put that scenario [together],” Prince Abdulaziz said this week, “is not in touch with reality.” 

Here’s Why the Fed Isn’t Frightened by the Jobs Report

Jobs are hard to fill and wages are rising, but the Federal Reserve is weighing other factors that will dissuade it from raising rates for now

By Justin Lahart

The way for employers to overcome the incentives against working is to raise the incentives for working—most obviously through wages. / PHOTO: KEITH SRAKOCIC/ASSOCIATED PRESS


Employers are struggling to find workers, and that will push up labor costs, leading the Federal Reserve to raise rates much sooner than it expects to.

Oh, please.

The Labor Department on Friday reported that the economy added a seasonally adjusted 559,000 jobs last month. 

That big number counted as a mild disappointment in comparison with the 671,000 economists polled by The Wall Street Journal expected. 

Coming on top of April’s weaker-than-expected report, it adds to evidence that businesses are having a hard time staffing up.

There are many possible reasons why, and many probably are occurring at once. 

An incomplete list: Difficulty obtaining child care, extended unemployment benefits that make lower-wage jobs less attractive, continued worries about Covid-19 and a pandemic-related shift in perceptions about what work is worthwhile. 

They all come down to incentives against working. 

The way for employers to overcome them is to raise the incentives for working, most obviously through wages.

There is some evidence that is beginning to happen. 

The employment report showed that average hourly earnings rose 0.5% from a month earlier, topping the 0.2% gain economists expected. 

That is particularly impressive since the biggest job gains were in the leisure and hospitality sector—lower-paying jobs that tend to put downward pressure on the average wage figure.

The obvious worry is that rising wages could lead businesses to raise prices, leading workers to demand even higher wages and creating inflationary pressures that the Fed would need to fight back against. 

But let’s not get ahead of ourselves.

For starters, there were 7.6 million fewer jobs in May than before the pandemic hit. 

Adjust for population growth and that hole deepens to about 9 million. 

The Fed’s mandate calls for it to bring the country to full employment. 

Tapping the brakes now would go against that.

Second, many difficulties businesses face finding workers will probably subside within months. 

Schools will be back to in-person learning in the fall and enhanced unemployment benefits will end in September, while increased vaccination and falling Covid-19 cases should make people more comfortable returning to work.

Finally, the Fed wants to get wages running higher. 

It actually needs them to if it is ever going to meet its goal of inflation running at 2% over the long term, and perhaps also because it would like to see labor get back some of the share of national income that it has lost in recent decades.

The Fed’s probable course remains that sometime this summer it will start talking about reducing asset purchases and that some time after that it will begin the monthslong process of bringing them down to zero. 

After that it will finally begin to gradually raise rates. 

There are things that could change that, like employment recovering surprisingly quickly, but grumbling about how hard it is to hire a dishwasher isn’t one of them.

The U.S. Economy Is Sending Confusing Signals. What’s Going On?

The ebbing of the pandemic has brought price increases, supply bottlenecks and labor shortages. Key indicators will show whether it’s just a stage.

By Ben Casselman


This is a strange moment for the U.S. economy.

Unemployment is still high, but companies are complaining they can’t find enough workers. 

Prices are shooting up for some goods and services, but not for others. 

Supply-chain bottlenecks are making it hard for homebuilders, automakers and other manufacturers to get the materials they need to ramp up production. 

A variety of indicators that normally move more or less together are right now telling vastly different stories about the state of the economy.

Most forecasters, including policymakers at the Federal Reserve, expect the confusion to be short-lived. 

They see what amounts to a temporary mismatch between supply and demand, brought on by the relatively swift ebbing of the pandemic: Consumers, flush with stimulus cash and ready to re-engage with the world after a year of lockdowns, are eager to spend, but some businesses lack the staff and supplies they need to serve them. 

Once companies have had a chance to bring on workers and restock shelves — and people have begun to catch up on long-delayed hair appointments and family vacations — economic data should begin to return to normal.

But no one knows for sure. 

It is possible that the pandemic changed the economy in ways that aren’t yet fully understood, or that short-term disruptions could have long-lasting ripple effects. 

