Percentage changes in personal consumption expenditure
Universal value advisor
Mask requirements are now a reality in many parts of the country. That can’t be good for third quarter economic growth. The first pass in GDP in the second quarter came out with growth of + 6.5% with the consensus north of 8%. Despite that disappointment, the markets seemed to like the number, even if Amazon, the figurehead of the America pandemic, disappointed.
Some road management departments are now seeing Q3 and Q4 with yellowish eyes, as we do. Goldman Sachs, for example, recently set its growth forecast for the second half of the year to a range of 1.5% to 2.0%, while the overall consensus is still close to 7%. And as you will see in our comments below, the consensus has consistently been missed on the bullish side, suggesting us that the slower growth ahead is not yet priced into the markets.
In fact, a look at the GDP growth pattern of 6.5% in the 2nd quarter shows that almost all of that 6.5% was accounted for in the 1st to 2nd quarter handover. Remember, the March drop in helicopter money led to new heights of growth this month. Part of this spilled over into April, but the GDP growth rates in May and June were absent. While the 2nd quarter maintained the GDP level of March, which allowed an increase of 6.5% for the 2nd quarter, the transfer to the 3rd quarter remained unchanged. Maintaining June GDP levels would result in non-growth in the third quarter. While we are not in the forecasting business, we understand that the GDP forecast of more than 7% for the third quarter is in the left field. The stock market has yet to face this reality. On the flip side, the bond market, which has puzzled many media commentators, appears to have picked up on this growth problem, with yields trending lower across the spectrum.
The work scene continues to be divided, with states that have opted out of state unemployment benefits of $ 300 / week making much faster progress on the employment front than states that have opted for it. We recognize that there is more at play here than just the federal grant (e.g. childcare problems, school openings, fear of contagion or perhaps the opt-out states opened their economies earlier and / or more fully). Still, federal funding seems to play a big role, according to the data.
For the last week of data (July 24), state-level Initial Unemployment Claims (ICs) were a mixed mix with the seasonally adjusted number of 400,000, a decrease of -19,000 from last week’s number (419,000, since then revised to 424,000). ). The consensus view was optimistic at 385,000, so a disappointment. The readers of this blog know that we believe that the pandemic biases are not subject to seasonality, so we rely on non-seasonally adjusted data. In that regard, there has been a huge downward movement in government ICs from 406K (since the revision to 411K). That is a move of -61,000 in the right direction. Forty-three states reported fewer ICs, 10 more, but seven of those 10 reported fewer than 1,000 increases. Only in TN (+1,439), NV (+2,434) and CA (+10,937) did the increase exceed 1,000. CA is an outlier for both ICs and Continuing Claims (CCs) that receive benefits for more than a week (more on CA below).
We believe that in the aftermath of September 6, if federal subsidies are removed, opt-in states will see a much faster decline in unemployment.
The table shows the percentage changes in unemployment over the past three weeks after the date of deregistration, based on data from May 15. In this week’s table we added a row to exclude CA from opt-in states, as the CCs there have increased by a gigantic + 234K in the past two weeks.
Percentage changes of the CCs after the deregistration date
Universal value advisor
Here are some other aggregate observations:
- State CCs July 17: 3,247,071 100.0%
- Opt-In State CCs July 17: 2,453,666 75.6%
- Opt-out State CCs July 17: 793,405 24.4%
- Total change in CCs 10.-17. July: -28428
- Total change opt-in 10.-17. July: +56967
- Total change cancellation 10.-17. July: -85395
Convinced? In the week of July 17, the opt-out states reduced their unemployment by -85,000 with 24.4% of the total CCs, while the opt-in states (75.6% of the CCs) increased their unemployment by almost +57,000 !!
OK – let’s exclude CA. The data now show that the opt-ins (ex-CA) have reduced their unemployment by a significant -15.4%, still behind the -26.5% of the opt-outs, but better than the -11.3% the previous week. We expect the opt-ins to catch up quickly in the coming weeks. As for CA’s data for the past two weeks, the only plausible explanation we can fathom, and this is just speculation, is that the rapid surge in ICs and CCs is due to the Delta variant. If this turns out to be the cause and CA is a leading indicator, think about what this could mean for the third and fourth quarter growth path!
