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August Philadelphia Fed Manufacturing Survey, July Leading Indicators and Weekly Unemployment Claims

KEY DATA:  Phila. Fed (Manufacturing): -2.5 points; Orders: +5.8 points/ LEI: +0.9%/ Claims: -29,000

IN A NUTSHELL: “If the economy is softening, you cannot see it yet in the labor market, which remains drum-tight.”

WHAT IT MEANS:  Another day, another set of economic numbers that should drive investors crazy.  First, there was the Philadelphia Fed’s survey of manufacturers.  The index eased back in the first part of August, which was hardly a surprise.  Not because the index was anywhere close to the near-record high it reached in April, but because this index is crazy volatile.  So, ups and downs are taken as a given and when the change is as small as it was in August, then you have to say that conditions didn’t change much.  Indeed, the manufacturing sector in the Mid-Atlantic region is in pretty good shape.  New orders grew much faster, hiring remained robust and pricing power improved solidly.  If there was a warning in this data, it came from the special question section.  Respondents expect that they will have to raise compensation by 4% over the next year but will be able to offset that by an even faster 5% increase in prices.  These results are similar to the ones found in the May survey, except firms now think national inflation will run at a 5% pace over the next year rather than 4%.  That seems to point to rising inflation expectations, something the Fed should be worried about.  

If the Fed is going to start tapering, it should time it when the economy is still improving and it looks like we are in for more strong growth.  The Conference Board’s Leading Economic Index rose sharply in July, as every component added to the gain.  That is about as broad based as you can get.  Given how much the index has risen this year, the Conference Board expects “real GDP growth for 2021 to reach 6.0 percent year-over-year”.  It even thinks that 4% is likely in 2022.  That hardly looks like much of a slowdown. 

As for the labor market, new claims for unemployment insurance declined to a level that is very consistent with a strong economy and an unemployment rate at the current 5.4%.  That is, the market churn, (hires versus fires, quits, retirements etc.) that determines initial claims is pretty normal.   

IMPLICATIONS:Is the economy in good shape? Yes,but it is also true that it is not too hot, not too cold, and not just right.  Forget Goldilocks, bring on confusionSome of the data, including the housing and retail spending reports, have not been great.  But the labor market data have been really great.  And then there are the inflation numbers, which show no signs of subsiding.  The reality is that the economy is in transition and that is the way it is going to be for quite a while. So, expect some volatility in the data, especially when we get to the fall, which is when the labor markets will be moving from government manipulation to private sector actions. For investors, uncertainty is never a good thing, so don’t be surprised if we get some big ups and downs. And that may be in part because the Fed continues to find itself in a tough spot. Clearly, the economy is better than the members expected it to be, while inflation is worse.  That should mean it is a layup that tapering would begin this fall.  But the weak housing and consumption reports, which might just turn out to be temporary aberrations, means that investors are getting worried about the sustainability to strong growth.  If the Fed only had a dual mandate, maximum employment and stable inflation, then there would be no issue.  But the Fed continues to operate under its self-imposed, but never stated, triple mandate, where stable and/or rising markets are also a major factor in its decision making.  Chair Powell doesn’t want to spook the markets (i.e., investors), so he must get his timing right.  Yet when all is said and done, the Fed is likely to start cutting back on its liquidity adds sometime in the next six months.  The issue is not whether but how quickly, so the best thing is to assume it is going to happen and act accordingly.

July Retail Sales, Industrial Production and August Home Builders Survey

KEY DATA:  Sales: -1.1%; Ex-Vehicles: -0.4%/ IP: +0.9%; Manufacturing: +1.4%/ NAHB: -5 points

IN A NUTSHELL: “Despite household uncertainty affecting demand, the manufacturing sector remains strong.”

WHAT IT MEANS: Households have been shopping ‘till they dropped, but it looks like they dropped shopping in July.  Retails sales declined sharply, led by a major pullback in vehicle purchases.  Since we knew that vehicle demand was down significantly, the fall in overall sales was not a surprise.  What was disconcerting was the broad-based nature of the cutbacks.  People ate out a lot and bought electronics and appliances, but that was it.  There was a major increase in gasoline purchases, but there was also a major increase in gasoline prices, so we can discount that rise.  Otherwise, sales at most other types of stores, including the Internet, declined.   Consumers may be cautious with their money, but you could not tell that from the Fed’s industrial production numbers.  Manufacturing output was up in almost every segment.  Only the petroleum and apparel sectors were down.  While it was nice to see a burst of new production, manufacturing has been up and then down every other month.  The saw-tooth trend is up, but extremely uneven.

