Long Economic Recovery on Horizon, But Recovery Has Started – Look Out for Inflation
It's may take years for the US economy to fully heal from the economic disaster brought about by COVID-19 and the government-mandated shutdowns which limit economic activity across the country. A full recovery is more than real GDP getting back late 2019 levels; it’s getting the unemployment rate below 4.0%, and that’s unlikely to happen before late 2023.
But key recent reports show the economy is recovering. The ISM Manufacturing and Service indices, autos sales, and the employment report all beat expectations. The Manufacturing index came in at 54.2, while the sub-indices for new orders and production both exceeded 60.0 for the first time since 2018. The ISM Services index hit a robust 58.1 for July, the highest reading so far this year, including back in January and February when the economy was doing quite well. The new orders sub-index for services hit 67.7, the highest on record (dating back to 1997).
Consumers are increasing auto purchases. Cars and light trucks sold at a 14.5m annual rate in July, the highest since February, when sales were 16.8m annualized. Contrast that to April, when auto sales bottomed at an 8.7m annual rate The big news for the week was Friday's employment payrolls that are expanding faster than anticipated while the unemployment rate declined further. Nonfarm payrolls rose 1.763 million, while civilian employment, an alternative measure of jobs that includes small-business start-ups, increased 1.350 million. Combined with jobs gains in May and June, these figures show that roughly 40% of the jobs lost in the carnage of March and April were recovered. Both average hourly earnings and the total number of hours worked rose in July, with earnings up 0.2% and hours up 1.0%. Recently, these two figures have moved in opposite directions. Recent declines in unemployment claims signal that the improvement in the labor market is continuing. Initial jobless claims came in at 1.186 million in the latest week, 249,000 fewer than the prior week and the lowest level since March. Continuing claims for regular benefits fell 844,000 to 16.1 million, the lowest since April.
The initial report on real GDP growth in the third quarter won't be released until October 29 – but economic models suggests growth at a 15.0% annual rate.
But along with faster growth, comes higher inflation. Broad measures of the money supply are growing rapidly, while the Federal Reserve remains committed to keeping short-term rates low as far as the eye can see. Consumer Price Index (CPI) rose 0.6% in July, coming in above the consensus expected 0.3%. The CPI is up 1.0% from a year ago. Energy prices rose 2.5% in July, while food prices declined 0.4%. The "core" CPI, which excludes food and energy, rose 0.6% in July, versus a consensus expected 0.2%. Core prices are up 1.6% versus a year ago. The Fed doesn't think we'll hit its 2.0% inflation target until at least 2023. From: First Trust Advisors L. P.