State of the Economy

Monthly Economic Dashboard for Financial Advisors and Investors

Updated: October 19, 20219

The state of the economy can greatly affect securities, the markets, and the people invested in them. To help provide clarity into the major economic factors that influence our market, we’ve created a monthly State of the Economy report that is comprehensive, yet practical—with the goal of helping investors and advisors make more confident and well-informed investment decisions. 

Economic Overview for October 2021

Most of 2021 has been characterized by positive economic growth, but the tides seem to be shifting. Second quarter GDP growth checked in at 6.7% (annualized), following an equally strong first quarter. Consumer spending was strong in the first half of the year, but we started to see a different story develop in the third quarter. Inflation concerns became more prevalent and more sustained, and consumption is beginning to falter. Supply chain disruptions amplify both trends. GDP estimates for the third quarter have gone from over 6% to just 1.3% (annualized). With slowing fiscal stimulus, growing supply chain frustrations, and monetary tapering on the horizon, the “snapback” portion of the economic recovery is behind us.

Core Economic Indicators

  • Consumption
  • Investment
  • Government Spending
  • Net Exports

Retail sales figures moderated in August, up just 0.7% for the month. While sales actually surpassed projections, this monthly increased follows a 1.8% decline in July. Since June, we’ve seen a net negative trend in sales, in line with rising inflation, declining consumer confidence, and sustained supply chain challenges.

Private nonresidential fixed investment increased 2.5% in the second quarter (quarter-to-quarter, revised), led by demand for transportation equipment and intellectual property products (software and R&D).

Private Residential Fixed Investment has slowed, but remains positive with a 0.4% quarterly increase (revised). In recent quarters, low-rate and stimulus-fueled demand has been unphased by rising housing prices. As stimulus is scaled back and consumer confidence declines, the housing boom seems to be leveling off, albeit at historic highs of over $1 billion in expenditures.

Government expenditures in the second quarter of 2021 show a quarter-by-quarter decline of 12.9%. Spending moderated in the second quarter due to elimination of direct payments to individuals and reduced unemployment benefits. However, continued loans to businesses and government grants paired with advanced child tax credit checks helped keep overall spending elevated. If the monumental infrastructure and social spending plans are implemented government expenditures will continue to rise but ultimately hinder long term productivity and GDP growth.

The trade deficit grew to $73.3 billion in August, up $2.9 billion, or 4.2% from July. Exports remained relatively flat for the month, with a 0.5% increase, while imports rose by 1.4%. The increase in imports was led by a rise in pharmaceuticals ($2.2 billion), industrial supplies ($1.8 billion), and services ($1.3 billion – transport and travel).

Economic Indicator Deep Dive

Each month we highlight economic indicators and contributing data points that are particularly relevant to advisors and investors. See the complete list below:

GDP

+1.3%

third quarter, 2021

 

The Federal Reserve Bank of Atlanta’s GDPNow forecast has declined to just 1.3% growth in the third quarter of 2021. This is down from an initial expectation of more than 6%. So what happened?

Take a look at the below table, which outlines the contributing components of GDP for the second quarter versus expectations for the third quarter.

Yes, reduced government spending will lower GDP. And yes, a historically high trade deficit will lower GDP. But those aren’t the main drivers of this unexpected GDP weakness. Instead, we can look toward slowing consumption and lower inventories.

Consumer confidence is near historic lows. Pair that low confidence with substantial inflation expectations and you can easily see why consumption figures are retracting. And as shown by lower private inventories, global supply chain issues further suppress consumption figures.

Additionally, transportation costs have skyrocketed. A combination of labor shortages, higher demand for durable goods, and rising energy prices have driven container costs through the roof. These challenges, along with a few disasters (natural and manmade), have placed considerable strain on the global supply network and created either shortages, higher prices, or both in various segments of the market (e.g. autos).

The takeaway here isn’t just that we’ve had a bad quarter in terms of consumption. It’s that the factors weighing down consumption and expectations aren’t a simple hiccup, but more systemic challenges. Inflation looks poised to continue at levels that are higher that the historical lows of the past several decades, and global supply issues won’t be fixed overnight. As such, we wouldn’t be shocked to see continued volatility in economic growth over the next few quarters.

Consumer Confidence

68.1

Future Expectations, September 2021

The University of Michigan conducts a monthly survey of consumer sentiment, both for current economic conditions and future expectations.

In August, the survey returned a historically-low 65.1 rating for future expectations. That number rose slightly in September, but remains extremely low at 68.1 (9.9% lower than a year ago). Depressed sentiment is likely driven by a few factors, including worries around the more potent Delta variant, persistent inflation, and the likelihood of future rate hikes.

When paired with lower sentiment in current economic conditions (80.1, down 8.8% year-to-year), we would expect to see lower current and future consumption. This aligns with modest consumption figures over the past few months, and is feeding the reduction of economic growth forecasts. 

Inflation

5.4%

Year-over-Year Growth, September 2021

We know everyone is tired of hearing about inflation, but the coverage is justified.

Prices continue to rise steadily. September produced a 0.4% monthly increase in CPI for all Urban Consumers, which amounts to a 5.4% year-over-year rise. And with multiple months of plus-five percent year-over-year increases, the transitory visitor’s pass assigned to rising prices begins to lose legitimacy. It looks more and more like inflation is here to stay.

As shown in the chart below, inflation is particularly high in various segments of the market. Energy is a great example, which rose nearly five times more than the broader all-items calculation. Within the Energy sector, gasoline prices are up more than 41% over the last year. Utility gas services is up more than 20%.

What does this tell us? A few things. First, it shows that the factors driving inflation are likely less a product of increased money supply and more a product of cyclical factors and supply chain disruptions. Second, on the current trajectory, inflation is going to be particularly painful for lower- and middle-class Americans, whose money is spent in greater percentage on necessities, like energy, food, and shelter (also, used cars, another segment that impacts lower income families, is elevated nearly 25% for the year).

For the market, sustained inflation means the Fed will be encouraged to reign in loose monetary policy sooner, rather than later. However, faltering economic growth incentivizes the opposite—continued looseness.  Given continued high equity market valuations and the dual challenges of rising inflation and faltering growth that will drive Federal Reserve policies, equity investors should expect market volatility to remain elevated.

Sources: Bureau of Economic Analysis, U.S. Department of Commerce | Federal Reserve Economic Data, Federal Reserve Bank of St. Louis | Bureau of Labor Statistics | University of Michigan

The information and opinions in this report have been prepared by the investment staff of Advanced Asset Management Advisors (AAMA). This report is based upon information available to the public. The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but AAMA makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report constitute AAMA’s judgment and are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as a recommendation to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation would violate applicable laws or regulations.

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