The housing bubble seems to be deflating.  The National Association of Home Builders’ index plummeted in August, led by a declines in both current sales and traffic.  I don’t know how many times I have said that “the next time a housing bubble slowly deflates will be the first time a housing bubble slowly deflates”, so I am a little cautious about what comes next.  Clearly, the panic buying and huge price increases we saw over the past year had to come to an end – and it is doing just that.  It’s unclear, though, how big a slide will follow.  If there is a sign of hope, it was in the expectations component of the index.  It was flat.  Let’s hope the confidence that the developers are showing in the future turns out to be correct.         

IMPLICATIONS:  Is the economy slowing?  Yes.  Is that a surprise? No.  Is there cause for concern?  Not yet. The big problem facing the economy, once again, is the virus.  It is knocking the sox off consumer confidence, as seen by the huge decline in the early August University of Michigan Consumer Sentiment index.  Those that hoped the virus would disappear have been greatly disappointed.  And with schools reopening, the Delta virus affecting younger adults and children and the politics of dealing with the virus getting even worse, if that is possible, uncertainty is setting in.  The Census Bureau has developed an experimental state monthly retail sales report, which will be released in ten days, and it will be interesting to see if the impacts differ by cases of virus.  Just a few states account for a large majority of new cases and looking at those states vs. those where the virus is not as viral might provide some insight into how important the continued pandemic is on consumer decision making.  But there is also good news, as industrial production remains strong.  The issue isn’t the level of demand, as that remains high.  It’s just that the huge increases in sales were not sustainable and we have to get used to more normal patterns.  Overall, all, though, the risks going forward are to the downside.  The supplemental unemployment payments have only a few more months to go and with the government’s business support waning as well, we could see a slowdown in retail sales and a rise in business bankruptcies.  We are entering the transition phase, from massive government support to ultimate dependence on the private sector.  Biden’s eventual budget will not likely have a major impact for a few more months, so look for some additional large swings in the economic data.  Interestingly, those negative numbers could arrive just as the Fed is contemplating announcing its intention to reduce its asset purchases.  As is the case with most things in life, timing is critical and the Fed may be doing the correct thing, but not necessarily timing it well.   

July Producer Prices and Weekly Jobless Claims

KEY DATA:  PPI: +1%; Goods: +0.6%; Goods Ex-Food and Energy: +1%; Services: +1.1%/ Claims: -12,000

IN A NUTSHELL: “Wholesale price pressures continue to build and that argues for firms continuing to use their pricing power to overcome those rising costs.”

WHAT IT MEANS: Hey people, inflation pressures are not fading just yet.  The Producer Price Index posted another large gain in July, and that was the case even excluding volatile food and energy.  Food was the only major component where costs fell, but the sharp decline was offset by another major rise in energy costs.  Price pressures rose significantly in just about every major and minor component and every special index.  In other words, increasing producer costs are pressuring businesses in every nook and cranny of the economy. 

Jobless claims eased back again last week, and we are slowly moving toward a pace that would be expected in a strong economy.  How long it will take to get back to where we were before the pandemic hit is a different issue.  Then, the unemployment rate was below what most economists believe is full employment.  Now, it is still two percentage points above that record low level, even with the sharp decline in July. 

IMPLICATIONS: Is the Fed whistling past the graveyard?  Both retail and wholesale prices are rising sharply.  Some have argued that the “lower”, i.e., not as huge, increase in consumer prices is the start of the deceleration in inflation.  However, it is hard to make the case that the high inflation posted in July is better than the very high inflation we had been seeing.  Both are disturbing, to say the least.  The wholesale numbers only argue for at least a few more months of high consumer inflation.  Firms have pricing power and there is little reason to think they will not continue using it.  It has been so long since that was the case, that the conventional wisdom that the high inflation is temporary and we will get back to “normal” inflation without any long-term impacts, has to be called into question.  Investors believe that is true and Fed members continue to say the same, though some at the Fed are breaking ranks.  My view is that when you combine labor shortages, declining unemployment rates and rising wages with supply chain problems, excess demand and increasing input costs, you have the recipe for an extended period of inflation.  Interestingly, if the Fed is going to get back to an “average 2% inflation rate”, then the extended period of sub-2% inflation will have to be offset by an extended period of above 2% inflation.  That is where we seem to be headed.    

