Companies are fighting to interpret the signs of a warming of the US economy

The speed of the American rebound after the Covid-19 crisis has left executives, investors and economists struggling to interpret whether labor shortages and rising prices point to a short-term summer economic heat wave term or a longer period of dangerous inflation.

Some of the country’s largest companies have hailed the strength of the recovery in recent profit announcements, though they have declined to predict whether the rapid implementation of vaccination and the massive fiscal stimulus will cause problems for U.S. companies.

“The second half will likely have more uncertainty than a normal year,” warned Doug McMillon, Walmart’s chief executive this week, even as he and his contemporaries pointed to the strength of consumer spending and the outlook that rates high savings would indicate continued demand.

3M, the manufacturer, was one of the companies that highlighted the “tremendous inflation” in labor, transportation and some raw material costs last week, though it said it raised customer prices as the answer.

Some recent economic data has generated red flags, such as a jump consumer prices, although it was driven by factors that could be transient. These included a sharp rise in the price of air fares as Americans began to travel again and increased demand for used cars caused by the shortage of chips that has affected the production of new vehicles.

Unexpectedly weak job creation last month also masked a more confusing picture and was driven by a drop in employment in temporary jobs, transport and storage and manufacturing.

“The pandemic. . . he cut the market and chose certain industries and demolished them like a hurricane [but] it jumped out of other industries and left them intact, ”said Nela Richardson, chief economist at ADP.

These disparities have been evident in corporate profits. A sharp rise in timber prices has hurt home builders and DIY retailers, while clothing chains such as TJX have warned that driver shortages could keep freight costs “stubbornly high” throughout the year.

Gershon Distenfeld, co-head of fixed income at AllianceBernstein, said: “For a long time it is clear that there will be an increase in prices in the spring and summer of this year. The question is not whether prices will rise in in the short term, yes. That is whether this will be persistent. ”

Despite widespread evidence of labor shortages, companies such as Disney and Home Depot have expressed confidence that they can get staff to meet the reactivation of consumer demand, while conveying higher costs to customers.

However, a tighter labor market worries some employers, as the combination of factors makes it more difficult to find staff, including higher unemployment benefits, a shortage of childcare and the fact that some workers remain concerned about employment. if while the virus is still spreading.

A McDonald’s franchisee in Florida reached the headlines last month to offer $ 50 to anyone who applied for a job interview, and the parent company announced plans to raise salaries by an average of 10% at the 650 U.S. restaurants it directly manages. Under Armor, the sportswear group, on Wednesday announced large increases in the minimum hourly wage.

Rising costs and “simply the lack of workers to fill plants” were challenges “that we will have to navigate during this long, hot summer,” warned Robert Vitale, chief executive of the Post Holdings cereals group, earlier this month. . But he said he hoped more people would return to work when extended unemployment benefits expire in September.

Analysts and policymakers are divided on how long investors can expect labor and cost pressures due to the unique circumstances of the Covid-19 pandemic and the resulting response from policymakers

“It simply came to our notice then [and] we have never had tax support of this size during a recession. The opening will be. . . injured, “said Louise Sheiner, policy director at the Hutchins Center on Fiscal and Monetary Policy, an economic think tank.

“There is a lot of demand in some areas, though. . . you don’t know how [long] it will last, ”he said.

Ellen Zentner, chief U.S. economist at Morgan Stanley, agreed that short-term price increases were always expected, but warned that inflation data “worked even harder than expected.”

“I see a multitude of risks here: the risk of higher inflation holding, the risk that we may not recover just as quickly as we would like, and the risk of some of these longer supply chain disruptions occurring. and depresses production “.

Morgan Stanley still expects 8% growth for the U.S. economy this year, but if disappointing job growth persists over the summer “this would cause a lot of concern,” Zentner said.

However, recent market movements suggest that investors are not too afraid that current higher consumer prices herald a longer onslaught. inflation.

U.S. government debt sales have moderated after a tumultuous first quarter. After yielding almost 1.8% in March, the 10-year benchmark bond is now trading below 1.7%. Inflation hurts these bondholders because it erodes the value of their interest payments.

Short-term inflation indicators are still above their long-term counterparts, indicating that investors largely subscribe to the Federal Reserve’s view that current inflation is “transient”.

Richardson, of the ADP, said many of the current cost pressures were the product of temporary bottlenecks and hopes September will be “a turning point for employment,” as children return to schools and their parents go back to work.

But part of the challenge for those trying to read the mixed messages of the U.S. economy is that the pandemic has brought about rapid structural change, she said: “There is nothing in history that can mimic it, and even and everything, if any, the economy changed in a different direction. ”