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Key Points for the Week

  • New and existing home sales fell 5.9% and 0.9% respectively as higher prices slowed purchases.
  • The U.S. Personal Consumption Expenditures (PCE) inflation index rose 3.9% as expected, up from 3.6% in April. Core PCE inflation rose 3.4%.
  • Increased employment pushed employee compensation 0.7% higher as more states reopened parts of the economy and wage pressures remained high.

Infrastructure is essential and sometimes taken for granted. Pipes carry drinking water to our homes, offices, and healthcare facilities, and carry away sewage and wastewater. Highways, airports, railroads, waterways, roads, and bridges make safe and efficient transportation of goods and people possible. Energy systems and transmission lines keep the lights on and the stove cooking. Broadband data transmissions systems assure high speed internet access.

On Thursday, President Biden and a bipartisan group of senators announced that progress had been made on the framework for a bipartisan infrastructure plan. Investors were happy to hear it. Randall Forsyth of Barron’s reported:

…Washington this past week finally took steps to address the nation’s manifest deficiencies in its infrastructure…Perhaps tellingly, the bond market had only a minimal reaction to the prospect of further government spending. But stocks of companies that could see a bonanza of dollars flowing from D.C. had double-digit gains on the week, and the indexes notched gains averaging around 3%, with the S&P 500 ending at a record.

Randall Forsyth, Barron’s

Financial markets paid less attention to inflation.

On Friday, The Bureau of Economic Analysis reported on the Federal Reserve’s favorite inflation measure, core personal consumption expenditures (PCE). Prices, excluding food and energy, were up 3.4 percent from May 2020 to May 2021. From April 2021 to May 2021, PCE increased 0.5 percent which was lower than the previous month-to-month increase.

Yields on 10-year U.S. Treasuries moved slightly higher last week, and U.S. stocks had their best week since February, reported Naomi Rovnick and Francesca Friday of the Financial Times.

This Week in the Markets

The challenge of higher prices is starting to weigh on home sales. New and existing home sales both dipped last month while the median price of existing homes sold topped $350,000 for the first time. Vacation home sales jumped 57.2% over the last year.

Increased demand and slow-to-recover supply continue to pressure prices. The PCE inflation index jumped 3.9%, and core inflation rose 3.4% last month. Employee compensation rose 0.7% while disposable income dropped 2.3% as pandemic government support unwinds. As these pandemic-related support programs are reduced or expire, more income will need to come from employment to support current spending levels.

Stocks rallied after the previous week’s decline. The S&P 500 jumped, more than making up for the loss of the previous week. The gains pushed the index of large U.S. stocks to an all-time high, while the MSCI ACWI gained and the Bloomberg BarCap Aggregate Bond Index declined.

June’s employment data will be the key economic report for the week. After missing estimates in recent months, the report will gauge whether workers are returning to jobs as states continue to reopen.

Infrastructure

Since 1998, the American Society of Civil Engineers (ASCE) has been grading infrastructure in the United States. ‘A’ is exceptional, fit for the future. ‘B’ is good, adequate for now. ‘C’ is mediocre, requires attention. ‘D’ is poor, at risk. ‘F’ is failing, unfit for purpose.

The 2021 Report Card for America’s Infrastructure graded 17 categories of infrastructure. The grades were poor.

  • Rail B
  • Ports B-
  • Solid waste C+
  • Bridges C
  • Drinking water C-
  • Energy C-
  • Aviation D+
  • Public Parks D+
  • Schools D+
  • Inland Waterways D+
  • Wastewater D+
  • Hazardous Waste D+
  • Dams D
  • Roads D
  • Stormwater D
  • Levees D
  • Transit D-

The report’s authors stated:

If the United States is serious about achieving an infrastructure system fit for the future, some specific steps must be taken, beginning with increased, long-term, consistent investment. To close the nearly $2.59 trillion 10-year investment gap, meet future need, and restore our global competitive advantage, we must increase investment from all levels of government and the private sector from 2.5% to 3.5% of U.S. Gross Domestic Product (GDP) by 2025. This investment must be consistently and wisely allocated...

