Forget the employment number and focus on what is going on in the real economy. The world is changing so fast, that the employment data are backward-looking and not providing a strong indicator as to what the economy will be like over the next month. The following are a list of issues from the latest manager PMI survey, and this is not really accounting for more Ukraine war fallout.
- Energy price shock - over $100 oil and little reason to see this falling in the near-term.
- General commodity price shock - metals and grains all higher which will put pressure on global growth.
- Logistical challenges - Significant backwardation in commodities and as fuel costs increase, shipping will be more expensive. Fertilizer is expensive for farmers.
- Supply chain disruptions - the supposed driver of transitory inflation has not been solved.
- Capacity constraints, shortages, and restocking issues - there are stock-out problems and limits on the ability to produce from continued supply chain issues. Production will not keep-up with demand.
- Labor and staffing shortages - labor participation is higher, and unemployment moved to 3.8% but there is still an overhang of unfilled jobs.
- Inflation - Continues to move higher and unlikely to reverse given the commodity price increases.
The stagflation story that did not take hold during the COVID pandemic has a higher probability of occurring. Using the NY Fed probability measure, the likelihood was only 6% for their most recent update, but current calculations will put that number at double that level.
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