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
2021 2021 2020 Change Change
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
SP500 0.72% 19.92%
NASDAQ -0.53% 15.45%
DJI 1.23% 16.93%
GOLD -3.17% -10.73%
OIL -0.09% 40.08%
EFAF 0.39% 11.27%
BOND -0.65% -1.11%
SECTORS WEEK RETURN YTD RETURN
Energy 1.90% 30.62%
Technology -0.54% 19.67%
Cons Discretionary -0.10% 13.42%
Cons Staples 1.36% 2.32%
Industrials 2.18% 21.72%
Utilities 1.05% 12.49%
Financials 4.71% 33.23%
Real Estate -0.82% 32.60%
Communications 0.38% 24.44%
Health Care -0.15% 18.00%
Materials 4.10% 20.27%

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.  All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index.  The Dow Jones Industrial Average (DJIA) is a price-weighted index of 30 actively traded blue chip stocks.  Indexes are unmanaged and do not incur management fees, costs or expenses.  It is not possible to invest directly in an index.

References

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.

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Grant Collins is a Financial Advisor and co-founded Advanced Investment Management. Grant has been in the finance industry since 2013. Grant is an active member throughout the Owensboro community and currently serves on Brescia’s endowment committee, their alumni association, and teaches economics part time at the University. In his free time, he enjoys spending time with his friends and family, traveling, reading, and playing golf.