Working our way back

• Net job gains trending in the right direction
• ISM Indexes also signal improvement ahead
• Global tax coordination coming?
• More inflation data coming
• CRE riding the employment recovery 

The employment situation for May fell roughly in line with our expectations. Net job gains totaled 559,000. The unemployment rate declined by 30 basis points (bps) to 5.8% while the labor force participation rate declined by 10 bps to 61.6%. Average hourly earnings grew by a robust 50 bps during the month. This represents a gain of some momentum in the labor market after a tepid April, though revisions pushed up April’s job gains slightly.  Most of the job gains occurred in industries that suffered massive job losses last year, including food services and drinking places and amusement, gambling and recreation. That should provide some comfort that we remain squarely on the road to recovery. 

Many will find the data disappointing, waiting for a massive surge in job gains, but we view the situation as heartening, not only in terms of the absolute level of job gains and the composition of the gains, but the overall trend. The employment recovery got off to a strong start last summer, but lost steam heading into the winter – a resurgent pandemic coupled with cold weather (forcing people indoors and limiting certain activities such as outdoor dining). But as vaccination accelerated in 2021, it began to prop up the economy and the labor market. The 3-month rolling average net job gain reflects this pattern, smoothing out the random month-to-month volatility. But in the 3- months ending with May, average net job gains neared the level from last November, before the worst of the labor slowdown. Other labor market data reaffirms this view – weekly initial unemployment claims continue to fall, reaching their lowest level of the “pandemic era.” We expect job gains to continue to increase and claims to continue to decrease in the coming months as the economy more fully reopens and pent-up demand continues to get unleashed.

ISM Indexes also signaling acceleration ahead

Both the ISM Manufacturing and Services Indexes for May also signaled a coming acceleration in the economy. The Manufacturing Index increased in May, reflecting a production increase and a solid pipeline for orders, even though hiring remains challenging. Meanwhile, the Services Index reached a new record high last month. As we mentioned as last week, as consumers transition from goods consumption to services consumption with the full reopening of the economy, the outlook for the balance of the year looks incredibly bright and the ISM Index reflects that.

Global corporate tax coordination?

Over the weekend, the G-7 group of advanced economies (Canada, France, Germany Italy, Japan, the United Kingdom and the U.S.) reached an agreement on setting a minimum global corporate tax rate at 15%. This represents the beginning of an attempt to reverse a decline in taxes paid by multinational companies that stretches back roughly 40 years. According to the Tax Foundation, the average global corporate tax rate was 40% in 1980 but declined to about 23% in 2020. These G-7 countries are aiming to end the “race to the bottom” by which countries around the world offer increasingly lower tax rates to capture tax revenue that they likely would not otherwise receive. This occurs when companies shift the location of their headquarters for tax purposes or shift where revenues are recognized for tax purposes.  The timing of implementation remains uncertain, but the Biden Administration has pushed for such an agreement to limit American firms’ ability to shelter revenues abroad. This is just a first step, and a long and complex process likely awaits, but negotiators would ideally like to have a binding agreement by the G-20 meeting in July. Ultimately, the outcome remains highly uncertain. Some countries, such as Ireland, generate meaningful revenues via taxation and would likely push back on any agreement. Moreover, Congress must approve U.S. taxation rules and international treaties require a two-thirds majority in the Senate. Some senators have already decried that the U.S. would hand over too much authority to foreign governments in a way that hurts U.S. companies. And of course, other countries’ governments must also approve the measure.

|  What we are watching this week  |

Inflation data will once again dominate the economic story this week. The consumer price index (CPI) for May should show another meaningful increase in both headline and core inflation, driven by the same dynamics we discussed last week. Weekly unemployment claims should continue to decline. And the preliminary reading for consumer sentiment in June should show an increase, reflecting the approach of summer and a fuller reopening of the economy. 

|  Thought of the week  |

The domestic demand for in-theater movies continues to recover. The first quarter of 2021 generated over $240 million at the domestic box office, the best quarter since the pandemic. The second quarter could more than double that figure with the return of “summer” blockbusters.