Financial markets were primarily calm despite rising Delta Variant concerns, Inflation data remaining high, the passing of the infrastructure bill, and confidence falling. This week I want to highlight significant changes happening in the economy.
The Recovery is losing steam
To begin, we are seeing key economic data slowing, which will ultimately slow economic growth. I highlight a few starting with Industrial Production, a measure of economic output for all facilities located in the U.S. manufacturing, mining, electric, and gas utility sectors. You can see that Industrial production peaked in April and has been rolling over since the Spring. During regular economic cycles, a reduction in business activities results in employers laying off workers to reduced staff to reflect the slow down in business. However, the Post-COVID cycle will likely be different because many Americans are already on the sidelines. However, production slowing could stall the employment growth we’ve already experienced.
Employment data is my second economic signal specifically the unemployment rate. Currently, the unemployment rate sits at 5.4%, still well above the natural unemployment rate defined by economists at 4.45%.
A higher unemployment rate poses a problem because persistently high unemployment leads to an economy producing less than its capacity. A higher unemployment rate also means less income for many Americans. This relationship can be seen in the chart below. The graph of personal income, personal savings, and personal consumption is busy. However, you can notice that personal income (Blue) and personal savings (Black) have declined below pre-pandemic levels. As a result, consumption or spending by households has decreased.
When incomes fall, Americans become less confident in the overall economic conditions. We observed this in the University of Michigan Consumer Confidence survey data as the index declined -13.50% from July to August.
|Preliminary Results for August 2021||Aug||Jul||Aug||M-M||Y-Y|
|Index of Consumer Sentiment||70.2||81.2||74.1||-13.50%||-5.30%|
|Current Economic Conditions||77.9||84.5||82.9||-7.80%||-6.00%|
|Index of Consumer Expectations||65.2||79||68.5||-17.50%||-4.80%|
Figure 1 Source: Charts – Surveys of Consumers (umich.edu)
These indicators will be necessary to watch because they indicate the economy is slowing just as we started to recover. If this slowdown persists, look for the government to play an even larger role in the economy. The data we’ve outlined above could explain why student loan payments were delayed until January 2022, and the infrastructure bill was passed in the senate. These measures will provide additional stimulus and jobs, which could help provide a floor underneath these decelerating trends.
What does this mean for markets?
An economic slowdown into a young recovery could affect assets prices. With the economy slowing and the markets at an all-time high, investors will likely take profits in fear of growth slowing. So, it’s prudent to remain cautious as slowing economic growth will create market volatility.
|Data Source: Yahoo Finance||Returns as of 8/13/2021|
|SYMBOLS||WEEK RETURN||YTD RETURN|
|SECTORS||WEEK RETURN||YTD RETURN|
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University of Michigan Consumer Confidence Survey. (2021). Retireved from Surveys of Consumers (umich.edu)
Board of Governors of the Federal Reserve System (U.S.), Industrial Production: Total Index [INDPRO], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/INDPRO, August 12, 2021.
U.S. Bureau of Economic Analysis, Personal Income [P.I.], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PI, August 12, 2021.
Board of Governors of the Federal Reserve System (US), Industrial Production: Total Index [INDPRO], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/INDPRO, August 15, 2021.