The idea that the inflation we are currently experiencing is somehow “systemic” still plays well in the financial media. At the press conference after the last Fed meeting (July 27-28), Chairman Powell, while vaguely insisting on the dates and determinants of future Fed monetary policy actions, insisted (and consistently) that the Fed is still seeing the current surge in inflation “Temporarily”. ”On Friday, July 30th, the private consumption expenditure (PCE) price deflator, the Fed’s most closely watched inflation indicator, was reported at + 0.5%, slightly lower than consensus expectation of +0.6 %. The “core value” (less food and energy) was + 0.4%. On a Y / Y basis, the headline was + 4.0%, while the “core” was 3.5%. As mentioned above, this is the Fed’s primary inflation guide.
The blue line in the diagram above shows the percentage changes compared to the previous year in this metric from January 2019 to June 2021. The right-hand side looks pretty scary: March 2021: + 12%; April: + 30%; May: + 20%; June: + 14%. But move your eye to the left on the blue line. There have been 10 consecutive months with negative Y / Y values. The financial media don’t talk about that.
Most of these Y / Y swings are due to “base effects,” that is, the downturn in this inflation meter from a year ago in the denominator of percentage change skews the true picture. We added a second line (orange) to the chart that uses 2019 data as the denominator. The resulting percentage changes relate to a period of two years, so we have extrapolated them for the year. That is, if the resulting number is 4%, it means that from the month of 2019, multiplying the price twice by 1.04 (once for 2020 and once for 2021) would give today’s price level. This method eliminates the “base effect” problem. Now look at the right side (orange line). Not that scary at all: March: 4.2%, April 4.4%, May: 4.2%, June: 4.6%. For comparison: The percentage changes compared to the previous year in this PCE measure were 4.5% in December 2019, 4.7% in January 2020 and 4.7% in February 2020. Today’s prices then rise after removing the “base effects” at the same rate as before the pandemic. Back then, nobody spoke or wrote about inflation. If these “base effects” disappear in the next few months, the fear of inflation will also disappear. The Fed knows that.
There is other data to convince us that GDP growth will remain unchanged over the next six months.
· Housing: This seems to have peaked. Remember, despite the levels, when the M / M data is lower, growth will slow down.
- New home sales in June were 676,000 – 12.1% below the 769,000 originally reported in May (since then revised down significantly to 724,000). The consensus estimates, of course, use the latest data available (769,000 in this case) and thought that a 3.5% increase from 769,000 to 796,000 was in sight. The miss was a gigantic -15.1%. (See what we mean by over-optimistic estimates?)
- Sales of existing homes were slightly higher in June at 5.86 million units (annual rate) than in May (5.78 million), but they still represented a decline of -26% in the last six months. The reason has, as everyone knows, mostly to do with rapidly rising prices, with the median price rising + 23.4% Y / Y and a hell of an annual rate of + 38.0% over the past six months.
- As a result, mortgage loan applications have declined -21% in 2021.
· Construction: Both residential and non-residential construction show negative M / M, with non-residential construction in its own recession.
· Delivery bottlenecks: Indications of delivery delays and backlog data from the most recent regional Federal Reserve Banks (KC, Richmond, Philly, NY and Dallas) show a clear relaxation in the supply chains.
· Moratoriums: The eviction moratorium is supposed to expire on Saturday, July 31st. Eight million tenants (15% of the total) are in arrears with rent, while 1.55 million mortgage holders (2.9% of active mortgages) are in arrears. Payments for student loans have also not been required for some time.
- Let’s consider the best possible outcome: mortgages get extended payment terms and tenants have to pay increased rent until the rent is repaid (no evictions). In both cases, consumers are left with less net dollars than when the moratoriums were in place, as they have to return to mortgage and rent (higher) payments. This certainly cannot be positive for the economic growth scenario.
· Delta variant: We noticed above in this blog that a significant part of the population has been forced to wear mask again. The attached map shows the US regions most affected. This is just another downside to future economic growth (but maybe a positive one for Amazon!).
State risk level for Delta variant
Brown School of Public Health
- The data and trends suggest much weaker economic growth in the second half of 2021.
- The opt-out states have so far made greater progress in reducing unemployment than the opt-ins. Without a CA, however, as the September 6th amendment end date approaches, opt-ins are starting to catch up. We expect this trend to intensify in August and (especially) September.
- The Fed is closely monitoring the PCE deflator. Our analysis shows that the four-month rise in the PCE index is indeed temporary.
- From an economic growth perspective, the end of moratoriums on rent, mortgage payments and student loan payments can only be negative.
- The wearing of masks has returned. CA’s employment data has deteriorated rapidly. We don’t know why, but if it is the Delta variant, economic growth could be severely affected.
(Joshua Barone contributed to this blog.)