Today’s report on spending in July shows the economy continued to grow at a rapid pace, with inflation at 4 percent to 5 percent. Data this coming week are likely to show the economy grew at a somewhat slower pace in August.
The Week That Was
Today’s report on July spending and income shows spending rose at a 5 percent annual rate and wages and salaries rose at a 12 percent annual rate. The faster rise in wages and salaries brings it more in line with the prior surge in spending.
Inflation measures show prices rising at a 4 percent to 5 percent annual rate, down slightly from the previous five months.
The Markit business surveys for August show a further slowdown among manufacturing and service companies. The composite reading fell from the 60s to 55.
Although a reading of 55 is down sharply from recent months, it continues to signal strong growth.
Moreover, businesses are optimistic in the light of continued strong increases in demand.
Businesses attribute the slowdown to ongoing shortages in labor and materials and uncertainties over the Delta variant of Covid-19. Businesses are rapidly raising prices to offset the increase in costs. They expect shortages to ease in the months ahead.
New orders for durable goods in July leveled off at the high rates reached in June.
Housing activity in August also shows signs of leveling off. The Homebuilders index fell to 75 as builders said soaring home prices were limiting the number of buyers.
Weekly data show initial unemployment claims close to 350,000, down from the 400,000 area of recent months. The number of people receiving unemployment payments continues to trend downward in August.
Things to Come
Next week’s economic news includes the August ISM business surveys (Wednesday and Friday).
With the August Markit surveys reporting a slowdown, the upcoming ISM surveys are also likely to show signs growth has slowed, perhaps to the high 50s.
Since the slowdown appears more related to shortages than to any letup in demand, the
weakness is likely to be temporary.
Next Friday’s job report is likely to continue to show strong gains. In the past two months, private payroll jobs have been increasing by 700,000 a month. Even so, the number of private jobs remains almost 4 percent below its pre-Covid peak.
Job gains should remain strong, with gains in August in the range of 500,000 to 700,000.
Market Forces
Stocks moved erratically higher this week.
The S&P500, Nasdaq, and QQQs hit all-time highs on Wednesday before moving lower yesterday.Small cap stocks, which fell 4 percenta week ago, rebounded will gains of 4½ percent to 5 percent.
The debacle in Afghanistan continues to deteriorate as the death toll increases. Bad news will likely continue as Americans are taken hostage and the refugee problem intensifies. A spike in U.S. Covid cases and drug companies announcing the need for booster shots
provided another setback for the economy.
This coming week’s economic news is likely to point to some slowing in business activity in August. A combination of shortages in materials and labor, plus concern over the Delta variant, could impact the euphoria surrounding stocks.
From a technical standpoint, the Nasdaq and S&P500 indexes remain extended above their 50-day averages. The S&P500 is 27 percent above its fundamental value. This makes stocks vulnerable to a further correction, particularly if accompanied by bad news in other areas.
With signs the economy slowed in August and with the Fed likely to announce plans to taper monetary expansion, stocks are vulnerable to a correction.
Although the risks of a downward move have increased, the Fed’s ongoing monetary stimulus should provide sufficient money to enable both the stock market and the economy to move erratically higher.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 overvalued by 27 percent
Monetary Policy: expansive