Some prominent economists are publicly fretting that today’s price increases could set the stage for faster inflation down the road. 

Historical analogues such as the postwar boom of the 1950s or the “stagflation” era of the 1970s provide at best limited insight into the present moment.

“We can’t dismiss anything at this point because there’s no precedent for any of this,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, a forecasting firm.

On Friday, the Labor Department will release its monthly snapshot of the U.S. labor market. 

Last month’s report showed much slower job growth than expected, and economists will be watching closely to see whether that disappointment was a fluke. 

But don’t expect definitive answers. 

A second month of weak job growth could be a sign of a faltering recovery, or merely an indication that the temporary factors will take more than a couple of months to resolve. 

A strong report, on the other hand, could signal that talk of a labor shortage was overblown — or that employers have overcome it by bidding up wages, which could fuel inflation.

To get a clearer picture, economists will have to look beyond their usual suite of indicators. 

Here are some things they will be watching.

1. Prices

Consumer prices rose 4.2 percent in April from a year earlier, the biggest jump in more than a decade. 

But the largest increases were mostly in categories where demand is rebounding after collapsing during the pandemic, like travel and restaurants, or in products plagued by supply-chain disruptions, like new cars. 

Those pressures should ease in the coming months.

What would be more concerning to economists is any sign that price increases are spreading to the rest of the economy. 

Researchers at the Federal Reserve Bank of San Francisco studied sales patterns from early last year to categorize products and services based on the pandemic’s impact. 

Their Covid-insensitive inflation index so far shows little sign of runaway inflation beyond pandemic-affected areas.

Economists will also be watching other, less pandemic-specific measures that likewise aim to discern the signal of inflation amid the noise of short-term disruptions. 

The Federal Reserve Bank of Cleveland’s trimmed-mean C.P.I., for example, takes the Labor Department’s well-known Consumer Price Index and strips away its most volatile components.

“What we’re looking for is what does underlying inflation look like,” said Ellen Zentner, chief U.S. economist at Morgan Stanley.

For those looking for a simpler measure, Ms. Zentner offers a shortcut: Just look at rents. 

The rental component of C.P.I. (as well as the “owner’s equivalent rent” category, which measures housing costs for homeowners) is the largest single item in the overall price index, and should be less affected by the pandemic than some other categories. 

If rents start to rise rapidly beyond a few hot markets, overall inflation could follow.

2. Inflation Expectations



One reason economists are so focused on inflation is that it can become a self-fulfilling prophecy: If workers think prices will keep rising, they will demand raises, which will force their employers to raise prices, and so on. 

As a result, forecasters pay attention not just to actual prices but also to people’s expectations.

In the short run, consumers’ inflation expectations are heavily affected by the prices of items purchased frequently. 

Gasoline prices weigh particularly heavily on consumers’ minds — not only do most Americans have to fill up regularly, but the price of gas is displayed in two-foot-tall numbers at stations across the country. 

Economists therefore tend to pay more attention to consumers’ longer-run expectations, such as the five-year inflation expectations index from the University of Michigan, which recently hit a seven-year high.

Forecasters also pay close attention to the expectations of businesses, investors and other forecasters. 

Many economists pay particular attention to market-based measures of inflation expectations, because investors have money riding on the outcome. 

(One such measure, derived from the bond market, is the five-year, five-year forward rate, which forecasts inflation over a five-year period beginning five years in the future.) 

The Federal Reserve has recently begun publishing a quarterly index of common inflation expectations, which pulls together a variety of measures. 

It showed that inflation expectations rose in the first quarter of this year, but remain low by historical standards.

3. Labor Supply



Restaurants, hotels and other employers across the country in recent months have complained that they cannot find enough workers, despite an unemployment rate that remains higher than before the pandemic. 

There is evidence to back them up: Job openings have surged to record levels, but hiring hasn’t kept up. 

Millions of people who had jobs before the pandemic aren’t even looking for work.

Many Republicans say enhanced unemployment benefits are encouraging workers to stay on the sidelines. 