July Consumer Prices, Real Earnings and Help Wanted OnLine

KEY DATA: CPI: +0.5%; Over-Year: +5.4%; Ex-Food and Energy: +0.3%; Over-Year: +4.3%/ Real Hourly Earnings: -0.1%; Over-Year: -1.2%/ HWOL: +3.8%

IN A NUTSHELL: “It’s hard to get excited about a deceleration in inflation which goes from scorching hot to extremely hot.”

WHAT IT MEANS: Inflation surged again in July, but the increases were a little bit more concentrated in the volatile food and energy sectors during the month. Excluding those components, household costs were up solidly, but not ridiculously. The monthly rise was also the lowest since February, which I guess you can say is progress. I will not say that, since the over-the-year pace is still way too high. In July, the big increases were in almost all components of food and energy, as well as in new vehicles. Interestingly, services costs, including housing and medical services, rose more moderately. Used vehicle price increases also eased, though they are up 42% over the year.

With inflation so high, it should not be a surprise that it is cutting into household spending power. While hourly wages were up in July, when adjusted for inflation, they were down slightly. Over the year, consumer purchasing power is off solidly and that is not good news, especially with some of the government’s support programs about to disappear.

The strength of the labor market is clear and the surge in the number of jobs being advertised online only confirms that point. The Conference Board’s Help Wanted OnLine index keeps setting new records, as firms both reopen fully and expand. Companies are also using every means possible to find new employees as the number of unfilled positions also it at record highs.

IMPLICATIONS: I like to say that the answer to all economic questions is “It depends!” and that is the case with the current state of inflation. Consumer prices surged in July, but the rise was less than what we saw in the previous four months. So, does that mean inflation is fading? Well, it depends. If all you worried about was the period from March through June, then the answer is yes. If you look at it in an absolute sense, that is, was the rise in July high, the answer is no. So, pick you poison. My view is this: The last thing we want to see is additional months of price gains that are above 0.2%. To get back to the Fed’s average target of 2%, you need a monthly rise of less than 0.2%, so we are nowhere that happening, at least not yet. Actually, it would be nice to see that number once. Until that happens, I will not be exuberant about any “deceleration” in the monthly consumer cost numbers. In addition, the massive number of job openings points to further gains in wages, which should keep the pressure on prices. That said, these reports will not do anything to the Fed’s wait and see approach. The members are not so foolish as to think an annualized pace of 5.8%, which is what we would get if the July gain was repeated over the next year, is anything to be happy about. But they need more time to allow the wild swings that were created in 2020 because of the pandemic to be smoothed out. As long as the Fed holds off on warning that it is nearing the point that tapering will begin and subsequently rates will be increased, investors will likely remain optimistic.

Second Quarter Productivity and July Small Business Index

KEY DATA:  Productivity: +2.3%; Unit Labor Costs: +1%; Real Compensation: -4.8%/ NFIB: -2.8 points; Future Conditions: -8 points

IN A NUTSHELL: “Businesses continue to operate very efficiently, which should help keep earnings solid.”

WHAT IT MEANS: The economy soared in the second quarter and that was good news for nonfarm businesses.  The sharp 7.9% rise in output more than offset the 5.5% robust gain in hours worked and as a result, productivity increased at a solid pace.  The increase in efficiency also largely offset the surge in hourly compensation, so labor costs rose at a modest pace.  While businesses did well in the spring, things were quite as good for workers.  Yes, it was nice to see that hourly wages rose strong pace, but inflation soared even faster.  That led to a sharp decline in real, or inflation-adjusted compensation. 

Small businesses should be happy about the reopening of the economy, and they were for a while.  But conditions could be changing, at least a little.  The National Federation of Small Businesses’ optimism index decline in July.  There had been a nice bump up in June, but that disappeared and the level is similar to what we have seen for four of the last five months.  For the eight consecutive month, the outlook for business conditions was negative and it dropped sharply in July.  Earnings expectations are also negative, not a good sign for hiring or expansion.  The big problem remains costs, both labor and nonlabor.  Input expenses are rising sharply and actual compensation increases are exceeding expected ones.  The lack of qualified workers is also a major issue, with a record 49% of the respondents saying they could not fill positions.       

