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Key Points for the Week

  • Supply chain issues weighed on second-quarter GDP and the June housing market.
  • U.S. real GDP grew 6.5% annualized, capping a strong first half of growth, but the second quarter fell short of expectations.
  • June PCE inflation rose 4.0% last year, although numbers came in below expectations.
  • Our next Town Hall is scheduled for Wednesday, August 11th at 6:00 p.m.

For decades, investors have recognized the investment potential of China. Since the country opened to foreign trade and investment in 1979, its economy has grown rapidly. Through 2018, its gross domestic product (GDP), which is a measure of economic growth, increased by 9.5% a year, on average, according to the United States Congressional Research Service.

The country’s gradual economic development lifted millions out of poverty. In 2020, about 20 percent of the world’s middle class lived in China. China’s middle class has an appetite for goods and services that rivals that of America’s middle class, creating demand for a wealth of goods and services, reported the Brookings Institute.

In recent months, investors have been unsettled as Chinese authorities aggressively implemented new regulations for its online education industry and its technology companies. Austin Carr and Coco Liu of Bloomberg reported:

President Xi’s government has outlined sectors it wants to prioritize, including semiconductors and artificial intelligence. Xi has called the data its tech industry collects ‘an essential and strategic resource’ and has been pushing to tap into it for years.

Austin Carr and Coco Liu, Bloomberg

In early July, the Cyberspace Administration of China launched an investigation of the nation’s largest ride-hailing service company for monopolistic behavior. A month before, the company had raised $4.4 billion when it listed shares on the New York Stock Exchange. Jing Yang of The Wall Street Journal recently reported the company is considering delisting in an effort to placate Chinese authorities and compensate investors for losses.

Last week, “The selloff in Chinese stocks went from an orderly pullback to a full-blown panic…after China told its for-profit education companies that they would have to become nonprofits,” reported Ben Levisohn of Barron’s.

The Securities and Exchange Commission responded by announcing that it would stop processing registrations of U.S. IPOs and other sales of securities by Chinese companies until specific requirements were met.

This Week in the Markets

Supply chain issues continued to constrain economic growth and housing. U.S. GDP grew 6.5% in the second quarter, falling 2.0% short of expectations. Strong consumer demand created a surge in purchases. Production didn’t match demand, and the corresponding drop in inventories robbed more than 1% of GDP growth. Housing demand slowed as well last month. Shortages of appliances along with higher interest rates and prices are pressuring demand for housing.

Inflation increased 4.0% in the last year, supported by a 0.5% increase last month. Rapid inflationary gains are showing signs of slowing.

Stocks dipped slightly last week. The S&P 500 slipped as did the MSCI ACWI, while the Bloomberg BarCap Aggregate Bond Index increased. The decline last week reversed the overall monthly trend. The U.S. employment report leads a series of key economic releases this week.

The Recovery Continues

The U.S. economy continues to recover from the pandemic. U.S. gross domestic product rose 6.5% on an annualized basis in the second quarter. The strong growth just edged the 6.4% growth in the first quarter. The U.S. economy had been growing just below 2% annually prior to the pandemic. The high rate of growth the last two quarters reflects the broader trend toward reopening, which is providing people more options to spend money.

While 6.5% growth is very rapid, the economy grew slower than expected. Economists predicted the economy would grow 8.5% based upon massive government spending. By falling short by 2.0% was a large miss. A deeper look into the data suggests the economy performed roughly at expectations except for weakness in three categories that are likely to be made up in future quarters.

Inventories were the biggest detractor from GDP. Consumers and businesses are spending money, but companies aren’t producing new goods quickly enough to replace all those sold. Inventories dropped an annualized 1.1% in the second quarter after a larger 2.6% decline in the first quarter. This drop in inventories is contributing to supply chain challenges for the economy.

Housing also shrank as high prices and shortages of key inputs cut back on overall activity.

Federal government spending dipped 0.4% from the previous quarter. Adjusting those three factors increases growth to the target 8.5%.

The lower-than-expected growth this quarter will likely boost growth in coming quarters. The decrease in inventories will add pressure to increase production to make up for the current low levels. Removing supply chain bottlenecks and expanding hiring are key to rebuilding inventories. Issues with semiconductor manufacturing have slowed automobile production levels. Demand for appliances has also exceeded supply. Hiring to fill vacant positions will also help inventories recover as supply can catch up with demand.

While some areas of the economy are wrestling with shortages, consumers propelled the economy higher. Consumption rose 7.8% as people spent more on services. About two-thirds of the GDP came from services spending and the rest from goods.

Some of this jump in consumer spending stems from various stimulus checks provided in previous quarters. While the last major direct payments were sent out in March, not every American was able to spend the money quickly. The economic boost from past checks will continue to fade. Getting people back to work is central to supporting ongoing growth.

While quarterly growth gives us excellent insight, some longer-term measures can lend further perspective. With the recovery this quarter, the U.S. economy is now larger than it was before the pandemic. There is still growth that has been lost, but it is 0.8% larger than it was at the end of 2019. One conclusion investors can draw from the data is the U.S. economy remains resilient. Our advice: Stay invested to reap the rewards gained by corporations from this growth.

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. www.taxpayeradvocate.irs.gov/can-tas-help-me-with-my-tax-issue/.

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 7, 1782: George Washington creates the Purple Heart

On August 7, 1782, General George Washington, the commander in chief of the Continental Army, created the “Badge for Military Merit,” a decoration consisting of a purple, heart-shaped piece of silk, edged with a narrow binding of silver, with the word Merit stitched across the face of silver.

The badge of to be presented to soldiers for “any singularly meritorious action” and allowed its wearer to pass guards and sentinels without challenge.

Weekly Focus

The important work of moving the world forward does not wait to be done by perfect men.

George Eliot, English Novelist and Poet

Those who do not want to imitate anything, produce nothing.

Salvador Dali, Spanish Artist