by Louis Navellier

August 10, 2021

Modern Monetary Theory (MMT) remains alive and well at the Bank of Japan and the Federal Reserve, but especially at the European Central Bank (ECB) as they boosted their quantitative easing and declared that they would not lift their interest rates above zero until inflation reached a 2% annual rate. This ECB action weakened the euro and caused foreign capital to pour into the U.S. seeking positive yields, versus the negative yields that have been all too common in Japan and much of Europe for several years now.

The Federal Reserve is not only embracing MMT but is also on the path to negative interest rates. First, they’ll have to break a few thresholds, like the 10-year Treasury bond staying below the 1.2% level for a significant time. (In the wake of Friday’s better-than-expected payroll report, rates rose back to 1.3%.)

On Friday, the Labor Department announced that 943,000 payroll jobs were created in July, substantially above economists’ consensus expectation of 865,000. Also impressive was that the May and June job totals were revised up to 614,000 (from 583,000 previously estimated) and 938,000 (from 850,000), respectively. Also, the unemployment rate in July declined substantially to 5.4% from 5.9% in June.

Average hourly earnings improved by 11 cents (+0.4%) in July to $30.54 per hour. Wages have risen 4% in the past 12 months. Interestingly, the labor force participation rate and average workweek both remained unchanged at 61.7% and 34.8 hours, respectively. Overall, this was simply a stunning payroll report that bodes well for future economic growth due to all the new workers being added to the labor force.

Nonetheless, the Fed is essentially refusing to fight inflation until the approximately six million jobs lost during the pandemic are restored. Unfortunately, the labor force participation rate has fallen 1.6%. While it is possible that many workers opted for early retirement, many mysteries remain, such as why about 20% of people in their 20s are neither working nor in school. What are they doing? There are definitely some severe disruptions, especially in education, both in attendance and curricula. For example, approximately 80% of the STEM (science, technology, engineering, and mathematics) students in the California State University I attended decided not to return after the Covid-19 restrictions were lifted.

This all means that the “Goldilocks” environment of low interest rates and accommodative Fed policy will persist. Due to strong order backlog from supply chain glitches, I expect the U.S. economy will continue to grow at a 6% annual pace in the third quarter, while corporate sales and earnings momentum will start to decelerate gradually. It is imperative that consumer spending and confidence remain strong, especially as the holiday shopping season approaches. Overall, this is an impressive economic recovery.

Most of the Economic News is Positive, Despite the Negative Media Spin

While the news media continues to over-emphasize the number of Covid-19 cases due to the highly contagious Delta variant, most economic news was positive last week. (Case totals can be irrelevant if most of those cases are asymptomatic or mild. Hospitalizations and deaths are rising at a slower rate.)

First off, the Commerce Department reported last Tuesday that factory orders rose 1.5% in June. That was significantly higher than the economists’ consensus expectation of a 1% increase. In the past 12 months, factory orders have risen an impressive 18.4%. That indicates rapid GDP growth for the rest of 2021.

In addition to Friday’s positive jobs report, the other economic news last week was also positive. The Labor Department reported on Thursday that new weekly unemployment claims came in at 385,000, down from a revised 399,000 the previous week. Continuing unemployment claims were 2.93 million, down from a revised 3.296 million the previous week. This is the first time that continuing unemployment claims came in under 3 million since March 2020. This was significantly under economists’ consensus expectation of 3.255 million. So overall, this was a very encouraging unemployment claims report.

The Institute of Supply Management (ISM) reported that its manufacturing index slipped to 59.5 in July, down from 60.6 in June. Since any reading above 50 signals an expansion, the July reading was still very strong. The only reason for July’s modest decline was that the new orders component slipped to 64.9, down from 66 in June; plus, the production component declined to 58.4, down from 60.8 in June. The best news is the backlog of orders component, which rose to 65, up from 64.5 in June. All but one of the 18 industries ISM surveyed reported an expansion, with only the textile industry reporting a contraction. Due to supply chain glitches, I expect the ISM manufacturing index to keep expanding in upcoming months.

On Wednesday, ISM reported that its non-manufacturing (service) index surged to a robust 64.1 in July, up from 60.1 in June. This is obviously a great sign for the economy, since the ISM service index is now at an all-time high. All 17 service industries that ISM surveyed reported growth. The best way to describe the service sector is that it is like “a dog that broke the leash.” Despite more counties imposing mask mandates, it is apparent that consumers are out and about, which means that any additional Covid-19 restrictions are going to be next to impossible to enforce, due to rising vaccination rates.

By contrast, China’s purchasing managers index (PMI) slipped to 50.4 in July, down from 50.9 in June. Since any reading over 50 signals an expansion, China is barely growing now. There are reports that the Covid-19 Delta-variant has impacted China, but Chinese government authorities are not transparent on infections and deaths. All we know is that China is imposing travel restrictions to prevent the spread of Covid, so some economists are trimming their GDP estimates as more travel restrictions are imposed.

One indication that China is still prospering is that the Commerce Department reported on Thursday that the U.S. trade deficit surged 6.7% in May to $75.7 billion. U.S. imports surged 2.1% to $283.4 billion, while exports rose just 0.6% to $207.7 billion, for total trade volume of nearly $500 billion (a $6 trillion annual rate), but a rising deficit may cause some economists to trim their second-quarter GDP estimates.

Last Thursday, The Wall Street Journal reported that the Biden administration had prepared an executive order setting a voluntary target of 50% for electric vehicles (EVs) by 2030. In a joint statement, Ford, GM, and Stellantis said they plan to have electric, fuel cell, and plug-in hybrids reach 40% to 50% of sales by 2030. What is holding the domestic auto industry back is an acute shortage of lithium batteries for EVs – as well as soaring prices for lithium, nickel, and cobalt. Cobalt now comes primarily from the Congo and is mined by children, many of whom die in cave-ins. There is simply not enough cobalt to meet EV goals, so less efficient iron-phosphate batteries, like Tesla is using in China, may be an interim solution.

Longer-term, solid-state batteries are the ultimate solution, but they are likely to be very expensive when they are commercially available in 2025. There are approximately 38 giga-factories planned around the world to meet the transition to EVs, but delays will likely be common, like Tesla experienced with its new Berlin factory. Overall, I question if the Biden Administration can meet its 2030 goal, which will dramatically increase the U.S. trade deficit, since most raw materials for batteries are processed in China.

Navellier & Associates does own Tesla (TSLA), for one client, per client request in managed accounts.  We do not own Stellantis (STLA), Ford (F), or General Motors (GM). Louis Navellier does not own Tesla (TSLA), General Motors (GM), Stellantis (STLA), or Ford (F), personally.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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