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Key Points for the Week

  • U.S. annualized GDP (Gross Domestic Product) growth slowed to 2% from 6.7% last quarter as concerns over the Delta variant and ongoing supply issues limited economic growth.
  • Businesses seeking to restructure supply chains and altered demand patterns have pushed business investment 13.2% higher during the last 12 months.
  • Core PCE (Personal Consumption Expenditures) inflation increased 0.2% in September, the lowest increase in seven months.

Last week, we learned that economic growth slowed in the third quarter as a new wave of COVID-19 surged across the United States, reported The Bureau of Economic Analysis. Gross Domestic Product (GDP), which is the value of all goods and services produced in the United States, increased by 2 percent annualized in the third quarter.

Consumer spending dropped sharply during the period. The change may reflect the limited availability of goods due to supply-chain issues, a reluctance to pay higher prices, or a drop in disposable personal income. Jeff Cox of CNBC reported:

Spending for goods tumbled 9.2%, spurred by a 26.2% plunge in expenditures on longer-lasting goods like appliances and autos, while services spending increased 7.9%, a reduction from the 11.5% pace in [the second quarter]. The downshift came amid a 0.7% decline in disposable personal income, which fell 25.7% in [the second quarter] amid the end of government stimulus payments. The personal saving rate declined to 8.9% from 10.5%.

Jeff Cox, CNBC

Despite slower economic growth and lower consumer spending, many companies remained highly profitable during the third quarter. At the end of last week, John Butters of FactSet reported:

At this point in time, more S&P 500 companies are beating EPS [earnings-per-share, which is a measure company profits] estimates for the third quarter than average, and beating EPS estimates by a wider margin than average…The index is now reporting the third highest (year-over-year) growth in earnings since [second quarter] 2010. Analysts also expect earnings growth of more than 20% for the fourth quarter and earnings growth of more than 40% for the full year.

John Butters, FactSet

It appears that public companies remain adaptable and resilient despite the ongoing challenges created by the pandemic.

This Week in the Markets

Businesses have multiple options when facing a labor shortage. One is to automate more tasks, and business investment increased 13.2% during the last 12 months. Another option is to increase prices. Core PCE inflation indicates prices are rising at a slower pace. The 0.2% increase in inflation for goods excluding food and energy was the smallest in the last seven months and indicates businesses are being cautious when raising prices. When the chief shortage is labor, wage increases can help lure people back to the labor force. Employment costs jumped 1.5% in September.

Investors looked past some of the weakness in the report and focused on the positive. The S&P 500 finished 7.0% higher in October. The index of 500 large U.S. stocks ended the month at a new record. The global MSCI ACWI added as well. The Bloomberg U.S. Aggregate Bond Index increased last week but finished the month basically unchanged. The U.S. employment report and another round of corporate earnings will be the focus this week.

Misfiring

The U.S. economy can no longer be characterized as hitting on all cylinders. This is especially true since the lack of new car production was a major reason economic growth increased much less than expected.

Growth increased just 2%, using annualized calculations, missing final estimates for a 2.8% growth. Supply chain woes showed up throughout the report but most strongly in automobile manufacturing and sales. Automobile sales sliced 2.4% off overall growth as motor vehicle and parts sales plunged 17.6% last quarter.

To pin the blame on new car sales and broader supply challenges alone would be unfair. Initial estimates were for high single-digit growth in the third quarter, and those estimates were reduced consistently. The Delta variant contributed to slowing economic activity by making it riskier for consumers to engage. It also affected whether workers would return to the labor force. Restaurants and other service organizations are having a hard time finding workers, and the labor shortage may have contributed more to the slowdown than sluggish demand. Restaurant purchases grew at less than 25% of last quarter’s rate, indicating reopening didn’t occur fast enough keep the economy in high gear.

Growth is expected to bounce back sharply in the fourth quarter. Economists anticipate some improvement in supply chain challenges. COVID-19 cases are declining, and several countries are reaching major vaccination milestones, which should increase production and alleviate some product shortages. Inventories have also been tapped for supply in recent quarters, and manufacturers will increase production for immediate sale and to provide adequate inventory for future demand.

There are risks to expecting a big bounce back next quarter. Challenges in the supply chain are proving persistent, as companies struggle to adjust to higher demand. Labor supply isn’t bouncing back as quickly as many hoped. Many workers have left the labor force, and service businesses can’t recover as quickly without them. The U.S. employment report will provide the next major set of clues to determine if this economy can recover its strength.

November Holidays

November is chock full of holidays. Thanksgiving, Veteran’s Day, Dia De Los Muertos, Diwali, Hanukkah, and Giving Tuesday are widely celebrated, and there are a significant number of less widely celebrated holidays on the calendar, too. These include:

  • World Vegan Day: Celebrating the vegan lifestyle (November 1).
  • National Sandwich Day: Celebrating all sandwiches, from peanut butter and jelly to BLTs (November 3).
  • National Stress Awareness Day: It’s a day to begin to identify, manage, and lower stress in your personal and professional lives (November 3).
  • World Tsunami Awareness Day: Within a decade, almost half of the world's population will live in coastal areas that are vulnerable to tsunamis. The United Nations reports that having plans and policies in place can help manage the effects (November 5).
  • National Redhead Day: Celebrate all of the red-headed people in your life (November 5).
  • World Freedom Day: Commemorating the fall of the Berlin Wall, as well as the end of communist rule in Central and Eastern Europe (November 9).
  • Marine Corps Birthday: Celebrating the men and women who serve in the U.S. Marines (November 10).
  • World Kindness Day: Promoting the idea that kindness and compassion has the power to build and unite us (November 13).
  • National Absurdity Day: Celebrate the ridiculous, unreasonable, and crazy in everyday life and throughout history (November 20).

Here are two things you can talk about on National Absurdity Day: (1) Tulips were once more valuable than gold; and (2) There are almost 100 holidays in November.

Build Back Better

The two bills that are being debated continue to evolve in their proposals on how to pay for the $2.750 Trillion of spending. The following is not a comprehensive list but here are some of the highlights:

  • A 15% minimum tax for corporation
  • A surcharge on stock buybacks by corporations
  • A surtax of 5% on income above $10,000,000 and an additional 3% surtax on income above $25,000,000
  • “Closing loopholes” for some taxpayers that allow them to escape the 3.8% Affordable Care Tax on some income
  • Increased funding for IRS for IRS to hire more auditors
  • Limit the deductibility of business losses

Did you Know? This Week in History

November 1, 1512: Sistine Chapel Ceiling Opens to the Public

The ceiling of the Sistine Chapel in Rome, one of Italian artist Michelangelo’s finest works, was exhibited to the public for the first time on November 1, 1512.

Michelangelo’s epic ceiling frescoes, which took several years to complete, are among his most memorable works. Central in a complex system of decoration featuring numerous figures are nine panels devoted to biblical world history. The most famous of these is The Creation of Adam, a painting in which the arms of God and Adam are stretching toward each other.

Michelangelo worked until his death in 1564 at the age of 88. In addition to his major artistic works, he produced numerous other sculptures, frescoes, architectural designs, and drawings, many of which are unfinished and some of which are lost. In his lifetime, he was celebrated as Europe’s greatest living artist, and today he is held up as one of the greatest artists of all time, as exalted in the visual arts as William Shakespeare is in literature or Ludwig van Beethoven is in music.

Weekly Focus

The fact that an opinion has been widely held is no evidence whatever that it is not utterly absurd.

Bertrand Russell, Mathematician

In order to write about life first you must live it.

Ernest Hemingway, Novelist