July brought new equity market highs, despite concerns about the rapid spread of the Delta variant of COVID-19. With the economy and inflation showing strength in the past quarter, many are beginning to wonder whether the trends we’re seeing are a short-term blip on the radar or part of a larger shift.
In this newsletter, we’ll look at the current state of the economy, the way that housing illustrates some of the complexities of the recovery, and what we’re looking at in terms of policy as we head towards the fourth quarter.
In just about 15 months, the U.S. economy went from the first lockdowns back to reaching a pre-pandemic level of economic activity.
The rebound is likely to slow through the rest of the year as pent-up demand for goods and services eases a bit. Moody’s, the ratings agency, anticipates economic growth of 6.5% for 2021 and 4.5% in 2022.
Consumer demand has been an especially strong driver of the economic turnaround: in the second quarter, total personal consumption spending rose at an 11.8% annualized rate, while the demand for services grew 12%. Moody’s expects to see this trend continue as supply bottlenecks ease and the economy continues to reopen.
Consumer confidence rose to an unexpectedly high level in June, and the number of workers voluntarily quitting their jobs has exceeded pre-pandemic levels and reached a record high. This could be partially explained by awareness that jobs are plentiful, meaning that despite a still-high unemployment rate workers are recognizing that they have more options.
For some observers, the key risk to continued strength in economic growth is the Delta variant of COVID-19. Even if demand remains strong, Delta could worsen supply chain bottlenecks and make it difficult for workers to move towards open jobs, which could both hamper the recovery.
Housing prices leapt this year—to the point that home price growth of 17% in one year set an all-time record. With a wave of buyers on the market, home inventory fell 53% between April of 2020 and April of 2021, and prices reflected that decline.
If you were looking for a new home during this period, you would be forgiven for wondering if you need to hurry up and pay any price to get into the market. But the tide already appears to be turning: available homes on realtor.com rose by 3% in May and another 9% in June, while the pace of home sales sharply slowed.
Of course, that’s not the end of the story. The lapse of two important mortgage assistance programs this year may drive inventories back up, but that doesn’t mean prices will fall. Inventories may remain low for some time, and demographic trends (namely, Millennials buying houses) could support a higher level of long-term demand.
In other words, just as in many other areas of the economy, there are short-term quirks and long-term trends. Picking apart the two isn’t always so simple. In the case of housing, we’ve seen some dramatic pandemic-related market pressures—but they exist in the context of a bigger picture.
This balance between pandemic effects and longer-term trends is, in our view, likely to play out across the economy.
The Federal Reserve recently noted that it would continue to provide supportive policy until unemployment falls to levels consistent with what economists call “full employment” and until inflation moderately exceeds 2% “for some time.” In other words, from the perspective of the Fed there’s still a potentially long on-ramp to a return to normalcy.
The high inflation numbers we’ve seen recently are, according to the Fed, transitory, meaning they’re expected to cool over the coming months. We’ve talked about inflation before, but despite the Fed’s statement about inflation being temporary, some polls are showing that Americans are increasingly concerned about rising costs.
Should they be? Some indicators (for example, the wholesale prices for used vehicles) show signs of easing price pressures. As the economy recovers, we hope to see more resolution of supply and potentially a petering-out of the pent- up demand for goods and services, which could further ease price pressures.
Of course, another important aspect of this is fiscal policy: with a $550 billion infrastructure bill heading towards a Senate vote (as of this writing), we could see additional stimulus for the economy. It is certainly too early to tell how this plays out, but it is another variable to consider.
All that said, what happens next depends on a mix of policy, wages, and of course the impact of Delta and any other variants that arise. It does appear that the Fed is looking for slightly accelerated inflation before tapping the brakes, and we expect a lot of early communication about what policy decisions are coming. While consumer confidence and jobs appear to be returning, we’re also closely monitoring the Delta variant situation in the event that it disrupts expectations for jobs growth and a return to pre-pandemic normalcy.
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