Stock Market Rally In the Face of Chip Shortage

The stock market's rally remains on track, underpinned by expectations of new fiscal stimulus and increased vaccinations.   The latter is already helping the economy, with indoor eating at restaurants beginning in New York and other places.  The latest hiccup, however, is the shortage of chips, which is impeding production in a number of industries, particularly motor vehicles.  

The chip shortage's impact could knock a noticeable amount from Q121 Real GDP Growth if it lasts through March.  It should worsen a number of economic data, including Retail Sales, Unemployment Claims, Payrolls, and Business Investment (in equipment and inventories).  But, it could be viewed as setting up for a bounce-back in economic activity later in the year.  This could mitigate a negative impact on the overall market.

Weak prints will probably be trumpeted as support for the $1.9 Tn Democratic stimulus package.  But, this would be incorrect.  Since the shortage's impact stems from supply constraints, not inadequate demand, fiscal stimulus will not address the problem.  Instead, it could exacerbate the inflationary implications of the shortage.

The re-starting of indoor restaurant eating could help the labor market considerably.  This relatively low-productivity industry requires a lot of workers, so its expansion could make a significant dent in unemployment.  

A contraction in high-paying industries, due to the chip shortage, combined with the expansion of low-paying industries, like restaurants, could hold down aggregate measures of wage inflation.  It also could boost a shift in consumption to services from goods (particularly durables).

It is probably too soon to see the impact of the chip shortage in this week's US economic data, except for Unemployment Claims.  Consensus looks for a decent 1.0% m/m rebound in January Retail Sales (both Total and Ex Auto) after they dropped in December (-0.7% and -1.4%, respectively).   Consensus sees +0.4% m/m Total and +0.2% Core PPI, both near the recent trend.   It sees a slight pullback in January Housing Starts/Permits.  Consensus sees little impact from the chip shortage on Initial Claims and February Markit US Mfg PMI.  It expects Initial to fall to 775k from 790k in the prior week.  And, it sees only a downtick in the Markit US Mfg PMI to 58.5 in February from 59.2 in January.  The risks presumably are for weaker prints.