The latest economic numbers show a continuation of very rapid growth along with very rapid inflation. Although growth and inflation will slow in the second half of the year, both are likely to remain higher than the consensus forecast.
The Week That Was
Friday’s report on spending and incomes in May shows the economy soared in the second quarter.
Wages and salaries were up at an annual rate of 20 percent from the first quarter, and up at a 9 percennt annual rate after inflation. Consumer spending was little changed in May from April, but was still up at an annual rate of 35 percent from the first quarter. The
data show both rapid growth and rapid inflation.
Markit surveys of business activity for early June provide the first hint of overall activity this month. The latest survey shows manufacturing up slightly, but service companies, at 65, are down five points from May. At 65, growth was still very rapid. It just wasn’t as rapid as in May.
New orders for durable goods soared in May, rising to 10 percent above their pre-Covid peak.
Orders ex-transportation and defense were down slightly from April but remained 21 percent above their pre-Covid peak in February of 2020.
Weekly initial claims for unemployment insurance have stabilized in the vicinity of 400,000. There has been no further downward move in the past four weeks.
Things to Come
This week’s reports include the ISM survey for manufacturing and the jobs report for June.
On Thursday, I expect the ISM survey of manufacturing companies to remain close to its
May reading in the low 60s. The Markit survey for June reported a reading of 62.6, up slightly from May. Manufacturing appears to be doing very well despite widely predicted shortages of workers and materials.
Weekly employment data for June were not very encouraging. Initial unemployment claims declined only slightly from early May to early June. Hence, I expect Friday’s report to show
private job gains closer to 200,000. This compares with an increase of almost 500,000 in May.
Market Forces
Stock prices moved sharply higher last week. The largest gains were in small cap ETFs, which were up by 4 percent to 5 percent. The other leading indexes rose by 2 percent to 3 percent.
The increases restored positive technical trends for all indexes. With the S&P500 closing at 4266, it’s now 24 percent above its fundamental value.
The economy continued to provide good news. Early data for June show continued rapid growth. Also, a $1 trillion a year infrastructure bill moved closer to approval. So much government spending is a short-term positive but a longer-term negative. Let’s hope the remaining political hurdles will prevent more spending and debt.
Monetary policy remains expansive. The Fed is increasing the raw ingredients of money so rapidly that banks are leaving most of it with the Fed. When the Fed begins to taper (slow its purchases of securities), banks will have more than enough
reserves to accommodate growth.
Interest rates remain low. From a purely technical standpoint, the near-term trend for longer-term securities remains down. In contrast, the trend at the intermediate level is up. Artificially low long-term rates mean the Fed has convinced investors inflation will not be a problem. It will be.
History suggests the Fed won’t raise interest rates until it is too late and too little. At that point, rates will move sharply higher. For now, lower interest rates and rapid growth in money continue to provide a tailwind helping stocks.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 overvalued by 24 percent
Monetary Policy: expansive
