Superficially, the economy seems to be experiencing a quiet year with little to no growth. Unfortunately, below the surface, trouble is brewing as a result of both Fed policy and destructive policy moves.
The Week That Was
Today’s report on July consumer spending and personal incomes points to a gradual slowing in the pace of spending and incomes.
In the three months ending in July, consumer spending and wages rose at 7 percent to 8 percent annual rates. Inflation slowed to 6 percent (core was 4 percent). The slowdown in inflation points to a slight increase in real growth.
With wage growth remaining high, the Fed will opt to increase rates by 0.75 percent at its next meeting.
Superficially, all appears calm for the economy. The Atlanta Fed’s latest estimate for third quarter GDP is for growth of about 1 percent. However, below the surface, trouble is brewing.
S&P Global’s flash August business survey reports a composite PMI reading of 45, down from 47.7 in July. The reading suggests the economy declined at a faster rate in August than in July.
There still is a conflict between S&P’s business surveys and the more popular ISM surveys. The July ISM surveys show moderate to strong performance in the service sector into July. Our industry contacts suggest the S&P surveys are more accurate.
New orders for durable goods continued to hold up well in July. Total orders were essentially unchanged at new high levels. July orders ex-defense and -transportation increased by 2 percent, but they have been little changed since March. Orders are down slightly after factoring in inflation.
Weekly initial unemployment claims continued to level off. The first three weeks in August averaged 250,000, close to July’s average.
If it stands, President Joe Biden’s unconstitutional elimination of student loan debt will be another move putting downward pressure on productivity and growth.
Things to Come
The most significant economic information this coming week will be on Thursday. Both the August ISM survey for manufacturing and the S&P final survey for manufacturing are due.
Manufacturing readings are expected to be down slightly, with readings in the high 40s.
August business surveys for the more important service companies will not be available until the following week.
On Friday, August employment data should show a slowdown from the rapid increases of almost 400.000 jobs in recent months. I expect job gains in private industries to down sharply, to the 200,000 vicinity or less.
Business surveys are also indicating a slowdown in job growth.
Money, Money, Money
Interest rates moved slightly higher this week, as the yield on 10-year Treasury Notes rose to 3.0 percent. From the Treasury’s six-month T-bill to seven-year T-Note, rates are above the 10-year. Hence, the yield curve is inverted for all except the three-month T-bill. Inverted yield curves tend to be followed by recessions.
Fed data confirms the message from the inverted yield curves. In July and August, the Fed (along with banks) drained approximately $44 billion from the economy. Most conventional measures of the money supply point to a more restrictive monetary policy.
The Fed’s M2 money measure shows no growth over the past six months. It is highly unusual for stocks to be rising when monetary policy turns restrictive.
Market Forces
Stock prices have reversed momentum, with all indexes declining this week.
An uptick in stocks Wednesday and Thursday cut the week’s losses to 2 percent to 3 percent. All major indexes fell to resistance levels at their 200-day moving averages. Trading volume remains low, meaning institutions are not rushing to buy into the two-day upturn.
The overall trend is down whenever indexes are below this key level.
Current economic news indicates there is little or no growth in the economy. The housing market, a reliable early indicator of the economy, is showing a clear downtrend. The latest data show the new home market has gone from a shortage of homes to an 11-month supply. The weakness of the housing market suggests a deeper decline in the economy will arrive late this year.
Our model shows the S&P500 Index is roughly 30 percent overvalued. With the growing potential for a steeper downturn in the economy toward year-end, investors can be expected to remain defensive.
Outlook
Economic Fundamentals: deteriorating 
Stock Valuation: S&P 500 overvalued by 31 percent
Monetary Policy: restrictive
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