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Key Points for the Week
The Standard & Poor’s (S&P) 500 Index finished last week slightly higher and has gained about 6 percent during the past 25 days; however, investors have curbed their enthusiasm. The S&P 500 hasn’t experienced a move of one percent or more in 25 trading days. That’s the longest period without a move of that size in about two years, according to a source cited by Avi Salzman of Barron’s.
It is possible investors are taking time to think about the current mix of conditions and how the economy and financial markets may be affected. For example:
U.S. retail sales surprised economists, rising 1.7% in October. Rising prices contributed 1% to the growth, and increased purchases generated the remaining 0.7%. Both the top-line and after-inflation rates were higher than pre-pandemic levels. Supply chain risks may have prompted consumers to kick off Christmas shopping early at internet retailers and stores selling electronics and appliances. Those two segments contributed to the strong results.
The supply chain issues seem to be improving. Industrial production rose 1.6%, with much of the increase from auto production, which rose 11% as the industry began returning to normal inventory levels.
The S&P 500 index of stocks finished a calm week with a slight gain. The biggest daily move was less than 0.4% in either direction. The global MSCI ACWI dipped, and the Bloomberg U.S. Aggregate Bond Index rallied minimally after being pressured lower from increasing inflation in the U.S. Personal spending, personal income, and a second U.S. inflation reading lead this week’s data releases.
The bipartisan Infrastructure Investment and Jobs Act (IIJA) was signed into law last week, and the Build Back Better Act (BBBA) passed the House of Representatives and moved on to the Senate.
For decades economists have tried to determine how spending on infrastructure – roads, bridges, canals, railways, broadband and other projects – contributes to economic growth. There are diverse opinions on the subject. Here are a few:
Increasing infrastructure investment has significant macroeconomic benefits. Near term it has a large so-called multiplier—the increase in GDP for a dollar increase in investment. It is among the highest compared with other types of federal government spending and tax policy… In a full-employment economy, the GDP multiplier on traditional infrastructure is estimated to be 1.23 one year after the investment, and 1.12 for nontraditional infrastructure. It is higher when the economy is operating below full employment.
Mark Zandi and Bernard Yaros, Jr., Moody’s Analytics, July 21, 2021
Infrastructure spending by government can boost long-run economic growth by making an economy more productive, in part by improving connectivity – both physical and digital…The point here is that there can be diminishing returns from spending…I view infrastructure investment primarily as a way of boosting the economy’s speed limit. Government should focus on high-value projects.
James Pethokoukis, American Enterprise Institute, April 2, 2021
A new era of large-scale infrastructure investment would necessarily be less revolutionary than the railways and roads of the past. Yet it might nonetheless prove surprisingly transformative in its direct economic impact, its knock-on effects on private industry—and in the psychological spur it provides to a country that could do with a bit of reinvigoration and renewal.
The Economist, May 1, 2021
Finally, even if infrastructure investment had no impact on employment, productivity, and growth, it’d still deliver public goods that should be available to all but that may not be profitable to produce privately (such as rural broadband).
Marcela Escobari, Dhruv Gandhi and Sebastian Strauss, Brookings Institute, March 17, 2021
The IIJA will invest approximately $1.2 trillion, including $550 billion in new spending, on infrastructure projects across the United States. IIJA is expected to increase the deficit by about $256 billion over the next 10 years, according to the Congressional Budget Office.
Are Christmas lights coming out early this year? It seems more houses are decorated with lights, and you can already see trees in windows. The latest retail sales data suggest the Christmas season may be starting early as well.
October retail sales were released last Tuesday and showed consumers are continuing to spend money as spending beat expectations for the third straight month, rising 1.7%. Over the past three months, retail sales increases have averaged 1.2%, which is higher than the average pre-pandemic monthly climb of around 0.2-0.3% per month. Online sales continue to lead the way. An increase in motor vehicle and parts sales was a good sign, after sales were hampered by a semiconductor chip shortage for most of this year.
The overall increase benefited from higher-than-normal inflation. The good news is that real retail sales, which adjust for inflation, still increased 0.7% month over month and are still 10% higher than the trends observed prior to the COVID crisis.
As noted in the summary, internet retailers and electronic and appliance store sales indicate consumers are willing to spend and are more concerned about goods arriving in time for Christmas than how much they might have to pay. Stories about supply shortages are likely raising concerns among shoppers.
Even though shoppers are worried, retailers have generally indicated their inventory situation remains positive. Retailers appear to have ordered goods earlier than normal, and some larger retailers have sought to use smaller ships docking in smaller ports to move goods. Improvements in the Los Angeles / Long Beach port have slightly decreased the number of container ships waiting to dock, and shipping prices have fallen in recent weeks.
The strong results also show that higher prices aren’t keeping consumers from spending. If consumers will pay more, inflation may last for longer than expected as retailers raise prices to reflect the higher demand.
The net effect is the Christmas season looks to be in solid shape. Consumers are receiving bigger pay checks, and consumer debt seems well controlled. Initial data suggest the Christmas season should be strong.
The US House of Representatives passed the Build Back Better Act (BBBA) last week. The Bill now moves to the Senate, which is expected to make changes to the Bill. However, we have received inquiries as to what tax changes the Bill proposes:
November 26, 1941: FDR Establishes Modern Thanksgiving Holiday
On November 26, 1941, President Franklin D. Roosevelt signed a bill to officially establish the fourth Thursday of November as Thanksgiving Day.
Thanksgiving became an annual custom throughout New England in the 17th century. In 1789, President George Washington became the first president to proclaim a Thanksgiving holiday. However, it was not until 1863, when President Abraham Lincoln declared Thanksgiving to officially fall on the last Thursday of November, that the modern holiday was celebrated nationally.
Lincoln’s precedent was followed annually by every subsequent president until 1939 with few deviations. The most controversial deviation occurred in 1939 when Franklin D. Roosevelt declared November 23, the next to last Thursday that year, as Thanksgiving Day. Some Americans refused to honor Roosevelt’s decision, and for the next two years, he repeated his unpopular proclamation. It was not until November 26, 1941, that Roosevelt admitted his mistake and signed a bill into law making the fourth Thursday in November the national holiday of Thanksgiving Day.
You can tell you ate too much for Thanksgiving when you have to let your bathrobe out.
Jay Leno, Television Show Host
Thanksgiving; when the people who are the most thankful are the one who didn’t have to cook.
Melanie White, Designer
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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as "The Dow" is an index used to measure the daily stock price movements of 30 large, publicly owned U.S. companies. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.
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