Today’s report shows the economy continued to soar at the end of the second quarter. The momentum will drive spending, wages, and prices sharply higher in the months ahead.
The Week That Was
The real economy grew at a 6½ percent annual rate in the second quarter, the same pace as the first quarter growth.
Prices increased at a 6 percent rate, the fastest quarterly rate in forty years. On a year-over-year basis, prices increased at the fastest rate in more than thirty years.
Driving prices to these extremes was a rapid, 13 percent rate increase in spending, the fastest quarterly increase in more than forty years. Over the past year, spending rose by 17 percent, the fastest yearly increase in seventy years.
Today’s report on spending and wages at the end of the second quarter shows the economy
continued its rapid growth. Spending and wages grew at double-digit annual rates, and inflation was in the 5 percent to 6 percent range in June.
The Fed continues to attribute the explosive rise in spending and inflation to special factors associated with reopening the economy. Special factors did drive prices higher. However, the explosive increases could not have occurred without the Fed pouring massive new bank reserves and money into the economy.
At its meeting this week, Chairman Powell admitted the Fed underestimated inflation.
He will be admitting to more mistakes in the year ahead.
By continuing the policies that have produced the current inflation, the Fed guarantees further serious problems with inflation in the year ahead.
The latest weekly unemployment data show little change. Initial unemployment claims leveled off near 400,000. They have been in this vicinity for the past two months. The number of people receiving unemployment benefits also stabilized at 3.2 million.
After soaring in April and May, new orders for durables slowed a bit in June. Both the total and orders without the highly volatile transportation and defense category increased by slightly less than 1 percent from the previous month.
Things to Come
The ISM business surveys for manufacturing and service companies are due Monday and
Wednesday. Both surveys are likely to continue to show strong growth for the composite as well as new orders, with readings in the 60s.
Next Friday’s employment numbers are likely to slow dramatically from the increase of 660,000 private-sector workers in June. The June increase at a 7 percent annual rate was extraordinary and is likely to be offset by an unusually slow number in July.
Market Forces
After several weeks of mixed performance, stocks moved broadly higher.
The leading indexes all hit new highs at one point in the past week. Small cap stocks, which have recently been weak, rose by 2 percent to outpace the major indexes.
Stocks continue to be driven higher by ongoing unprecedented monetary ease. The same monetary ease is primarily responsible for the unprecedented spending and inflation.
There was also some good news on corporate profits, as some of the largest companies outperformed already optimistic earnings targets.
The Fed did its part to keep the party going by not even preparing markets for a cutback on purchasing securities. The Fed insists such cutbacks would come before any consideration of hiking interest rate hikes.
In short, the Fed promised to continue pouring gasoline on the inflationary fires. More money should send stock prices still higher.
The Fed did its best to convince investors it will be keeping interest rates low for an extended period. The downward trend in long-term interest rates shows how successful the Fed has been.
Technical indicators point to flat to lower longer-term interest rates. Fundamental indicators point to much higher rates once markets wake up to the future inflationary environment.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 overvalued by 30 percent
Monetary Policy: expansive
