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Key Points for the Week

  • Last month U.S. inflation rose 0.47% while core inflation increased only 0.3%, offering some hope that the inflation surge may be losing steam.
  • Job openings topped 10 million, fueled by continued demand in leisure and hospitality, retail and professional, and business services.
  • Second quarter earnings grew 89.3% last quarter as 89% of S&P 500 companies beat analyst estimates.

The most common way to measure economic output is Gross Domestic Product, or GDP. It’s the value of all goods and services produced in our country over a specific period of time. GDP is a combination of the following:

  • Government spending
  • Business investment
  • Consumer spending
  • Net exports (Exports minus imports)

In June, U.S. GDP was almost $23 trillion, reported the Bureau of Economic Analysis.

A trillion is a difficult number to comprehend. Jerry Pacheco of KRWG explained the amount like this, “If you laid one billion dollars side by side like tile, they would cover about four square miles. A trillion dollars laid out the same way would cover approximately 3,992 miles, or 1,000 square miles larger than the states of Rhode Island and Delaware combined.”

Twenty-three trillion dollars would cover Rhode Island, Delaware, Connecticut, Hawaii, New Jersey, Massachusetts, New Hampshire, Vermont, Maryland, West Virginia and part of South Carolina.

U.S. GDP grew by 6.5 percent annualized in the second quarter of 2021. Consumer spending was up 7.8 percent, while government and business spending were down, along with net exports. It’s not unusual for net exports to decline because the U.S. imports more than we export. Overall, consumer spending accounted for almost 69 percent of the economy. So, the answer to the initial question is that consumer spending is the most important driver of economic growth in the United States.

Consumers tend to spend when they feel confident. Last week, we learned that consumers are feeling a lot less confident than they were in July. Richard Curtin of the University of Michigan Consumer Sentiment Survey reported:

Consumers reported a stunning loss of confidence in the first half of August. The Consumer Sentiment Index fell by 13.5% from July…The losses in early August were widespread across income, age and education subgroups and observed across all regions. Moreover, the loses covered all aspects of the economy, from personal finances to prospects for the economy, including inflation and unemployment. There is little doubt that the pandemic's resurgence due to the Delta variant has been met with a mixture of reason and emotion.

Richard Curtin, University of Michigan Consumer Sentiment Survey

The seven-day moving average of new U.S. COVID-19 cases has been rising since early July, reported Our World in Data.

This Week in the Markets

Core inflation moderated significantly last month, rising only 0.3% after jumping 0.9% in June. Used vehicle prices, which rose 10.2% in June, increased only 0.2% in July. Core CPI excludes food and energy prices, which rose 0.7% and 1.5% respectively. Those two categories propelled overall inflation 0.5% higher, down from 0.9% last month.

Job openings surpassed 10 million for the first time and have climbed by more than 2.5 million in the last four months. Hiring was strong in July, but not enough to keep up with increasing demand for workers.

S&P 500 earnings grew 89.3% in the second quarter compared to one year ago. Big gains in industrials and consumer discretionary stocks supported high growth compared to the same quarter a year ago, when much of the country experienced a lockdown.

Markets generally reacted positively to the news. The S&P 500, global MSCI ACWI, and Bloomberg BarCap Aggregate Bond Index all gained. Retail sales in the U.S. and China lead the list of economic data this week.

Inflationary Trends May be Moderating

Transitory may be the word of the year. Webster defines it as “of brief duration: temporary,” and the July inflation report suggested our bout with inflation may prove transitory as Federal Reserve Chair Jerome Powell suggested. Overall inflation growth was 0.5%. Core inflation rose 0.3%, just above the monthly pace associated with the Fed’s inflation target.

The 0.3% increase was much lower than the 0.9% increase the month before. Prices for items related to mobility increased at a much slower rate in July than June. Used car prices increased only 0.2% after rising more than 10.2% the previous month. New car prices still rose 1.7%, but that was a dip from a 2.0% gain the previous month. Lodging prices rose 6.8% last month while rental car prices dropped 4.6%.

Our expectation remains that U.S. inflation will average 4-5% as some of the demand shocks work their way through the system. Before used car prices jumped so rapidly, lumber prices were getting most of the attention. High prices attract additional supply, and lumber prices have since retreated more than 70% from their peak. The same type of decline in used car prices seems unlikely, but rapid price gains seem less likely in coming months.

Chinese inflation, both for consumers and producers, also serves as an indicator of global inflation pressure. The Chinese economy has been growing faster than the U.S. for years, and inflationary pressures seem likely to show up in both Chinese and U.S. data. Chinese consumer inflation is very low. Consumer prices have only increased 1.0% in the last year and haven’t experienced the same shock as the U.S. One reason is Chinese food prices have fallen significantly. Pork prices have fallen 43.5% during the last year, and pork is a staple for many Chinese people.

Chinese producer prices tell a different story as they have increased 9.0% over the last year. While 0.2% higher than last month, the sharp acceleration seems to be slowing as well.

Labor costs are the biggest threat to our benign inflation outlook. The U.S. has more than 10 million positions available for hire. Some firms are raising wages quickly to attract or retain workers. The demand for labor has led more people to have the confidence to quit their jobs.

