Sightline Weekly Market Update: Has Economic Growth Peaked?
Markets finished the week mixed with the Dow and the S&P400 Mid-cap indices down just 0.24% on the week. The S&P 500 increased 0.58%, followed by the Russell 2000 gaining 0.58%, the TSX adding 1.26%, and the Nasdaq jumping 1.55% as growth resumed leadership. In Europe UK’s FTSE 100 and France’s CAC 40 were flat while the Italian FTSE MIB index gained 0.22% and Germany’s DAX index fell 0.45%. In Asia, Japan’s Nikki 225 soared 5.38%, helped in part by news of the prime minister’s resignation, increasing expectations of additional economic stimulus. In China, the Shanghai Composite Index gained 1.7% in the week.
The latest consumer confidence survey reported on Tuesday dropped in August to a six-month low as consumers dealt with fears of inflation and the Delta variant slowing down economic recovery. As reported by the Conference Board, the survey fell to 113.8 from the previous reading of 125.1.1 Additionally, based on consumers’ assessment of current business conditions and labor market conditions, the Present Situation Index fell to 147.3 from 157.2 in July. Based on consumers’ short-term outlook for income, business, and labor markets, the Expectation Index fell to 91.4 from 103.8.2
*Shaded areas represent periods of recession.
Sources: The Conference Board; NBER
(c) The Conference Board. All Rights Reserved.
On Wednesday, the Institute for Supply Management released the latest report on manufacturing activity. The manufacturing sector grew in August with an increase of 0.4% to 59.9% compared to the July reading of 59.5%. This is the 15th consecutive month of expansionary growth. The new orders index increased by 1.8% to 66.7% from the July reading of 64.9%. The strength of manufacturing comes despite several other readings in the report pointing to struggles confronting companies as they tackle lead times for deliveries of raw materials, labor shortages, rising commodity prices and difficulties with transportation. Labor shortages of skilled labor, absenteeism and overseas supply chain issues continue to plague the manufacturing sector, limiting growth potential. The full report is here.3
On Thursday, the US Labor Department released the advanced number for the seasonally adjusted initial claims for the week ending August 28 at 340,000. The latest reading decreased 14,000 from the previous week’s revised level of 353,000 and nearing the pre-pandemic weekly level between 200,000 and 250,000. Continuing claims increased by 178,526 to 12,186,158.4 As the supplemental unemployment benefits expire this month and with job openings topping 10 million, it would not be surprising to see the initial claims and continuing claims return to pre-pandemic levels.5 Annualized US productivity increase 2.1% in the second quarter, and output increased 8.1% in the second quarter. Unit labor cost also rose 1.3% in the second quarter as many employers are increasing wages to attract workers.6
The big economic data point of the week was the new jobs number for August coming in at just 235,000 compared to the Wall Street Journal forecast of 720,000. The big surprise in the data was in the details. Leisure and Hospitality previously showing strong employment growth added zero jobs in the period. Construction lost 3,000, government 26,000, and retail lost 26,000. The unemployment rate dropped marginally to 5.2% from 5.4%.7 To many followers of the Federal Reserve, the bad news job creation numbers were good news giving rise to the question of whether the Fed would start tapering asset purchases late Q4.
From the data of recent weeks, it seems that economic growth peaked in the second quarter coming from an unprecedented low. However, while growth may be slowing, trends are in place for sustainable growth, albeit slower than in earlier quarters. Masking requirements, vaccination passports and vaccination requirements for the workplace create headwind for the economy as each side of the argument becomes more entrenched. Political leaders need to consider policies to unleash the potential rather than create more challenges for both consumers and businesses. Market sentiment is fragile and needs to be nurtured for the bull market in equities to continue.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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