With the exception of inflation, most economic news remains positive. The momentum from rapid growth in the second quarter is spilling over into the third quarter. Look for rapid price increases to continue.
The Week That Was
Today’s retail sales report for June shows sales rose 0.5 percent from May.
Sales data for June are 18 percent above their pre-Covid peak in February, 2020. They far exceed incomes and wages, which in May were 5 percent to 8 percent above prior peaks.
Although sales strength is explosive, all sales and income data are distorted by government payments.
Consumer price reports for June were close to the rapid double-digit annual rate increases in May.
In the three months ending in June, both total and core consumer price indexes rose at double-digit annual rates for the first time in 40 years. Producer prices for the first half of this year were up at a 14 percent annual rate.
The Fed’s measure of June manufacturing output was unchanged. This is odd and is not consistent with business surveys, which show manufacturing output moving ahead rapidly.
Weekly unemployment numbers continue to trend downward.
Initial unemployment claims in the second week of July were 360,000, down 33,000 from the average in June.
The number of people receiving unemployment payments in the first week of July was 3.2 million, down from 3.4 million in June.
Things to Come
There isn’t much significant economic news due next week.
There will be a number of reports on housing, the most important of these being Monday’s Homebuilders’ Survey for early July.
The Index for early June was 81, down from a peak of 85 in March. The decline is due to
soaring prices associated with a shortage of land, men, and materials.
Even so, 81 represents a very strong level of demand for housing. Look for continued strong new home activity in the months ahead.
Market Forces
Stock prices were mixed again this past week.
The Dow led with gains of 1½ percent. The S&P was up 1 percent. The Nasdaq was essentially unchanged. Small cap ETFs were down 1 percent.
For the first time, there was what appeared to be some negative news on the economy. Manufacturing in June was unchanged, and inflation hit the highest rate in 40 years.
Despite these seemingly negative developments, stocks held up well.
The main problem with the economy is businesses are struggling in the face of double-digit increases in demand for their products. Shortages in labor and materials affect almost
every business. These shortages mean sharply higher prices in the months ahead.
The stock market has gone up so well for so long, some downward adjustment is overdue. Thought that is a likely development, the ongoing massive monetary stimulus should limit any downward movement.
Longer-term interest rates continue to defy gravity. Despite the growing signs of serious inflation, the yield on the 10-year Treasury note is down to 1.3 percent. As inflation becomes more ingrained in the economy, the risk of holding longer-term bonds will also become more apparent.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 overvalued by 28 percent
Monetary Policy: expansive
