- Q1 GDP Growth Jumps 1.1% on Strong Personal Consumption
- A Strong March Leads to a Surge in Chinese GDP in Q1 2023
- Durable Goods Retail Sales Suffer from High Interest Rates and Wary Consumers
- Choppy GDP Means UK Should Avoid Q1 Recession
- Japanese Consumer Confidence Jumps to Highest Level in Over a Year
- The End of Summer Sees the End of Disinflation in Europe
- Labor Market Indicators are Starting to Unify on Easing in Hiring
- Inflation and Tight Financial Conditions Weigh on the German Consumer
- Euro Area Money Supply Contracts for the First Time Since 2010
- Dismal Economic Data Out of Germany
- Core Durable Goods New Orders See Gentle Uptrend in July
- More UK Data Pointing to Q3 Decline
- Whispers of a UK Contraction in Q3
- Japan's Core Inflation Resumes Uptrend in July
- Early July Economic Data Leads to a Sharp Increase in Q3 Growth Expectations
- UK CPI: Energy Inflation Crashes but Services Inflation is Still Sticky
- China's Weak Start to Q3 Means More PBoC Easing
- Bank of Japan is Too Optimistic on Inflation
- The Bank of England Pauses in a Near Split Decision
- UK Inflation August Update: A Precursor to the Bank of England's Announcement
- Housing Starts Tumble in August Amid Rising Mortgage Rates
- US Retail Sales Grow at Fastest Monthly Rate Since the Start of the Year
- US Consumer Prices Surge in August Driven by Energy Costs
- August NFIB Survey Showed a Tough Environment for Small Businesses
- All Signs Point to a Weaker Labor Market in August
- Thoughts on GME and This Week in the Stock Market
- Record Home Price Levels Point to Strength in Post-Pandemic Economy
- The Stock Market Looks Overvalued, but It's Probably Not
- China GDP Growth Surpasses Expectations
- President-elect Joe Biden Introduces His "American Rescue Plan"
- Political Polarization Intensifies with Another Impeachment Along Party Lines
- Metal Demand Has a Bright Future in 2021 and Beyond
- What Happened to That US-China Trade Dispute?
- Civil Unrest, A Rising Threat to the 2021 Economy
- What's in the $900 Billion Relief Plan?
Supply Pressures Looking to Peak
August 22, 2021
The Week Behind
It's been some time since we saw some choppiness in markets, and we finally got some this week. The S&P 500 fell -0.59% and the Nasdaq fell -0.73% after a solid Friday offset some losses early on in the week. Asian stocks performed worse with China's regulatory crackdown lingering. In the week, the Shanghai Composite fell -2.5% and the closely related Hang Seng index (in Hong Kong) fell -5.8%. Risks are making themselves known especially as US equities sit near all-time highs and the VIX ready to jump from its coiled position. The volatility also expressed itself in a major move lower in the price of oil. WTI futures started the week above $68 and fell towards $62 a barrel, reportedly, on worries that growth would slow due to Delta and tapering. Combine the downward move in oil markets with other commodities staggering lower (Bloomberg Commodity Index down -3.7% last week) and you've got a nod to the "transitory" inflation narrative.
Updates on business activity in the US came through retail sales and industrial production early on in the week. Retail sales stumbled to a -1.1% decline in July after a small gain of 0.7% in June. Motor vehicles & parts sales was the major factor in the decline (total retail sales ex-motor vehicles at -0.4%) with a -3.9% drop. The other sectors saw mixed movements but most were still 10-15% above a year ago. Food service & drinking places sales continued on its reopening path, up 1.7% in July and up 14.7% in the May-July 2021 period over the February-April 2021 period. The days of surging retail sales are over, and the summer spending bump was slightly disappointing. May-July 2021 retail sales were just 2.8% higher than the February-April 2021 period. There has been discussion of slower goods spending shifting to stronger service spending as the recovery continues in the latter half of 2021, and the sour July report provides evidence of this shift. The latest Quarterly Services Report has also been supportive of that narrative with service revenue growth up 4.0% in Q2 2021, up from 2.5% Q1 2021. Ceteris paribus, the trend will likely continue with goods sales returning back to a pre-pandemic path, and service spending strong in Q3. However, Delta virus risks remain.
While the demand front faltered in July, the supply side stepped forward with a solid industrial production number, up 0.9% month over month. The solid gain was mostly broad-based with end product growth up 1.6% (consumer goods up 1.0% and business equipment up 2.8%). Construction supplies bounced 0.9% after three straight declines. The short-term cooling of the real estate market likely led to these later spring early summer drops, but consistently high homebuying demand and the end of inflated lumber prices will keep construction production near and above peaks. Most importantly, we saw a large monthly spike in motor vehicle and part production, up 11.2% in July, that will help assuage fears of persistently high prices in the auto market. Primary metals and machinery production gains of 1.2% and 1.0% will also play into a "transitory" inflation narrative. Overall, observers can take the strides suppliers are making as a sign that constraints from low input inventories, high costs, and labor shortages began to peak in July. Total industry capacity utilization sits at 76.1%, well off the lows of 71.5% from a year ago, but still below the long-term average around 80%. The next round of stimulus through infrastructure spending is sure to heat industrial production even more, but could it prove to be too much? That remains to be seen and could depend on how much accommodation the Fed decides to keep in its monetary policy.
Chart of the Week
Where's the inflation? The US leads the developed world in all CPI categories. Canada and Australia are close behind while the EU and the UK are seeing moderate price pressures. Japan's deflationary struggles continue as COVID makes a reappearance.
The Week Ahead
Several more indicators of supplier activity in the US will be revealed as manufacturing orders data for July comes out. Personal income and consumption comes out after that. These reports follow the flurry of Flash PMI reports from IHS Markit that will give a glimpse of August business conditions. From Jackson Hole, the Fed will be watching these reports and hoping they will show some easing in the supply constraints. The solid industrial production from last week should give us hope that these economic releases will tell a similar story.