IMPLICATIONS: There is good news and bad news in today’s reports.  The sudden reopening of the economy has not caused business labor costs to rise significantly, as production gains outstripped rising labor costs.  When you add in inflation, compensation expenses are dropping at a rapid pace.  Thus, corporate earnings should be holding up.  But that also means workers’ spending power is beginning to falter.  That is not good news, especially for small businesses who are already concerned about the future.  Still, there are no signs that the economy is downshifting.  July’s job gains were massive and with so many more people working, it can only mean that total income is rising solidly.  The conundrum the Fed faces is that the current data do not support its massive liquidity program.  But uncertainties about the future argue for it to stay the course, at least for a while.  Once again, when facing a “do too much” vs. “do too little” choice, the Fed is likely to do too much.  It is easier to slow growth than accelerate it and with rates so low, it has a lot of arrows to fire at any inflation threat. 

June Job Openings and July Employment Trends

KEY DATA:  Openings: +590,000; Hires: +697,000/ ETI: +0.84 point

IN A NUTSHELL: “With openings exceeding unemployment, strong job gains look to be with us for a long time.”

WHAT IT MEANS:  The July job numbers were outstanding, and it is clear why that was the case:  Despite all the efforts that firms are putting into finding new workers, robust economic growth is causing employers to lose ground when it comes to filling job openings.  The rate of openings, which is openings divided by total employment, was by far and away the highest on record.  Indeed, there are more job openings than unemployed workers. Labor market conditions are beginning to look like what they were in the period of 2018 to early 2020, when the unemployment rate was near or at record lows.  However, the rate is now about two percentage points higher.  The willingness of workers to quit their jobs, which includes leaving a position or moving to another employer, is also as high as we have ever seen it.  In other words, while the unemployment rate may be well above what economists consider to be full employment, for employers, that situation has already effectively been reached.

Supporting the view that the labor market is extraordinarily tight was the July rise in the Conference Board’s Employment Trends Index.  The index has retraced all that it lost when the pandemic shut things down.  As the report note, “Despite the still-high unemployment rate, many employers are still having difficulty finding qualified workers.”     IMPLICATIONS:  As I noted in my discussion of the July employment data, the huge increases in hospitality and government payrolls are not likely to be sustained or even repeated. But few economists believe that the job gains that approached one million in June and July can be repeated.But keep in mind, payroll increases between 300,000 and 500,000 are viewed as massive, so even if the gains were cut in half, the report would be great.  With job openings exceeding unemployed workers, continued robust job gains and further increases in the labor force participation rate, as people are induced to get back out into the market, are likelyBut that also means that wage pressures could continue building for an extended period.  The solid increases in both consumption and inflation are likely to be sustained as well. Businesses that have pricing power will continue to use it, while those that don’t will likely try to find ways to raise prices, nonetheless.  That might be good news for investors, as it implies profits can be sustained.  And since the Fed is in no hurry to start easing back on its supply of liquidity to the system, fears of rate hikes are premature, at least for now.

July Employment Report

KEY DATA:  Payrolls: +943,000; Private: 703,000; Revisions: +119,000; Leisure and Hospitality: +380,000; Government: 240,000/ Unemployment Rate: 5.4% (down 0.5 percentage point); Hourly Wages: +0.4%; Over-Year: +4%  

IN A NUTSHELL: “The labor market is tightening sharply as workers are returning to restaurants and schools.”

WHAT IT MEANS: July was a good month for both businesses and workers. Firms continue to expand their workforces, despite all the complaints about the lack of availability workers.  The economy added an average 940,000 new employees over the past two months, so it looks like there are plenty of qualified people searching for jobs – and finding them.  In addition, the increases of the previous two months were revised upward significantly, implying the hiring was stronger as the months went on.  The payroll increases were spread across the entire economy, with the 67.5% of industries reported gains.  That said, there was a somewhat unbalanced increase, as nearly two-thirds of the new positions were in two areas: Leisure and hospitality and government.  Most of those were in restaurants and schools.  Going forward, it is not clear how many more workers will be hired.  Indeed, leisure and hospitality total payrolls are now only about ten percent below their peak in February 2020.  Local education employment is within two percent of its peak.  So, it appears that the massive job gains are behind us.  

On the wage front, hourly wages continue to rise solidly, both over-the-month and over-the-year.  With employees working longer hours, their weekly pay is also surging.    

