Economic Outlook - September 2021
- The Conference Board recently trimmed their full year projections for U.S. Real GDP growth to 6.0% from 6.6%. After a steady rebound in the first half of 2021, the economic environment appears more challenging for the balance of the year. Closely watched economic indicators suggest a recent surge in coronavirus cases have caused businesses and consumers to be more cautious. Both the U.S. Manufacturing and Services Purchasing Managers Indices softened from the prior month. Figures above 50 indicate expansion, while those below indicate the economy is contracting. The August Services reading of 56.9, a 1.2-point decline from July, was the weakest this year. The surge in coronavirus cases leading to slowing growth may cause the Federal Reserve to postpone tapering for now and create a catalyst for fiscal spending such as an infrastructure deal.
- Inflation appears to be transitory. The Fed has compiled 21 measures into a “Common Inflation Expectations” index, which indicates lower expectations for long-term prices. Consumers surveyed by the University of Michigan over the summer expected a median 4.7% increase in prices over the next year – the highest since 2008. One of the largest contributors to annual consumer-price index growth has been used automobile prices as semiconductor shortages have stalled production of new vehicles. However, inflation expectations for five to 10 years from now were 2.8%, close to the average in long-term annual surveys dating back to 2000. Consumers understand bottlenecks and shortages are temporary, created by sectoral supply chain dislocations. Well-anchored long-term expectations provide the Fed cover to maintain a dovish monetary policy stance.
- Real estate prices may have peaked. The red-hot real estate market showed signs of cooling after a torrid year of price increases, which have pushed some homes beyond buyers’ reach. According to the National Association of Realtors, existing single-family home prices rose 24% from the prior year compared to a 1.2% increase for the Median Family Income. As buyers balk at high prices, there are signs inventory imbalances may be correcting. The number of homes listed, a leading indicator of real estate market trends, rose 6.5% in July from a year earlier. Rising real estate prices have contributed to monthly inflation figures; we expect price increases to continue, albeit at a slower pace, in the months ahead.
- Retail spending may become more complicated. According to the National Retail Federation, Back-to-School shopping ranks second only to the holiday season. As many children return to in-person learning, spending projections estimate a 16% rise from last year. Still, higher prices and resurgent virus cases may dampen the reality, as consumer confidence appears to have weakened considerably over the last few weeks. The value of overall retail purchases dropped 1.1% last month following an upwardly revised 0.7% increase in June, according to Commerce Department figures. Categories including autos, durable goods and clothing declined the most, while spending on services grew – marking a shift in consumer spending. Based on recent trends, the Back-to-School season may be a much-needed driver of retail sales. We expect consumer spending will continue to moderate as the recovery has been largely achieved, which poses some risks to the downside for retailers. Looking ahead to the holiday season, retailers will need to navigate shipping bottlenecks, pass on higher prices and restock low ahead.
Sources: Bloomberg LLC, FactSet, U.S Department of Labor
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