Fascination with inflation: Three-minute macro
Inflation is top of mind for anyone who buys anything these days. In this month’s three-minute macro, we note that rising crude oil prices may have a disproportionate effect on low-income households. Meanwhile, a stagnating labor force participation rate doesn’t bode well for hopes of taming inflation, while a gap between supply and demand in Europe is also worth watching.
A crude awakening
The increasing importance of ESG considerations has been a powerful headwind to the energy industry, limiting flow of capital and, in turn, producers’ ability to grow and expand production, ultimately leading to tighter supply conditions. This notable tightening, paired with increasing demand from the reopening and extreme weather, has pushed energy prices up recently.
The downstream implications of rising crude oil prices have a direct impact throughout the economy. Simply put, abnormally high energy costs would effectively act as a tax on the U.S. consumer. Crude prices and energy’s share of total spending typically move in tandem. At 4% of personal consumption expenditures as of August 2021, consumer spending on energy goods and services (e.g., gasoline, heating oil, and electricity) as a share of total spending has decreased over the past seven years. With the recent move up in prices, the opportunity cost of spending more on energy is less money spent on other goods and services, eroding the bullish demand narrative associated with the reopening. We also note that increasing energy prices have a stronger negative impact on lower-income Americans, given their larger proportional share of expenditure on energy than higher income brackets. Critically, this could have a negative impact on growth, which is already at risk due to economic scarring from the pandemic.
The inflationary impacts of energy costs are likely to have even greater negative effects on growth in a global context than in the United States: In emerging-market countries, elevated energy prices create lofty inflation, and central banks will have to thread the needle to cool inflation without threatening growth and employment mandates.
Rising oil prices are pushing up spending on energy
Crude oil prices vs. Americans' energy spend
Source: Macrobond, Manulife Investment Management, as of 10/6/21. Spending on energy goods and services is measured by the personal consumption expenditures price index. WTI refers to West Texas Intermediate. LHS refers to left-hand side. RHS refers to right-hand side.
Labor force struggling to rise
Supply conditions aren’t the only thing that may contribute to rising inflation. Labor shortages are grabbing headlines across the globe as companies report being unable to fill job openings and/or to find the right people with the right skills. The data corroborates this: Compared with pre-COVID-19, there are still five million Americans who aren’t in the labor force; that is, they’re neither employed nor looking for a job. Survey data has suggested there are a host of reasons Americans (and others globally) are choosing not to look for work—from fear of COVID-19, to the need to take care of loved ones—particularly children in virtual learning—to early retirement. It’s also been long suspected that additional unemployment benefits suppressed the amount of people looking for jobs. That theory is being tested as we speak: In September, millions of Americans saw their Pandemic Unemployment Assistance expire, marking a critical inflection point in the country’s economy recovery story.
The hope is that the loss of government benefits can help the labor force participation rate recover, meaning businesses can get back to full capacity (or closer to it) and wage pressures can decline. However, September’s labor force participation rate hasn’t yet moved; in fact, it actually declined over the course of the month, from 61.7% to 61.6%. If the labor force participation rate doesn’t begin to recover, labor shortages are likely to remain problematic, and we’ll need to monitor for wage pressures more closely. Importantly, labor shortages can also weigh on production activity. A critical inflection point, indeed.
U.S. labor force participation rate has suffered, not yet recovered
U.S. labor force participation rate, by sex
Source: U.S. Bureau of Labor Statistics, Macrobond, Manulife Investment Management, as of 10/8/21.
The gap between supply and demand: European edition
We remain constructive on parts of Europe, particularly those spaces with exposure to the manufacturing segment. Like most of the planet, the region has been subject to supply chain disruptions that have constrained its ability to produce goods. We need look no further than Germany to see evidence of this trend: In addition to broad constraints, the country’s exposure to the automotive segment has left it particularly open to the well-documented semiconductor shortage. As a result, an unprecedented gap between orders and manufacturing production has emerged.
More broadly, examples such as this are illustrations that while inflationary pressure is certainly one consideration when looking at profitability, the top-line is increasingly becoming an important consideration as disruptions are hampering companies’ ability to sell products. The silver lining here is that over the medium term, as these issues dissipate, there’s a good chance that manufacturing-centric regions will also benefit from inventory rebuilds as normalization reasserts itself.
Significant gap in German production and new orders
German orders vs. production
Source: German Federal Statistical Office (Statistisches Bundesamt), as of 10/6/21. New orders data, as of 8/31/21; production data, as of 7/31/21.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person.
All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment, or legal advice. Clients and prospects should seek professional advice for their particular situation. Neither Manulife Investment Management, nor any of its affiliates or representatives (collectively Manulife Investment Management) is providing tax, investment, or legal advice.
This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.
Manulife Investment Management shall not assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment approach, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
Manulife Investment Management
Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation (Manulife). We draw on more than a century of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.
This material has not been reviewed by, and is not registered with, any securities or other regulatory authority, and may, where appropriate, be distributed by Manulife Investment Management and its subsidiaries and affiliates, which includes the John Hancock Investment Management brand and Hancock Natural Resource Group.
Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.
John Hancock Investment Management Distributors LLC, Member FINRA, SIPC, 200 Berkeley Street, Boston, MA 02116, 800-225-6020, https://www.jhinvestments.com/