Second Quarter GDP, June Pending Home Sales and Weekly Jobless Claims

KEY DATA:  GDP: +6.5%; Consumption: +11.8%; Consumer Inflation: +6.4%; Ex-Food and energy: +6.1%/ Pending Sales: -1.9%; Over-Year: -1.9%/ Claims: -24,000

IN A NUTSHELL: “The economy boomed in the spring, but what matters is the next few quarters and there are reasons to believe growth will moderate sharply.”

WHAT IT MEANS:  There was little doubt that economy surged in the spring and the first reading of second quarter GDP activity showed just that.  Many economists expected a lot faster increase, but gain is still great.  Consumers shopped ‘till they dropped.  Consumption exploded and the increases were almost evenly spread between durable and nondurable goods as well as services.  Business spending on equipment and intellectual property was also strong.  However, construction of business structures and housing fell, constraining growth.  As expected, the trade deficit widened, slowing growth. Also, inventories were drawn down sharply, taking over one percentage point out of growth.  Finally, the federal government cut its spending on goods and services.  It was busy supporting income through transfer payments.  As for inflation, it soared, no matter how you measure it.  Consumer goods and services prices skyrocketed, even when you excluded food and energy.  Housing prices soared, as did imports and exports.  Only the cost of business equipment declined.    

Once again, the National Association of Realtors reported that in June, pending home sales edged down.  Over the last five months, the index has gone up then down, but the average is near the level posted for 2020 – which was a pretty good year.  It is just that there was bubble for about six months that is, surprisingly, deflating not bursting.  Indeed, demand is solid, but with inventories extremely low, it is hard to sell lots of homes.

New unemployment claims gapped down last week, though the previous week’s number was revised upward.  The 400,000 level is a bit disappointing.  A few weeks ago, we were hoping it would start approaching 300,000, but it has gone in the opposite direction.  Also, there was sharp rise in the number of workers receiving benefits.  These data are extremely volatile and there is every reason to think the number of new claims and recipients will fall more consistently going forward.  It’s just that it may take longer than expected to get back to full employment.

IMPLICATIONS: We have had four consecutive quarters of strong to spectacular economic growth.  But that was driven by the reopening of the economy and massive government transfer payments.  We should see another really good gain this quarter, though it will likely be less than we have seen for three major reasons: The reopenings have largely occurred; states are already reducing their payments and in September, the federal government will follow suit; and job gains, though strong, are not likely to come close to the last twelve months given the problems firms are having finding workers.  Yes, businesses could get some help when the supplemental unemployment funding disappears, but it isn’t clear how big a factor that will be or how long it will take to significantly reduce the number of people on traditional unemployment rolls.  Income growth in the last quarter of the year will be mostly dependent on wage and job gains, not government largesse, and that doesn’t bode well for consumption.  There is little reason to expect a surge in business spending on structures.  Why the trade deficit would narrow is beyond me, as the rest of the world is not showing signs of growing a lot faster.  The only significant positive could be federal government spending.  States and local governments are losing their sugar daddy, the federal government, so don’t look for them to start buying all sorts of goods and services anytime soon.  While we might get an infrastructure bill, it will take a long time for those funds to make their way into the economy.  The Biden administration wants to spend like crazy and if it gets its way, the rise expenditures could offset somewhat the slowdown caused by the factors listed above.  That would imply a moderation in growth going forward, not a rapid deceleration.FOMC Decision: The FOMC met Tuesday and Wednesday and it kept rates constant.  No surprise there.  What was hoped for was a signal about when the asset purchases would start to slow.  The comment that “the Committee will continue to assess progress in coming meetings”, toward meeting their inflation and employment goals, with meetings being plural, implies that it will not signal when the tapering will occur until near the end of the year.  The Fed has indicated it will start tapering before it raises rates, so we need to see that happen first.  With the Fed pledging that short-term rates will remain near zero, the Fed is showing it will keep supporting the markets.  It is when tapering begins that the real challenge for investors will begin.