The report’s authors

Economic Transitions

The U.S. economy is transitioning from sustaining itself during a pandemic to relying on job growth and salaries to expand in future quarters. The economic progress from the pandemic has been strong. Government programs allowed people to stay in their houses, make credit card payments, and generally deal with any temporary job losses.

As the economy reopens, some policies may need to be adjusted or allowed to expire to keep the recovery on track and prevent imbalances in the economy.

Imbalances can show up in several ways, including in inflation data. Core PCE inflation, which excludes food and energy, is up 3.4% over the last year. The Federal Reserve has communicated it would like to see higher inflation; yet, these increases are greater than expected or desired. As we noted last week, the results caused Fed officials to move up the date when monetary policy would start to tighten.

A shortage of semiconductor chips has pushed up the prices of automobiles, appliances and may be affecting other areas as well. It also appears likely an imbalance between resurgent demand and labor supply is contributing to increased prices.

The programs designed to support people during the pandemic created an interesting dynamic in which people were taking in higher levels of income without working. By not working, they curtailed supply in some industries. Because income was strong, they were spending more than normal. Personal consumption is up 18.9% over the last year, and it is 5% higher than it was prior to the pandemic. When demand increases faster than supply, inflation is a natural outcome.

As additional unemployment benefits and other assistance continue to expire in various states, hopes are that this will push employment higher and expand the supply in some businesses that have not been able to serve as many customers due to labor shortages. Employee compensation grew 0.7% last month, and this measure is a better gauge of the recovery than disposable income, which includes government benefits, at this time.

A stronger recovery hinges on better job growth. On Friday, the government will release its monthly employment update. Economists are expecting approximately 700,000 net new jobs. These and data that shows whether wages are rising too quickly will be key points to indicate how well the economy is bouncing back from its pandemic-led decline.

The Spanish Flu Isn’t Gone

Known as “the mother of all pandemics,” the Spanish flu infected an estimated 500 million people and killed up to 100 million people worldwide in a two-year span. The 1918 flu was first observed in Europe, the United States, and parts of Asia before rapidly spreading around the world.

Although the Spanish flu happened about 100 years ago, over time the original virus mutated into strains that are the direct ancestor of modern flu viruses. When the descendants of the Spanish flu have combined with bird flu or swine flu viruses, the new strain resulted in deadly pandemics, specifically in 1957 and 1968 (1 million people died worldwide in each). This was also the case during the swine flu pandemic of 2009, which killed 300,000 people. According to virologist Jeffery Taubenberger, “we are still living in what I would call the ‘1918 pandemic era’ 102 years later, and I don’t know how long it will last.”

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

June 29, 1995: U.S. Space Shuttle Docks with Russian Space Station

On June 29, 1995, the American space shuttle Atlantis docks with the Russian space station Mir to form the largest man-made satellite ever to orbit the Earth.

This historic moment of cooperation between former rival space programs was also the 100th human space mission in American history. At the time, Daniel Goldin, chief of the National Aeronautics and Space Administration (NASA), called it the beginning of “a new era of friendship and cooperation” between the U.S. and Russia. With millions of viewers watching on television, Atlantis blasted off from NASA’s Kennedy Space Center in eastern Florida on June 27, 1995.

Just after 6 a.m. on June 29, Atlantis and its seven crew members approached Mir as both crafts orbited the Earth some 245 miles above Central Asia, near the Russian-Mongolian border. When they spotted the shuttle, the three cosmonauts on Mir broadcast Russian folk songs to Atlantis to welcome them. Over the next two hours, the shuttle’s commander, Robert “Hoot” Gibson expertly maneuvered his craft towards the space station. To make the docking, Gibson had to steer the 100-ton shuttle to within three inches of Mir at a closing rate of no more than one foot every 10 seconds.

The docking went perfectly and was completed at 8 a.m., just two seconds off the targeted arrival time and using 200 pounds less fuel than had been anticipated. Combined, Atlantis and the 123-ton Mir formed the largest spacecraft ever in orbit. It was only the second time ships from two countries had linked up in space; the first was in June 1975, when an American Apollo capsule and a Soviet Soyuz spacecraft briefly joined in orbit.

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