Democrats mostly blame other factors, such as a lack of child care and health concerns tied to the pandemic itself. 

Either way, those factors should dissipate as enhanced unemployment benefits end, schools reopen and coronavirus cases fall.

But not all workers may come rushing back as the pandemic recedes. 

Some older workers have probably retired. 

Other families may have discovered they can get by on one income or on fewer hours. 

That could allow labor shortages to persist longer than economists expect.

The simplest way to track the supply of available workers is the labor force participation rate, which reflects the share of adults either working or actively looking for work. 

Right now it shows plenty of workers available, although the Labor Department doesn’t provide breakdowns for specific industries.

Another approach is to look at the ratio of unemployed workers to job openings, which provides a rough measure of how easy it is for businesses to hire (or, conversely, how hard it is for workers to find jobs). 

Data from the Labor Department’s Job Openings and Labor Turnover Survey comes out a month after the main employment report, but the career site Indeed releases weekly data on job openings that closely tracks the official figures.

Both those approaches have a flaw, however: People who want jobs but aren’t looking for work — whether because they don’t believe jobs are available or because child care or similar responsibilities are keeping them at home temporarily — don’t count as unemployed. 

Constance L. Hunter, chief economist for the accounting firm KPMG, suggests a way around that problem: the number of involuntary part-time workers. 

If companies are struggling to find enough workers, they should be offering more hours to anyone who wants them, which should reduce the number of people working part time because they can’t find full-time work.

“The data is not necessarily going to be as informative as it would be in a normal recovery,” Ms. Hunter said. 

“I would not normally tell you coming out of a recession that I’m going to be closely watching involuntary part-time workers as a key indicator, but here we are.”

4. Wages



Wage growth remained relatively strong during the pandemic, at least compared with past recessions, when low-wage workers, in particular, lost ground. 

Many businesses that stayed open during last year’s lockdowns had to raise pay or offer bonuses to retain workers. 

Now, as the pandemic eases, companies are raising pay again to attract workers.

The question is whether the recent wage gains represent a blip or a longer-term shift in the balance of power between employers and employees. 

Figuring that out will be difficult because the United States lacks a reliable, timely measure of wage growth.

The Labor Department releases data on average hourly earnings as part of its monthly jobs report. 

But those figures have been skewed during the pandemic by the huge flows of workers into and out of the work force, rendering the data nearly useless. 

Economists are still watching industry-specific data, which should be less distorted. 

In particular, average hourly earnings for nonsupervisory leisure and hospitality workers should reflect what is happening among low-wage workers.

A better bet might be to wait for data from the Employment Cost Index, which is released quarterly. 

That measure, also from the Labor Department, tries to account for shifts in hiring patterns, so that a rush of hiring in low-wage sectors, for example, doesn’t show up as a decline in average pay. 

It showed a mild uptick in wage growth in the first quarter, but economists will be paying close attention to the next release, in July.

5. Everything Else

The indicators mentioned above are hardly a comprehensive list. 

The Producer Price Index provides data on input prices, which often (but not always) flow through to consumer prices. 

Data on inventories and international trade from the Census Bureau can help track supply-chain bottlenecks. 

Unit labor costs will show whether increased productivity is helping to offset higher pay. 

Economists will be watching them all.

“During normal times, you can just track a handful of indicators to know how the economy is doing,” said Tara Sinclair, an economist at George Washington University who specializes in economic forecasting. 

“When big shifts are going on, you’re tracking literally hundreds of indicators.”


Ben Casselman writes about economics, with a particular focus on stories involving data. He previously reported for FiveThirtyEight and The Wall Street Journal.

Will Biden's spending bring inflation back from the dead?

Jon Lieber, Eurasia Group and Robert Kahn, Eurasia Group


The US federal government is gearing up to spend a lot of money these days. 

So far, to cushion the blow of the pandemic, Washington has already parted with $5 trillion in the form of direct payments to households, forgivable loans to businesses, and other support including aid to state governments. 

And more is coming.

President Joe Biden has proposed another $4 trillion in federal funds for physical and "human" infrastructure, some of which would create income support and social spending programs that would last well beyond the pandemic.

