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Key Points for the Week

  • The Consumer Price Index surged 0.9% last month and is up 5.4% over the last year.
  • U.S. retail sales added 0.6% aided by consumers buying more electronics, appliances, and clothing.
  • China’s economy continues to rebound as industrial production rose 8.3% and retail sales rose 12.1% compared to last year.

The term “peak growth” has become popular.

Peak growth is a catchphrase with the potential to mislead. When the term is applied to the U.S. economy, it does not mean the United States economy has reached the pinnacle of growth and it’s all downhill from here. It simply means economic growth is likely to climb at a slower pace than it had previously.

Nicholas Jasinski of Barron’s reported the term is:

…a buzzy phrase used nowadays in discussing the rate of change in corporate earnings, U.S. gross domestic product, stock prices, government and central-bank stimulus and inflation. It’s the trend that matters for investors, and the outlook is moving toward a deceleration on several of those fronts.

Nicholas Jasinski, Barron’s

Last week, the bond market appeared to signal slower economic growth ahead, reported Mark DeCambre and Vivien Lou Chen of MarketWatch. Yields on 10-year Treasuries finished the week at 1.3 percent, which was lower than the previous week and well below the March highs.

The change in Treasury yields was surprising because of last week’s inflation report from the Bureau of Labor Statistics (BLS), which showed inflation well above the Federal Reserve’s target of 2 percent. The BLS reported inflation was 4.5 percent over the past 12 months when measured using the core Consumer Price Index (CPI), which excludes food and energy prices. With food and energy included, prices were up 5.4 percent.

When inflation rises above the Fed target, it suggests the economy is running too hot and the Federal Reserve, typically, raises the fed funds rate to cool things off. In this case, however, the Fed maintains that higher-than-desirable inflation will prove to be temporary.

The Fed’s expectation is due, in part, to supply chain shortages. The BLS report indicated inflation was up 0.9 percent in the month of June. Used car and truck prices rose 10.5 percent during the month, which accounted for more than one-third of the increase. A significant issue underlying the scarcity of vehicles is a microchip shortage.

“The origin of the shortage dates to early last year when [COVID-19] caused rolling shutdowns of vehicle assembly plants. As the facilities closed, the wafer and chip suppliers diverted the parts to other sectors such as consumer electronics, which weren’t expected to be as hurt by stay-at-home orders,” reported Michael Wayland of CNBC. There are about 1,400 microchips in a new car or truck, according to CNBC, and it can take up to 26 weeks from order to delivery, according to Max Cherney of Barron’s.

While supply chain issues may be resolved with time, another aspect of inflation is wages. Over the last 12 months, wages have increased 6.1 percent, and in June, they were up 1.1 percent. That’s good news for workers, but it’s an aspect of inflation that’s unlikely to be temporary. While we welcome this wage growth, it is this wage growth that may become the foundation for higher inflation.

A wildcard for global recovery remains COVID-19. Last week, the Centers for Disease Control reported the seven-day moving average for the number of cases was up 69 percent, hospitalizations were up 36 percent and deaths were up 26 percent. The Delta variant is a growing concern.

This Week in the Markets

Two big economic releases in the U.S. and a series of economic data in China highlighted a challenging week for U.S. stocks. Inflation surged 0.9% and has now increased 5.4% over the last year. The U.S. Consumer Price Index increased more than expected, led by large spikes in used vehicle prices.

Demand from retail consumers is likely contributing to price pressures. Retail increased 0.6% last month rather than falling 0.5% as economists expected. Some of the growth can be attributed to higher prices. Consumers seem to be sustaining the higher levels of spending that accompanied the most recent government stimulus. China’s economic recovery seems on surer footing. Industrial production rose 8.3% over the last year and retail sales rebounded 12.1% as China continues to grow in economic importance.

Stocks dropped last week in response to the economic data as well as concerns about how the Delta variant of COVID-19 will affect the economy. Last week, the S&P 500 and MSCI ACWI both dipped, while global stocks and the Bloomberg BarCap Aggregate Bond Index both added.

Economic releases will be fairly quiet this week. The Olympic opening ceremony is Friday as the games without fans begin. Earnings season continues as more of the S&P 500 reports.

Advanced Child Tax Credit

Last week, 39 million American households that have children age 18 or younger received their first Advance Child Tax Credit payment.

The Internal Revenue Service (IRS) explained, “Advance Child Tax Credit payments are early payments from the IRS of 50 percent of the estimated amount of the Child Tax Credit that you may properly claim on your 2021 tax return during the 2022 tax filing season. If the IRS has processed your 2020 tax return or 2019 tax return, these monthly payments will be made starting in July and through December 2021, based on the information contained in them.”

