On Memorial Day we honored the many American heroes who gave the ultimate sacrifice in service to our country. At a time when our country, and the world, has suffered so much through the pandemic, the sacrifices of these brave men and women hold extra meaning. As we work our way out of the pandemic, many people are finding a new appreciation for all of the little things that make up our "normal" lives.
With the unofficial start to summer in our rear-view mirror, the country is ready to get back on solid ground. This summer is when it could happen. Vaccinations are moving forward and many Americans who have hunkered down for the past year-plus are ready to reemerge. Just like the emergence of the Brood X cicadas after 17 years below ground, American consumers are about to make some noise.
Consumers are making up for lost time. Some of the hardest-hit sectors, leisure and hospitality are now making a comeback. OpenTable booking data shows restaurant seatings are now back to the pre-pandemic level. Even more, the hard-hit travel industry is making a recovery. To date, air traffic is 75% of the way back to normal. I expect these recovery trends to continue to strengthen heading into the summer travel season. Americans are itching to recoup all of the things they lost during the pandemic and many have the resources to do so.
Inflation On The Rise
A surging consumer is shifting the supply/demand equation. As is already the case, shortages are becoming a problem. In fact, the number of times "shortage" is mentioned on earnings calls has skyrocketed this year. Companies are not able to procure the materials or labor needed to meet the needs of elevated demand.
This means long delays and increased prices for certain products and services are common. Look no further than the surging housing market and ancillary sectors (building supplies, paint, furniture, appliances, etc.) for a prime example of how these shortages can impact the economy. Six to twelve-month delays are not unreasonable right now. The same delays are happening for products containing computer chips. The chip industry is responding, but it could take through the end of the year to implement the required adjustments to meet demand.
We expect these delays to persist in the near term. Global supply chains are in disarray at the same time demand is surging back. The important question is how long will this last. To date, much of the supply/demand imbalance may be transitory. Global supply chains will recover and the surge in demand will subside. This is the nature of the unique economic disruption that just occurred. However, if shortages persist well into next year, inflation risks become more troublesome.
In the face of rising inflation the Federal Reserve is being patient. Inflation has run below the Fed's 2% long-term target for years. This means it can run above 2% for a while before creating too much concern. However, the Fed is mindfully aware of the unprecedented amount of monetary stimulus in the system. While rising inflation may not turn the Fed hawkish overnight, it does diminish the need for some of the emergency policy initiatives implemented since the pandemic began. I expect that the Fed will explore ways to slowly remove some monetary stimulus throughout the second half of the year.
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Benjamin W. Jones, CFP®, AIF®
CERTIFIED FINANCIAL PLANNER™
President, Chief Investment Officer, Principal
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Sarasota, Florida 34236
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