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NFIB conservatives grudgingly turn bullish

Summary:
Investors received some data points today that is highly revealing about the economy. The most important was the NFIB small business survey. Small business sentiment is especially important as they have little bargaining power and they are therefore sensitive barometers of the economy. The other is the March JOLTS report of labor market conditions, which is a little dated but nevertheless revealing.  Small business owners tend to be small c-conservatives, and their political leanings tilt Republican. We can see that optimism fell in the wake of the election when Biden and the Democrats took control. What is remarkable is the uptick in optimism despite the leftward drift in government policy. This is a strong indication of economic strength. More NFIB details It’s no wonder

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Investors received some data points today that is highly revealing about the economy. The most important was the NFIB small business survey. Small business sentiment is especially important as they have little bargaining power and they are therefore sensitive barometers of the economy. The other is the March JOLTS report of labor market conditions, which is a little dated but nevertheless revealing.
 

Small business owners tend to be small c-conservatives, and their political leanings tilt Republican. We can see that optimism fell in the wake of the election when Biden and the Democrats took control. What is remarkable is the uptick in optimism despite the leftward drift in government policy.
NFIB conservatives grudgingly turn bullish
This is a strong indication of economic strength.

More NFIB details

It’s no wonder why optimism rose. Sales have strongly recovered.
NFIB conservatives grudgingly turn bullish
The NFIB survey also tells the familiar story of supply chain bottlenecks. Inventories are too low. 
NFIB conservatives grudgingly turn bullish
The supply chain squeeze is confirmed by the difference in ISM backlog and inventories. Backlogs are rising, while inventories are low.  There is, however, a silver lining in that dark cloud. Expect a couple of quarters of inventory accumulation when the supply chain problems are resolved. That translates into a global manufacturing boom.
NFIB conservatives grudgingly turn bullish
What about prices and the labor shortage? There are widespread anecdotal reports of businesses experiencing difficulty in hiring. It appears that price pressures are stronger than compensation pressures. I interpret this to mean that small business are able to pass on their cost increases. 
NFIB conservatives grudgingly turn bullish
The good news is sales are rising and margins don’t appear to be under pressure. The open question is how transitory these inflationary pressures are.

JOLTS: A strong labor market

The March JOLTS report confirms the March NFP survey of a strong labor market. The headline job openings were strong. More importantly, quits are rising, which is consistent with the April NFP report of rising job leavers.
NFIB conservatives grudgingly turn bullish
The strength in quits can be explained by the combination of a strong labor market and a backlog of “pent-up resignations”, as reported by Bloomberg:
Ready to say adios to your job? You’re not alone. “The great resignation is coming,” says Anthony Klotz, an associate professor of management at Texas A&M University who’s studied the exits of hundreds of workers. “When there’s uncertainty, people tend to stay put, so there are pent-up resignations that didn’t happen over the past year.” The numbers are multiplied, he says, by the many pandemic-related epiphanies—about family time, remote work, commuting, passion projects, life and death, and what it all means—that can make people turn their back on the 9-to-5 office grind. We asked Klotz what to expect as the great resignation picks up speed.

A “Not Enough” recovery

Putting it all together, this is a “not enough” recovery, as characterized by Myles Udland at Yahoo Finance:
 
The post-crisis economy was about too much — too much debt, too much housing, too much interdependence, too much, too much, too much. 
The post-pandemic economy is taking shape as one in which there is not enough — not enough housing, not enough workers, not enough cars, chlorine, or crypto. 
And this inversion of what is driving this cycle can help explain what we’re seeing from the labor market to the housing market to the stock market and beyond. And perhaps helps make sense of why everyone — professional investors, the general public, politicians, and so on — seems perplexed by today’s state of affairs.  
Fed governor Lael Brainard spoke today, and she is not overly worried about transitory inflation pressures from supply chain bottlenecks:

To the extent that supply chain congestion and other reopening frictions are transitory, they are unlikely to generate persistently higher inflation on their own. A persistent material increase in inflation would require not just that wages or prices increase for a period after reopening, but also a broad expectation that they will continue to increase at a persistently higher pace. A limited period of pandemic-related price increases is unlikely to durably change inflation dynamics.

The Fed is sticking with its story that it will “monitor incoming data”, but policy is going to stay accommodative for the time being.
 

I will remain attentive to the risk that what seem like transitory inflationary pressures could prove persistent as I closely monitor the incoming data. Should this risk manifest, we have the tools and the experience to gently guide inflation back to our target. No one should doubt our commitment to do so.
 

But recent experience suggests we should not lightly dismiss the risk on the other side. Achieving our inflation goal requires firmly anchoring inflation expectations at 2 percent. Following the reopening, there will need to be strong underlying momentum to reach the outcomes in our forward guidance. Remaining patient through the transitory surge associated with reopening will help ensure that the underlying economic momentum that will be needed to reach our goals as some current tailwinds shift to headwinds is not curtailed by a premature tightening of financial conditions.

In conclusion, we have a booming economy and signs that the strong recovery will persist for the next few quarters. The Fed is accommodative. Inflation and labor cost pressures should be transitory. With the exception of the semiconductors, which look a little wobbly, investors should stay long the cyclical trade.
NFIB conservatives grudgingly turn bullish
About Cam Hui
Cam Hui
Cam Hui has been professionally involved in the financial markets since 1985 in a variety of roles, both as an equity portfolio manager and as a sell-side analyst. He graduated with a degree in Computer Science from the University of British Columbia in 1980 and obtained his CFA Charter in 1989. He is left & right brained modeler of quantitative investment systems. Blogs at Humble Student of the Markets.

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