Gardner Intelligence Blog

In March 2021, real disposable income was $19,333,901 (millions of USD, SAAR). This was nearly 12% more than the next highest month of real disposable income in the history of the U.S. On its own, that is a staggering jump in income. Coupled with the fact that more than 16 million Americans are still filing unemployment claims, that 12% jump boggles the mind.

Compared with one year ago, real disposable income increased 29.3%. This was the fastest rate of month-over-month growth in disposable income since at least the mid-1960s. This was the only time that the month-over-month rate of growth was faster than 17%. In fact, only four times in history has the month-over-month rate of change grown faster than 10%, and all four times have happened since April 2020.

In March, real consumer durable goods spending was $2,314,045 (millions of $, SAAR), which was an all-time high. Compared with one year ago, durable goods spending increased 44.0%, which was the fastest rate of month-over-month growth ever and the only month ever with growth faster than 24%. Of course, this incredible rate of growth was partially a result of an easy comparison with March 2020 due to the start of the economic lockdown.

In nine of the last 10 months, month-over-month growth was more than 11%. The only exception was December when the growth rate was still almost 9%, nearly double the historic average. The annual rate of growth accelerated for the ninth straight month to 12.2%, which was the fastest rate of annual growth since April 2000. Also, the annual rate of growth was more than double the historic average.

Business Activity Post Modest Deceleration on New Orders and Exports

The April reading of the Gardner Business Index (62.7) declined for the first time since November 2020.  The slight decline from the prior month’s revised 63.3 reading resulted from a slowing acceleration in new orders and a slight contraction in export orders. Backlog and employment activity both signaled a slight accelerating expansion in activity which was offset by the slowing expansion of production activity. 

According to the Cutting Tool Management Report (CTMR) for February 2021 from the Association For Manufacturing Technology (AMT), real cutting tool orders were $149.5 million, contracting 18.5% from February 2020. This was the slowest rate of contraction since March 2020 at the start of the economic lockdown. It is likely that the February orders were affected by the deep cold in Texas and/or significant supply disruption that, among other effects, forced plant shutdowns in the automotive industry due to a lack of computer chips. February was the 24^th consecutive month of month-over-month contraction, but these same figures clearly show that the contraction is slowing. Further, starting in April, the month-over-month comparisons get much easier.

The annual rate of change contracted at an accelerating rate for the 17^th month. The annual rate of contraction was 27.4%, which was the fastest rate of annual contraction since the data was made public. The annual rate of contraction may be at its fastest in February, depending on the strength of March orders.

That the rate of inflation could be below the cost to borrow money defies a core principle of finance which is that borrowing costs should be the sum of 1.) the risk-free* rate of return plus 2.) a risk-premium. In general, the risk-free rate is the sum of the rate of inflation plus the yield of the treasury bond matching your investment duration. If we assume a 1-year rate of 0.05% as of late-April and an inflation rate of 2.62%, then the risk-free rate should be at least 2.67% (or higher if using a longer-dated treasury bond) before adding a risk premium.  Other measures of inflation are much higher. The inflation rate of physical goods at last reporting by the Bureau of Economic Analysis stood at 5.4%. Using this formula over the last 20-years results in a risk premium of 1.5% – 3% for a BBB-rated bond yield. Meaning that a company only slightly above “junk” bond status requires a 1.5% to 3% premium to borrow money.

In the present situation, which has largely come about by the government’s unprecedented intervention in financial markets, the system has somehow found a way to defy longstanding financial logic. Using the same mathematical equation as before, the risk-free rate at present is at least 2.67% per data provided by Bank of America Merrill Lynch.  However, the yield of BBB-rated companies is 2.43%.  This clearly presents a problem given that a company only one-notch above junk status — and thus relatively risky— should not be able to borrow money BELOW the risk-free rate capital.  Data provided by Moody’s Analytics in the form of their Baa Corporate Bond Rate was last reported at 3.60%, providing a risk-premium of less than 1% when using the lowest possible calculation of the risk-free rate.