Economic Outlook - June 2021
- The Consumer Price Index (CPI) in April was much higher than anticipated. Headline inflation jumped +0.8% in April, and the core CPI advanced +0.9%. April’s core personal consumption expenditures price index, a key measure of inflation, rose 3.1%, hotter than expected. The Producer Price Index (PPI) also jumped +0.6% in April. Various inflationary pressures are causing many strategists to sound notes of caution. In April, home prices rose at the fastest clip in 15 years. Commodity prices, including copper, timber and dairy, have surged. Excess liquidity is another potential source of inflation. Since the start of the pandemic, the Fed’s balance sheet has increased from about $4 trillion to $7.9 trillion. The Fed continues to buy U.S. treasuries at a rate of $80 billion per month, as well as mortgage backed securities at a rate of $40 billion per month.
- Fed officials have repeatedly emphasized their view that inflation is likely transitory and that they are committed to keeping short-term rates low. The Federal Reserve is expected to hold discussions around tapering bond purchases later this summer. In addition to the monetary stimulus, the Biden Administration is proposing a $6 trillion budget that would have total public debt reaching 117% of gross domestic product by 2031, well above historical levels. Under the plan, the government would run a deficit above $1.3 trillion throughout the next decade.
- Brent crude, the international energy benchmark, closed near $70 a barrel for the first time in two years. At one point last year, the world was facing a glut of supply that threatened to overwhelm storage capacity. However, oil inventories have fallen more than expected in recent weeks, and investors are increasingly bullish on energy demand as economic activity gains momentum.
- The 10yr treasury yield has stabilized at 1.6%. Weekly jobless claims have declined for five straight weeks and are at their lowest point of the pandemic. Unemployment data has been closely monitored by investors, given that the Federal Reserve is seeking a fuller recovery in the labor market before considering tightening monetary policy. Real interest rates (adjusted for inflation) remain near historic lows.
- The GDPNow model estimate for real GDP growth in the second quarter of 2021 is a robust 10.3% (seasonally adjusted annual rate), a pickup in growth from the first quarter. For the full year, we anticipate GDP growth will be above 6%.
Disclosure: This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.
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