Blowout economic data signal boomtimes ahead – and higher rates. Starting off with the most historically impactful piece of economic data on interest rates, the March jobs report topped expectations, the unemployment rate declined, labor force participation finally ticked higher, and the length of the workweek rebounded. The job gains were broad-based last month, in contrast to the prior month when reopening in leisure and hospitality dominated hiring and inclement weather weighed on sectors like construction. Other important data on consumer confidence (highest in a year), manufacturing activity (best since 1983) and demand for services (at all-time highs) released last week painted a similar picture.

Our take: Despite record-breaking job creation in the aftermath of the initial Covid-19 lockdown, total employment remains deep in the hole relative to pre-pandemic levels. The jobs deficit relative to February 2020 stands at a whopping 8.4 million, slightly worse than where labor conditions stood at the end of the 2007-09 recession, when the shortfall was about 8 million. Regardless, last week’s jobs numbers show we are headed in the right direction.

The massive job gains are indeed driving unemployment lower and will continue to do so over the next several months. However, the significance of falling unemployment will be less relevant until labor force participation – the percentage of the population that is either working or seeking work versus sitting on the employment sidelines – shows a more convincing recovery. At present, labor force participation sits at levels last seen in 1976. Adjusting for the participation collapse during the pandemic, the unemployment rate is closer to 8.5%-9.0%. This incomplete job recovery serves as a stark reminder of the substantial excess slack in the labor market, which will act as an anchor on both wage inflation and consumer inflation over a longer-term horizon, giving the Fed permission to sit on its hands regarding rate hikes for the foreseeable future. In the meantime, bond markets will continue to push long-term rates higher as re-opening euphoria tempts investors away from US Treasuries toward riskier and potentially higher yielding investments. 

Global factories are firing on all cylinders. Of particular note in last week’s data releases, the global manufacturing sector continues to outperform. US manufacturing expanded in March at the fastest pace since 1983, catapulted by the firmest orders and production readings in 17 years. Elsewhere, the eurozone manufacturing purchasing managers’ index illustrates how well the goods sector is holding up despite the pandemic, rising to an all-time high of 62.4 for March. The United Kingdom’s PMI rose to 58.9, the highest reading in 10 years, while Japan’s rose to 52.7. In China, the measure rose to 51.9 last month. All told, the data add to evidence of a global economy poised to accelerate.

The infrastructure battle begins. President Biden made public his plan to spend $2.3 trillion over eight years to modernize America’s transportation infrastructure, improve care for the aging, boost domestic research and development and address climate change, among other priorities. To help fund the proposal, the president would raise the US corporate tax rate from 21% to 28% and increase taxes on companies’ foreign earnings, among other levies. This multi-trillion-dollar investment plan is divided into two components: The first phase of the plan is targeted (mostly) toward physical infrastructure, such as roads, the utility grid and high-speed internet. The second component is also intended to boost growth but looks to be focusing more on “soft infrastructure,” like funding broader access to education, healthcare and childcare.

Our take: Biden is following a similar approach as Fed Chair Powell, pulling out all the stops to ensure the post-pandemic rebound does not succumb to a similar fate as the fiscally starved, protracted recovery following the global financial crisis. Ultimately, their collective “flood the zone” approach seeks to avoid risking inadequate support in critical pockets of the economy. For Biden specifically, it seems the President believes fiscal aid is best directed toward restoring household incomes – via stimulus checks and expanded unemployment benefits – as opposed to exclusively on public-works initiatives that are notoriously sluggish to launch. While $2.25 trillion is an impressive price tag, spread over the targeted eight-year investment horizon it will likely only lift the level of economic growth by a modest amount.