Economic Outlook - August 2021
- The Federal Reserve (FOMC) at their July meeting was slightly more dovish than in June. The FOMC did not lift interest rates nor did they reduce the amount of monthly bond purchases. With inflation increasing and employment activity improving, the Committee is considering rate hikes in the future. With the unemployment rate still higher than pre-pandemic levels, the Fed will likely keep rates low through 2022 to encourage economic years.
- Second quarter Gross Domestic Product (GDP) rose at a 6.5% annualized growth rate, well below the consensus estimate of 8.4%. The 6.5% growth rate was higher than the 6.3% rate in the first quarter of 2021 and the highest quarterly rate since 2003. GDP has now recovered and is above pre-pandemic levels. Despite the Delta variant of the coronavirus, we expect GDP growth to exceed 6.5% in 2021.
- IHS Markit US Manufacturing PMI was 63.4 in July, up from 62.1 in June, and slightly above market forecasts of 63.1. The reading shows accelerated growth in factory activity. Production expansion, stronger demand and a growing backlog drove the strong reading. Supplier shortages and lengthening supply chains have driven up costs and stymied production. Supply chain issues may lead to increased costs as the economy reopens but these costs will likely prove transitory.
- The June Consumer Price Index (CPI) rose a greater-than-expected 5.4% year-over-year, the highest since August 2008. Core-CPI, which excludes more volatile food and energy prices, rose 4.5%, the sharpest rise in since 1991. Used car prices along with air travel, hotels and car rentals were the largest contributors to the increase. Strong demand from reopening and a lengthening supply chain will lead to inflation over the short-term.
- The Bureau of Labor Statistics reported total nonfarm payroll employment rose by more than 943,000 in July, and the unemployment rate fell sharply to 5.4% from 5.8%. The labor force participation rate was unchanged at 61.7%, below the pre-pandemic rate of 63.4%. Leisure and hospitality sector recovery drove job growth. Interest rates will likely remain low until the labor market has fully recovered.
Sources: Bloomberg LLC, FactSet, U.S Department of Labor
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