As for the unemployment picture, there seemed to be some “make-up” in the numbers.  With all the hiring that had been going on, it was surprising that the unemployment rate hadn’t fallen more.  Well, whatever undercount had occurred is now gone.  The unemployment rate cratered, and for all the right reasons: The labor force participation and labor force rose, employment skyrocketed, and unemployment plummeted.  The duration of unemployment is also falling, which shows that people are getting pulled off the rolls.  Some of that may be due to states ending the supplemental payments, but we don’t have specific data on that yet.    IMPLICATIONS:This was a great report, but it did contain some warnings.  Given how many of the new positions were in sectors that are nearing their pre-pandemic highs, job gains anywhere near what we have seen over the past three months are unsustainable.  Economic growth, not reopenings will have to take over.  That is actually good, as we will start getting a picture of what the fundamental economy looks like.  Right now, we are still in the recovery phase.  Businesses will have to start expanding, not returning to previous levels, for payrolls and growth to remain strong.  That change in the driving force for job gains is coming as the government is beginning to cut back on their income supports.  Even if the infrastructure and budget bills get passed, their impacts are months if not years out.  Investors should start lowering their expectations for job gains and economic growth, especially when we get to the fall and winter.  That is not to say growth will stall; there is little reason to expect that.  But six percent is unsustainable and three to four percent, which we could get over the next year, means employment increases less than one-third we have recently seen.  Those rates are still somewhat outsized, since trend growth is closer to two percent and trend job gains is probably in the two hundred thousand to two hundred fifty thousand range.  Which means the economy is looking good going forward, just not looking like it has over the past few quarters of reopenings.  And then there is wildcard, the Delta and other possible variants.  The Fed might worry that growth could remain so strong that full employment is reached sooner than the members expect.  On the other hand, the pandemic is not over.  My guess is that the Fed is willing to let the economy run hot for an extended period and not panic if inflation is elevated as well.  It is a lot easier to slow growth than to accelerate it when rates are so low, especially if the government’s massive income supports disappear.  That creates uncertainties and if the Fed is to make a mistake, it is likely to err on the side of too much growth rather than too little.

July Manufacturing Activity and June Construction Spending

KEY DATA:  ISM (Manufacturing): -1.1 points; Orders: -1.1 points; Employment: +3 points/ Construction: +0.1%; Private: +0.4%; Private Residential: +1.1%

IN A NUTSHELL: “With manufacturing strong and construction starting to rebound, any economic slowdown is likely to be fairly modest.”

WHAT IT MEANS: The economy boomed in the spring, even if many economists expected even stronger growth.  That said, most forecasts, including my own, see activity rising more moderately in the quarters to come.  The issue, is how much of a slowdown should we expect going forward?  Right now, it doesn’t look like it will significant.  The Institute for Supply Management reported that manufacturing activity grew at a “slower” pace in July than we have seen in six months.  Still, the overall index level was pretty strong.  Keep in mind, this is a diffusion index.  If businesses expand one month but only retain that pace the next, the index declines.  To highlight that point, the new orders index eased.  What happened was that a large number of companies reported that demand was stable, rather than rising.  In contrast, a smaller share reported that orders had declined.  Indeed, only 3.3% said they were lower, compared to 8.2% that said demand had declined in June.  In other words, demand solidified, at a high level, rather than accelerated in July, which is not that bad.  Similar results were seen in most of the other components, so don’t look at the decline in the headline number as saying anything.  On the clearly positive side, employment, which had eased minimally in June, picked back up in July.  Also, backlogs continue to expand at a rapid pace, indicating that production and hiring should improve going forward.