While these measures are hugely popular with the public, the government has had to borrow heavily to pay for them. 

The national debt rose to 100 percent of GDP in 2020, its highest level since 1946, when war and recession drove the debt level to 106 percent of GDP.

Much of the recent borrowing has been from the Federal Reserve, which essentially prints money to purchase government debt.

And that has raised fears of an old enemy: inflation.

The logic of these concerns is straightforward and well accepted by economists: more dollars chasing the same amount of goods bids up prices. 

That was not much of a problem during the pandemic, when storefronts were closed and most people were stuck at home and unable to spend much money.

But as the pandemic ebbs, jobs are returning, consumers are starting to make delayed purchases, and signs of inflation are starting to appear.

Prices for new cars are up 8.4 percent, while real estate values, energy prices, and stock markets are all surging. 

Prominent economists such as former Clinton administration Treasury Secretary Larry Summers have warned that the administration's spending may add too much fuel to an economic fire that is starting to burn again as the pandemic recedes.

An inflation surge would be bad news for most people. 

Rising prices for basic goods would increase hardships in particular for low-income households, which tend to spend more of their income on these kinds of items and who have borne the brunt of the pandemic's economic impact. 

Higher prices would also put homeownership out of reach for millions of Americans. 

And they would likely force the Fed to deploy its main inflation-fighting tool — an increase in interest rates — which itself could trigger a recession by raising the cost of borrowing and causing a slowdown in spending.

Inflation hawks often point to the cautionary tale of the "Great Inflation" of the late 1960s and 1970s, which followed a period of Fed-financed borrowing by the federal government. 

Inflation accelerated from 1 percent in 1964 to 14 percent in 1980, resulting in energy shortages and price and wage controls. 

It also prompted a series of Fed rate hikes that caused two recessions. 

Inflation did not start to recede until interest rates reached 20 percent, a level unimaginable today.

But supporters of increased spending to pull the economy out of its pandemic-induced slump say the supply of goods will increase as conditions start to return to normal, alleviating any short-term bottlenecks that are currently causing price spikes. 

Federal Reserve Chairman Jay Powell and Treasury Secretary Janet Yellen have both said they expect today's emerging inflationary pressures to be transitory and that the Fed can quickly tamp them down if that proves not to be the case. 

And unlike in the 1970s, there is little evidence of widespread increases in post-pandemic wages, which could increase inflationary pressures by putting more money in consumers' pockets.

Furthermore, the remainder of the Biden economic plan is designed to be largely paid for by tax increases that will take effect over the next fifteen years, rather than by more borrowing. 

Once the tax increases are fully phased in, the federal government will actually be pulling more money out of the economy than it is pumping in.

So who is right? 

Only time will tell. 

For years now, US policymakers have treated inflation as an enemy long since vanquished. 

These unprecedented levels of spending may put those assumptions to the test. 

If the administration's supporters are right, the spending will be a historic reshaping and rebuilding of the American economy. 

If they are wrong, Americans could face a new type of economic disruption just as they put the pandemic behind them.

The Two Sides of Chinese GDP

Many economists care more about China’s per capita GDP, or income per person, than the aggregate measure. The key takeaway is that China remains a poor country, despite its phenomenal headline economic growth over the past four decades.

Nancy Qian





CHICAGO – Economic reporting about China focuses far too much on total GDP and not enough on per capita GDP, which is the more revealing indicator. 

And this skewed coverage has important implications, because the two indicators paint significantly different pictures of China’s current economic and political situation. 

They also focus our attention on different issues.

The US will no longer stand in the way of an international waiver that would allow the production of generic COVID-19 vaccines, but the fight isn't over. 

And the longer the pharmaceutical industry resists sharing knowledge and technology, the greater the risk posed by the emergence of new vaccine-resistant variants.

A quick search through all English-language news outlets in the ProQuest database for the ten-year period from 2011-21 shows that 20,915 articles discussed China’s GDP, whereas only 1,163 mentioned its GDP per capita. 

