State of the Economy
Monthly Economic Dashboard for Financial Advisors and Investors
Updated: June 11, 2021
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 June 2021
June brings more of the same story for economic growth and the economy. Employment figures continue to improve as jobless claims fall to pre-pandemic lows and overall unemployment dipped below 6%. However, these positive trends come with a massive disclaimer—widespread and heavy inflation continues. Fed spending has increased monetary supply to record levels, and there’s no exit plan for quantitative easing. Additionally, signs of a labor shortage are becoming more prevalent, which could create a trickle up effect of higher prices, due to higher labor costs. So while our economy continues to shake off the cob webs and spring to life (we’re even seeing signs of a revitalized service industry), we face headwinds that could, at the least, hamper future spending, and more seriously cripple American families’ ability to make ends meet (particularly lower income families).
Core Economic Indicators
Consumer spending growth slowed in April, but remained positive at an increase of 0.5% in April. Personal income and disposable personal income both decreased significantly, a natural decline in the wake of March stimulus payments (personal income and personal disposable income both jumped more than 20% in March).
One positive sign is that spending growth was driven by an increase in overall spending for services (which increased by $112.6 billion), a segment of the market that has been particularly suppressed by the pandemic.
Private Residential Fixed Investment increased 5.4% in the first quarter of 2021 and Private Nonresidential Fixed Investment increased 2.5%. However, in April we saw a small dip in new construction of privately-owned housing units, down 9.5% from March highs. The slowdown can likely be attributed to shortages in materials, such as lumber. With that said, total construction spending in the Private Residential market increased by 1% month-over-month and a staggering 29.7% year-over-year.
Total construction spending was flat in the private nonresidential market, falling 0.5% month-over-month and 4.8% year-over-year.
We can see a clear dichotomy between the residential vs. nonresidential markets. One can speculate that the sustained housing boom in the residential market has been bolstered by a combination of historically low interest rates, excess money supply from stimulus payments, and changing home preferences of workers who are transitioning out of larger cities and opting to work from home. On the other side of the coin, nonresidential markets face lower demand for office space and less economic support incentivizing new construction.
The Federal Reserve continues to purchase $120 billion worth of treasury bonds and mortgage-backed securities monthly, with no signs of tapering in the near future. However, on the flip side the Fed has begun to simultaneously drain liquidity from the system through reverse repos. Since the beginning of April, the Fed has steadily increased reverse repos from near zero to more than half a trillion dollars on June 9th—a sign that the Fed is trying to keep longer yields down and short-term yields from falling below zero.
The government continues to offer $300 in extra unemployment benefits; however, multiple states are planning to cut extra benefits ahead of the program’s September 6th end date. Recent labor shortage strains have placed speculation on the correlation between additional unemployment benefits and workers’ incentive to seek jobs. As we approach the September 6th cutoff and see states withdraw from the program, we will be able to monitor the impact of less attractive unemployment benefits on labor supply.
The trade deficit decreased in April by around 8% to -$68.9 billion (which is still well above near-term historical averages, which are more near -$50 billion).
The Export Price Index increased by 0.8%, continuing a steady advance since April 2020. This steady increase has led to a healthy 14.4% year-over-year increase in export prices (largest increase since the index’s inception in 1983). However, import prices were also up 0.7% for April, and 10.6% year-over-year. The monthly increase in import prices is primarily driven by a rise in fuel and petroleum prices. Fuel imports rose 126.5% year-over-year (largest increase since 2000), and petroleum prices increased 133.7%.
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:
year-over-year May 2021
The narrative from the Federal Reserve, using their preferred measure (PCE), is that the current inflationary pressure is temporary and under control. Some of this is logical: there have been massive supply shortages caused by COVID, as well as a strange combination of supply chain disruptions (Canadian lumber beetles, Texas oil refinery freeze, Suez Canal blockage, etc). If we remember Milton Friedman’s monetary theory, MV=PQ (Money Supply times Velocity equals Price times Quantity), it would be easy to blame this recent surge purely on the supply side, (Q)uantity, of the equation.
However, what the Fed is glossing over, and what we find more troublesome (and lingering) is the demand side of the equation. The (M)oney supply has continued to skyrocket, with M2 currently sitting over $20 trillion. For reference: During the global financial crisis in 2008, it was widely agreed that the Fed had to take extraordinary monetary policy measures to revive the economy. Once the dust settled after the ensuing recession, the Fed had dramatically increased the money supply— to about $8.5 trillion. The Fed has shown no signs of, or interest in, tapering the growth of the money supply. With that many dollars (M) chasing the same or even fewer number of goods (Q), the inevitable result is an increase in (P)rices. If you want to know why the Fed would voluntarily choose inflation, and to punish savers, that is a different (more political) commentary.
The more commonly cited measure of inflation, CPI, rose by 0.64% in May. This brings the 12 month inflation number to 4.93%, the highest it has been since 2008. While telling, this should also be taken with a grain of salt because it is comparing current inflation to pandemic lows of a year ago.
Unemployment & Labor
We are starting to see signs of a potential labor shortage. Last week we saw less than 400,000 new jobless claims for the first time since before the pandemic and the unemployment rate dropped to 5.8%. The number of long-term unemployed (27 weeks+) dropped by 431,000 people, the largest decrease since 2011. Labor shortages typically mean higher wages, and the companies that have pricing power will pass those costs on to consumers, exacerbating the inflationary pressures. Higher prices lead to more spending by definition, and therefore usually less saving. More spending and less saving is good for the economy in the short run, but bad for long-term economic growth.
Sources: Bureau of Economic Analysis, U.S. Department of Commerce | Federal Reserve Economic Data, Federal Reserve Bank of St. Louis
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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