After a shockingly poor U.S. jobs report for April, Wall Street is rethinking just how strong the U.S. economy is.
The relatively weak 266,000 increase in hiring last month means investors will give even more scrutiny to the upcoming batch of economic signposts. Although most economists doubt the labor market has gone soft, the report has generated plenty of second guessing.
“Next week’s data will be carefully watched for the underlying picture of the economy,” said chief economist Aneta Markowska of Jefferies LLC.
Read: A Jobs report whodunit: Here are the suspects
Wall Street is expecting some good news and bad news. Consumer spending is surging due to federal stimulus checks and a recovering economy — but so inflation.
See: MarketWatch Economic Calendar
First the good news.
Sales at U.S. retailers likely rose a healthy 1% in April. Although receipts won’t come close to matching the giant 9.7% increase in March — when Americans got their stimulus checks — it would still leave retailers in a good spot.
Sales are now well above pre-pandemic levels and are expected to keep climbing as the coronavirus wanes and the economy recovers. Retail sales account for about one-third of consumer spending, by far the main driver of the U.S. economy.
The one caveat: Americans are already starting to spend more on services that they large eschewed during the pandemic. Until very recently government restrictions, social-distancing rules and fear of catching the virus kept people from leaving their homes much to dine out, attend a ball game or travel.
Retail sales could slow over the summer if the shift in spending accelerates.
Read: Unemployment claims drop below 500,000 for first time since pandemic
Yet all the pentup spending appears to have a downside: Higher prices.
The cost of a wide variety of goods ranging from oil to lumber to precious metals are increasing. Manufacturers are starting to pass some of these price increases onto customers — and that’s sparking a surge in inflation.
The consumer price index, the main tool for tracking the cost of living, is forecast to rise in April for the 11th month in row. And the yearly rate of inflation could climb above 3.5% for the firs time since 2011.
Federal Reserve officials insist the spike in inflation will prove as short-lived as the toilet paper shortage early in the pandemic, as Boston Fed President Eric Rosengren recently put it. They predict inflation will subside by next year and fall back toward the central bank’s 2% target.
Wall Street is not so sure, but the debate is really just beginning.