Economic Outlook - July 2021
- Federal Reserve members (FOMC) at their June meeting struck a slightly more hawkish tone than in March. Seven of the eighteen FOMC members expect the Fed to begin rate hikes in 2022, up from four members. In response, the yield curve flattened with short-maturity rates rising and long-maturity rates falling; stock prices fell briefly before recovering. The Fed revised-up its expectation for GDP growth in 2021 to 7% from 6.5% in March and its 2022 GDP forecast to 2.4% from 2.2%. Despite the shift the Fed will likely continue to keep interest rates low for several more years.
- IHS Markit US Manufacturing PMI jumped to 62.6 in June from 62.1 in May, well above market forecasts of 61.5. The reading pointed to another record for growth in factory activity. Output and new orders continued to rise sharply although supplier delays and difficulties finding workers continued to weigh on production. Resolving supply chain issues may take more time than previously anticipated.
- Standard & Poor’s reported that its S&P CoreLogic Case-Shiller national home price index posted a 14.6% annual gain in April, the eleventh straight month of accelerating prices and the highest monthly reading in the more than thirty years since the index began in 1987. High demand from low interest rates and strong household formation combined with low inventories suggest the potential for further gains.
- The Consumer Price Index (CPI) in May rose a greater-than-expected 5.0% year-over-year, the fastest pace since August 2008. Core-CPI which excludes more volatile food and energy prices rose 3.8%, the sharpest rise in nearly three decades or since May 1992. Surging used car prices, up 7.3% in May, accounted for about one-third of the overall increase. While some components will likely be transitory, Owners’ Equivalent Rent is expected to contribute to rising inflation as the year progresses.
- The Bureau of Labor Statistics reported total nonfarm payroll employment rose by more than 850,000 in June, and the unemployment rate was little changed at 5.9%. The labor force participation rate was unchanged at 61.6%. The number of persons not in the labor force who currently want a job was 6.4 million, little changed over prior month but up 1.4 million since February 2020. Despite the Fed’s recent hawkish tilt it is unlikely policy rates will increase while the number of unemployed remains above pre-pandemic levels.
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