The difference was proportionally even larger among the eight largest and most elite papers, including the New York Times, Wall Street Journal, and Washington Post, where 5,963 articles referred to Chinese GDP and only 305 discussed the per capita measure.

In 2019, China’s GDP (measured at market exchange rates) of $14 trillion was the world’s second largest, after that of the United States ($21 trillion), with Japan ($5 trillion) in third place. 

Aggregate GDP reflects the total resources – including the tax base – available to a government. 

This is helpful for thinking about the size of China’s public investments, such as in its space program or military capacity. 

But it has much less bearing on Chinese people’s everyday lives.

Most economists therefore care more about China’s per capita GDP, or income per person, than the aggregate measure. 

And the key takeaway here is that China remains a poor country, despite its phenomenal headline GDP growth over the past four decades.

China’s per capita GDP in 2019 was $8,242, placing the country between Montenegro ($8,591) and Botswana ($8,093). 

Its per capita GDP in purchasing power parity (PPP) terms – with income adjusted to take account of the cost of living – was $16,804. 

This is below the global average of $17,811 and puts China 86th in the world, between Suriname ($17,256) and Bosnia and Herzegovina ($16,289). 

In contrast, GDP per capita in PPP terms in the US and the European Union is $65,298 and $47,828, respectively.

To understand the extent of poverty in China, we also need to consider the degree of inequality across its large population. 

China’s current level of income inequality (measured by the Gini coefficient) is similar to that found in the US and India. 

Given that 1.4 billion people live in China, the country’s inequality implies that there are still hundreds of millions of impoverished Chinese.

The Chinese government has said that 600 million people have a monthly income of barely CN¥1,000 ($155), equivalent to an annual income of $1,860. Of these people, 75.6% live in rural areas.

To leave the ranks of the world’s poorest countries, China must significantly boost the incomes of a population about the size of that of Sub-Saharan Africa, and with a similar average income of $1,657. 

And the Chinese government is aware that it must do so in order to maintain popular support. 

All else being equal, it will be preoccupied for at least another generation by the need to increase domestic incomes.

But all else is rarely equal in politics, and governments can also bolster their popular support in ways that do not foster economic growth. 

The Chinese government, for example, emphasizes its role in defending the population against external or impersonal forces, such as earthquakes or the COVID-19 pandemic. 

It has also recently adopted an assertive stance regarding territorial disputes in the South China Sea and along the Chinese-Indian border.

Western countries have responded to these and other Chinese actions in a variety of ways. 

The US is ramping up its military presence in the South China Sea, while China also faces the threat of economic sanctions and a boycott of the 2022 Beijing Winter Olympics because of human-rights concerns.

Experience suggests that sanctions, boycotts, and military pressure are unlikely to achieve their intended aims. 

Russia, for example, has faced Western economic sanctions since 2014 – and US President Joe Biden’s administration recently announced further punitive measures – but the Kremlin has persisted in its policy of occupation in eastern Ukraine’s Donbas region. 

Likewise, the boycotts of the 1980 Moscow Olympics and the 1984 Games in Los Angeles had little effect on either side in the Cold War.

On the contrary, military aggression often provokes a political backlash in the targeted country and strengthens support for its government. 

Economic sanctions can have similar effects and solidify public opinion behind more hardline policies.

The backlash effect is easily observed in China nowadays. 

Many Chinese think the West is seeking to reassert political dominance and feel painful reminders of colonialism and World War II, when China lost 20 million people, more than any country except the Soviet Union. 

The strong emotions triggered by Western policies toward China overshadow the fact that some of China’s actions are troubling countries like India, Vietnam, and Indonesia, which also suffered brutal colonial policies.

These emotional reactions also distract attention from important domestic issues, not least the need to boost incomes. 

China’s poor, most of whom probably care little about border disputes or international sporting events, will bear the brunt of any collateral damage.

To engage effectively with China, other countries should remember: contrary to first impressions, it is not an economic monolith. 

Behind the world’s second-highest GDP are hundreds of millions of people who just want to stop being poor.


Nancy Qian is Professor of Managerial Economics & Decision Sciences at Northwestern University's Kellogg School of Management and Director of China Lab.