Today’s employment report shows the economy continued to grow at a rapid rate in June in spite of shortages and rapidly rising prices.
The Week That Was
Today’s report on jobs shows explosive growth in June, with 662,000 private payroll jobs added.
Total weekly hours worked were down slightly, and hourly earnings rose at a 5 percent annual rate. For the second quarter, the growth in private jobs was at a strong 7 percent annual rate.
Despite the strong gain in workers, total employment in the private sector remained 5 percent below its pre-Covid peak of February 2020.
The June ISM survey for manufacturing companies showed strong growth in almost all areas.
The overall index and production remained slightly above 60, and new orders hit 66,
both indicating very rapid growth.
Manufacturing jobs were unchanged. Prices for materials hit 92, the highest reading since 1979.
In one sign of weakness, auto sales in June were down 10 percent from April. The decline is associated with a shortage of computer chips and other materials.
Weekly initial claims for unemployment insurance toward the end of June fell by 51,000. The four-week average was slightly below the 400,000 level of the past six weeks.
The number of people receiving unemployment payments was stable at 3.5 million.
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 it was still up at an annual rate of 35 percent from the first quarter. The data show both rapid growth and rapid inflation.
Things to Come
The only significant economic news due next week is on Tuesday. The ISM survey for service companies should continue to show rapid growth.
The June Markit survey for service companies was at a strong 64, but that was down from an even stronger 69 in May. The Markit survey showed new orders for service companies also remained strong.
This momentum suggests the summer months will bring continued rapid growth.
Market Forces
Stock prices moved mostly higher this week as the major indexes gained 1 percent. Small cap ETFs, which were up 4 percent to 5 percent last week, were unchanged.
The S&P500 closed at a new all-time high of 4320 and is now 25 percent above its fundamental value.
The mostly good news on the economy continues. Data for June show the economy continued to grow rapidly.
As might be expected, inflationary pressures are building. Monetary policy remains expansive. However, banks continue to leave most of the Fed’s new reserves with the central bank. Hence, the funds are not getting into the economy. The rapid increases in spending in the first half of 2021 were generated from increases in money in the spring and summer of last year.
Rapid growth in spending is likely to continue this summer in spite of shortages in some areas. Look for growth to slow going into the fall and winter months.
Longer-term interest rates continue to behave as if inflation is only a temporary problem. It is not. Inflation is quickly becoming ingrained in the system. As companies raise prices to offset rising costs, wages increase to pay the higher prices, and prices increase to offset the increase in wages.
History suggests the Fed is the last to recognize the problems associated with inflation. By the time the Fed becomes concerned, longer-term interest rates will have moved sharply higher.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 overvalued by 25 percent
Monetary Policy: expansive
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