The housing numbers haven’t looked great lately.  Nevertheless, the construction sector remains solid.  Construction spending rose modestly in June, but there was a solid rise in private residential activity.  A sharp drop in road construction restrained activity.  State and local government spending patterns have been driven by federal government assistance, while revenues from taxes, such as gasoline taxes, are still falling.  That is affecting infrastructure spending.  That could change if the bipartisan bill that is making its way through Congress actually gets passed.IMPLICATIONS:It’s the first week of the month and that means Friday is the big day for the markets as the July jobs report will be released. Estimating the number is difficult as the reopening of firms and government offices raises issues about the accuracy of the seasonal adjustment factors.  It’s not the season that is leading to the surge in hiring we are seeing.  The consensus is for something in the 800,000 range, similar to the 850,000 June number, but it could be a couple of hundred thousand higher or lower.  I’ve seen estimates that range from 350,000 to 1.6 million, so don’t get too bulled up or disappointed if the number is viewed as a “surprise”.  Regardless, the economy is still moving forward solidly.  Today’s data point to that.  It is just that we have had unsustainable growth for the past year.  It is hard to think that the 12.2% growth from second quarter 2020 to second quarter 2021 will be repeated anytime soon.What investors have to start getting their minds around is what the pathway to normal growth will look like.  How many additional quarters of well above 2% trend growth can we have?  The forecasts are made uncertain by issues such as government policy, the Delta or other virus variants and consumer behavior.  Specifically, what will the infrastructure and budget bills look like?  How much of the spending will occur over the next year or into the future?  Will the cutbacks in federal assistance to workers and businesses lead to slower income growth, spending and hiring?  Will firms that stayed afloat because of government programs start going out of business and if so, how many?  Will the virus get worse, be brought under control again or just become part of life?  How quickly will consumers, who have shopped ‘til they dropped in reaction to the economy reopening, resume more normal spending patterns?  It has never been easy to forecast the economy, but at least we have had trends to fall back on.  Right now, non-traditional economic factors may be the real drivers of growth over the next year, so take any forecast, including mine, with a grain of salt.

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.

June Durable Goods Orders, July Consumer Confidence and May Housing Prices

KEY DATA:  Durables: +0.8%; Ex-Aircraft: -0.2%/ Confidence: +0.2 points/ Case-Shiller National Prices: +1.7%; Over-Year: +16.6%/ FHFA National Prices: +1.7%; Over-Year: +18%

IN A NUTSHELL: “Growth is slowing, and households seem to be taking stock of what may happen going forward.”

WHAT IT MEANS:  The recent economic data point to continued economic growth, but at a more moderate pace, and today’s numbers do nothing but support that view.  Durable goods orders rose solidly in June, but as usual, the headline number doesn’t tell the full story.  Excluding the strong rise in aircraft orders, my preferred data point since airplane orders don’t lead to increased production for quite a while, demand for big-ticket items fell modestly.   The details were also mixed as orders for vehicles, computers and fabricated metals dropped, offsetting increases in demand for electrical equipment, metals, machinery and communications equipment. There was a positive number in this report: Backlogs continue to build at a solid pace and that points to increases in production and hopefully hiring in the future.   

There is some uncertainty setting in when it comes to consumer confidence.  The Conference Board’s July index was up just a touch.  There was a small gain in the view of present conditions while expectations eased back a touch.  On Friday, we get the University of Michigan’s Consumer Sentiment Index, which had dropped sharply during the first half of the month.  With Covid cases picking up and inflation pressuring households, it would not be surprising to see this measure post a solid decline for the entire month.    

Speaking of inflation, as expected, home prices spiked further in May.  Both the Case-Shiller and Federal Housing Finance Agency indices posted major increases, over the month and the year.  Three of the nine regions in the FHFA index had home price gains over-the-year in excess of twenty percent, with the smallest rise being 15.4%.  Similar increases were posted for the twenty cities in the Case-Shiller measure.  These are clearly unsustainable rises that reflect the panic buying we saw over the past year.  The surging home costs are reducing affordability, which helps explain yesterday’s sharp drop in June new home demand. IMPLICATIONS:Thursday we get the first reading on second quarter GDP and there is every reason to believe it will come in faster than 6.4% surge posted in the first quarter.  But there is also every reason to think that going forward, we could see a constant moderation in growth that could get us back closer to trend 2% in over the next year or so.  Part of the problem is the supply chain, which is not showing signs of being fixed in the near future.  Housing costs are pricing households out of the market and inflation is eating into many workers purchasing power.  With the supplemental unemployment insurance payments being cut by states and ending in September, much of the government-supported personal income growth is also coming to an end.  But as is the case with most economic issues, there is the other hand.  Slower growth should bring inflation down, easing pressure on the Fed to reduce asset purchases and/or raise rates sooner than expected.  Indeed, the Fed members are making that argument, which is music to investors’ ears.  Moderate growth is something that most economists like to see. Most economists have built into their 2022 forecasts an end of the pandemic (or a limitation of its effects).  Let’s hope that is the case.  But the pandemic is not over, yet many citizens and politicians are acting as if it is.  The greater risk is on the side of slower economic growth next year, as the Delta and/or future variants could keep the pandemic going longer than expected.