Even if wage increases push inflation somewhat higher, the possibility of a return to 1970s-style inflation seems very remote. Given the moderating prices in some key industries, the odds of breakout inflation continue to ebb. Today’s economy is more competitive and less energy-dependent than in the 1970s. More likely is an environment in which inflation runs above the average for the past ten years, but well below the rampant inflation in the 1970’s.

All Eyes on Digital Currency

It seems as though everyone is talking about digital currencies these days. Among the topics being discussed are:

  1. Should the Federal Reserve issue a central bank digital currency (CBDC)?
  2. Should digital currencies be better regulated?

In July, Federal Reserve Chair Jerome Powell confirmed that he is undecided about whether the Federal Reserve should issue a CBDC, reported Ann Saphir and Dan Burns of Reuters. He indicated that digital currencies have failed to become a widely accepted means of payment, although a CBDC would eliminate the need for private digital money, especially digital currencies that claim to be pegged to the U.S. dollar. Chris Matthews of MarketWatch explained:

Critics of stablecoins say they pose significant risks to financial stability, especially after it was revealed that some of these dollar-pegged tokens are not backed by actual U.S. dollars, but a combination of riskier assets…[Chair] Powell said in a congressional hearing that regulators need to apply rules to stablecoins that are similar to those that govern bank deposits and money market mutual funds.

Chris Matthews, MarketWatch

Congress and the Securities and Exchange Commission (SEC) are both considering ways to regulate digital currency. The pending bipartisan infrastructure bill includes tax-reporting requirements for cryptocurrency brokers. If the bill passes without changes, digital currency sales would be reported to the IRS in much the same way that stock sales are. The change is expected to generate about $28 billion in taxes over a decade to help pay for infrastructure, reported Marcy Gordon of AP News.

In addition to tax regulation, digital currencies may become subject to greater securities regulation. In early August, SEC Chair Gary Gensler discussed the need for cryptocurrency regulation at the Aspen Securities Forum. He said:

As new technologies come along, we need to be sure we’re achieving our core public policy goals. In finance, that’s about protecting investors and consumers, guarding against illicit activity, and ensuring financial stability… at our core, we’re about investor protection. If you want to invest in a digital, scarce, speculative store of value, that’s fine. Good-faith actors have been speculating on the value of gold and silver for thousands of years…I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight. This leaves prices open to manipulation. This leaves investors vulnerable.

Gary Gensler, SEC Chair

Delays in Tax Refunds

The Taxpayer Advocate Service (TAS) has stated that it is aware that taxpayers are experiencing more refund delays this year than usual. Typically, the IRS processes electronic returns and pays refunds within 21 days of receipt. However, the high-volume of 2020 tax returns being filed daily, backlog of unprocessed 2019 paper tax returns, IRS resource issues, and technology problems are causing delays. Once a return is processed by the IRS and loaded onto the agency's systems, TAS may be able to assist with delayed refunds if taxpayers meet case acceptance criteria. TAS has a case criteria tool that can be used to determine if TAS may be able to offer assistance.

Be Aware of Text Message Scam

The IRS and Security Summit have issued a warning regarding a new text message scam which cites the availability of an economic impact payment. The goal is to have the recipient reveal bank account details. If you have any questions about this scam, please contact us.

Did you Know? This Week in History

August 16, 1896: Gold Discovered in the Yukon

While salmon fishing near the Klondike River in Canada’s Yukon Territory on August 16, 1896, George Carmack reportedly spotted a nugget of gold jutting out from the creek bank. His two companions later agreed that Skookum Jim, Carmack’s brother-in-law, actually made the discovery, leading to the last great gold rush in the American West.

Regardless of who spotted the gold first, the three men soon found that the rock near the creek bed was thick with gold deposits and staked their claim the following day. News of the gold strike spread fast across Canada and the United States, and over the next two years, as many as 50,000 would-be miners arrived in the region. Rabbit Creek was renamed Bonanza, and even more gold was discovered in another Klondike tributary, dubbed Eldorado.

“Klondike Fever” reached its height in the United States in mid-July 1897 when two steamships arrived from the Yukon in San Francisco and Seattle, bringing a total of more than two tons of gold. Thousands of eager young men bought elaborate “Yukon outfits” (kits assembled by clever marketers containing food, clothing, tools and other necessary equipment) and set out on their way north. Few of these would find what they were looking for, as most of the land in the region had already been claimed.

For his part, Carmack became rich off his discovery, leaving the Yukon with $1 million worth of gold. Many individual gold miners in the Klondike eventually sold their stakes to mining companies, who had the resources and machinery to access more gold. Large-scale gold mining in the Yukon Territory didn’t end until 1966, and by that time the region had yielded some $250 million in gold. Today, some 200 small gold mines still operate in the region.

Weekly Focus

If I insist on giving you my truth, and never stop to receive your truth in return, there can be no truth between us.

Thomas Merton, American Monk

The main dangers in this life are the people who want to change everything, or nothing.

Nancy Astor, British-American Lawmaker