As the U.S. sees a surge in new COVID-19 cases due to the highly contagious Delta variant, concerns are growing for the resilience of the ongoing economic recovery. As events continue to shape the economic outlook, let’s examine some of the data that will guide us in monitoring the U.S. economy in the second half of 2021.
Strong GDP Growth Expected to Continue Through Year End
The U.S. economy saw strong growth in the first half of the year, expanding by 6.3% (annualized quarterly growth) in the first quarter and 6.6% in the second quarter. The economy has now recovered all of 2020's losses and is 0.8% larger than it was at the end of 2019. Consumer spending was the main growth driver in the first two quarters, but economists fear that activity could stall as COVID-19 cases continue to rise. July readings of both monthly personal consumer expenditures and retail sales disappointed, with both coming in below estimates. Still, analysts surveyed by FactSet expect growth to remain strong in the second half of the year, with median estimates for expansions of 6.3% and 5.8% in the third and fourth quarters, respectively. For the year, the economy is projected to expand by 6.2% following 2020’s 3.4% contraction.
Surging prices continue to be a key concern for consumers, goods producers, and financial markets. Consumer price inflation is being driven by the two largest goods categories in the U.S. Bureau of Labor Statistics (BLS) consumer price index (CPI): food and transportation goods excluding fuel. Together these two components represent more than one fifth of total CPI (21.7%). In July, food prices jumped 0.7% compared to June while non-fuel transportation goods, which includes new and used vehicles as well as parts and equipment, jumped 1.0% for the month. Total CPI was up 0.5% month over month while core prices (excluding the volatile food and energy components) rose 0.3%.
Producers are facing rising prices, as well. The producer price index (PPI) for final demand increased 1.0% in July, while the PPI for processed goods for intermediate demand rose 1.7% and the index for unprocessed goods increased 1.4%. Markets continue to monitor all these inflation numbers for signs that the Federal Reserve will tighten monetary policy. At the Fed’s closely watched Jackson Hole symposium in August, Fed chairman Jerome Powell indicated that a reduction in the Fed’s asset purchase program could start as early as this year but would not be tied to rate increases.
Employment Numbers Are Mixed
Initial filings for unemployment insurance fell at the end of August to their lowest levels since March 2020. First-time jobless claims totaled 340,000 for the week ended August 28; analysts surveyed by FactSet were expecting a figure of 350,000. However, the August jobs report disappointed. U.S. nonfarm payrolls increased by 235,000 in August compared to FactSet estimates for a 750,000 increase. On the positive side, due to revisions, employment in June and July combined is 134,000 higher than previously reported. In 2021, payrolls have seen an average monthly increase of 586,000 yet there are still 5.3 million fewer jobs than there were before the pandemic began. Meanwhile, the number of job openings increased to a series high of 10.9 million in July according to the BLS Job Openings and Labor Turnover (JOLTS) release.
Supply and Demand Imbalance Continues to Drive the Housing Market
The U.S housing market appears to have cooled off somewhat, but consumers still face tight market conditions. According to the U.S. Census Bureau, 708,000 new homes were sold in July, up slightly from June but down 28.7% from January’s peak of 993,000. Data from the National Association of Realtors (NAR) showed an increase in existing home sales in July, but the 5.99 million number was off by 10% from January’s reading. Prices remain elevated as a lack of supply continues to constrain the market. NAR data shows that the median price for an existing home was $359,900 in July, up 17.8% from a year ago. Total housing inventory at the end of July totaled 1.32 million units, up 7.3% from June and down 12.0% from one year ago. With the slight increase in inventories, the months’ supply of existing homes for sale has recovered from the historic lows we saw at the beginning of the year, but the U.S. continues to face a housing supply deficit.
Automotive Market Supply Woes Driving Up Prices
Consumers continue to be hit with soaring prices for both new and used cars and trucks. There are several supply and demand factors feeding this situation. New vehicle prices are rising largely due to a global shortage of semiconductor chips that developed because of early COVID-19 lockdowns that shifted production to chips used in consumer electronics. As production began to ramp up again for automotive-grade chips, new waves of COVID-19 hit the Asian countries where the chips are produced and shipped, once again limiting supplies. General Motors just announced production cuts at plants across North America due to the ongoing chip shortage. The U.S. Bureau of Economic Analysis produces monthly vehicle sales data that shows the jump in average retail prices paid by consumers for cars (up 13.3% year over year) and trucks (up 11.7% year over year) in July. There is evidence that sales in the high end of the market are growing faster than for the low end of the auto market, skewing the average retail price. Still, the quality-adjusted CPI for new cars showed a July year-over-year increase of 5.7% for cars and 6.8% for trucks; these increases are lower than the retail price increases but are still significant.
Meanwhile, the CPI for used cars and trucks was up 41.7% in July compared to a year ago. Prices in this segment of the auto market fell last year as car rental companies sold off their fleets in the wake of plummeting demand. This base effect could be partially responsible for the elevated inflation rate. But at the same time, demand for used cars is surging as many consumers are priced out of the market for new vehicles. With car rental companies trying to replenish their fleets as travel resumed this summer, they are competing with consumers for new cars, exacerbating the supply crunch. Consumers are also facing an explosion in prices for rentals, with car and truck rental prices up 73.5% year over year in July.
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