The amount Uncle Sam sends depends on the age of the children and the income of the family. Eligible households should receive $300 per month for every child age 6 or younger and $250 per month for every child between the ages of 6 and 17, reported Andrew Keshner of MarketWatch.

For some families, the money will help cover the cost of basic expenses. For others, the cash is a welcome windfall that could be used to:

  • Fund a 529 education savings plan. These plans provide a tax-advantaged way to save and invest for a child or grandchild’s education. Typically, after-tax contributions are invested and any earnings grow tax deferred. If distributions are used to pay qualified education expenses, they are tax free, reported savingforcollege.com.
  • Fund an ABLE account. The Achieving a Better Life Experience (ABLE) Act of 2014 allows Americans with disabilities and their families to save up to $15,000 a year in a tax-deferred account similar to a 529 college savings plan, explained FINRA.
  • Fund a Roth IRA. It may seem counterintuitive to open a retirement account for a 6-year-old, but Bankrate’s Roth IRA Calculator shows that a $3,600 investment, earning 6 percent annually, has the potential to grow to almost $150,000 at retirement by the time a 6-year-old is ready to retire at age 70.

Unlike stimulus checks, if the taxpayer is not eligible for this credit when they file their 2021 income tax return, these advance payments will need to be returned as part of the 2021 income tax liability.

Inflation

The U.S. Consumer Price Index rose 0.9% in June, which was 0.5% more than expected. The measure of U.S. consumer prices is up 5.4% over the last 12 months. It is rising faster than expected.

Food and energy prices increased more than normal. Food prices rose 0.8% and energy prices jumped 1.5%. Food and energy are generally more volatile than other areas of the economy, and many investors focus on core inflation, from which food and energy are excluded. Yet, that measure also leapt more than expected, rising 0.9% in June and climbing 4.5% over the last year.

What is causing the big moves in inflation? It turns out inflation is moving because more people are interested in moving around. Prices of items related to mobility are increasing faster than other items. The combination of used cars and trucks, new vehicles, car and truck rentals, lodging away from home, and airline fares accounted for 72% of the increase in core consumer prices.

Used car and truck prices have experienced the most rapid rise of the group, jumping 10.5% last month. The big increase follows hikes of 10% and 7.3% in the last two months. Over the last quarter, used car and truck prices have increased more than 30% and are up more than 45% over the last year.

Our view remains these seismic price changes in certain industries will slow in coming months. Automobile demand has increased significantly because of COVID-19. Public transportation and carpooling aren’t such attractive options during a pandemic, and people moving to less densely populated areas have few options, other than automobiles, to get around. New cars provide an alternative to used cars in most environments, but a shortage of microchips has slowed new car manufacturing and provided extra support for the used car market.

While sticking with our expectations for declining inflation, we are watching several factors closely to see if inflation trends are turning. Most international economies are also experiencing higher inflation but not to the same levels as the U.S. Job trends are another area of focus in our outlook. As enhanced unemployment benefits are set to expire, we’ll be watching if more unemployed workers are willing to return to jobs and relieve some of the pressure in industries experiencing a surge of demand.

If price increases don’t abate soon, they may force the Fed to move against inflation risk by cutting back on quantitative easing or signaling rates may rise sooner than expected. If that happens, it may have more market impact than higher inflation.

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

July 19, 1799: Rosetta Stone Found

Although there is some debate about the exact date, on what was likely July 19, 1799, during Napoleon Bonaparte’s Egyptian campaign, a French soldier discovered a black basalt slab inscribed with ancient writing near the town of Rosetta, about 35 miles east of Alexandria. The irregularly shaped stone contained fragments of passages written in three different scripts: Greek, Egyptian hieroglyphics and Egyptian demotic. The ancient Greek on the Rosetta Stone told archaeologists that it was inscribed by priests honoring the king of Egypt, Ptolemy V, in the second century B.C. More startlingly, the Greek passage announced that the three scripts were all of identical meaning. The artifact thus held the key to solving the riddle of hieroglyphics, a written language that had been “dead” for nearly 2,000 years.

Several scholars, including Englishman Thomas Young made progress with the initial hieroglyphics analysis of the Rosetta Stone. French Egyptologist Jean-Francois Champollion, who had taught himself ancient languages, ultimately cracked the code and deciphered the hieroglyphics using his knowledge of Greek as a guide. Hieroglyphics used pictures to represent objects, sounds and groups of sounds. Once the Rosetta Stone inscriptions were translated, the language and culture of ancient Egypt was suddenly open to scientists as never before.

Weekly Focus

To live is so startling it leaves little time for anything else.

Emily Dickinson, American Poet

We must believe in free will. We have no choice.

Isaac Bashevis Singer, Polish-American Writer