July 30, 2021


     The economic recovery continues amid a growing perception among more than a few that it has reached peak growth and inflation. The first estimate of second quarter GDP showed a 6.5% annualized quarterly rate. The consumer, flush with cash from federal aid and elevated pandemic-induced saving, were and remain the primary drivers in an uneven economic rebound. The rapid spread of the Delta and Lambda variants of COVID is a key and increasing downside risk to the recovery.

GDP and Employment

     Supply-side constraints both in the labor and products markets continue to affect many sectors of the economy. The latest Beige Book, released on July 14, suggested the constraints have intensified as the economy re-opened more widely. Supply is struggling to keep up with demand, leading to price pressures and raising the specter of inflation risks to the upside. The Fed’s belief (and hope) is that as the pandemic ends, many of the constraints will solve themselves.


Core Inflation


    To date, inflation pressures have shown few signs of easing. The Consumer Price Index
(CPI) for June once again surprised to the upside, rising by 0.9% month-to-month for both the headline and core readings. On a year-over-year basis the rate of change for headline and core are 5.4% and 4.5%, respectively. Some of the large annual increase is due to base effects of price drops on the pandemic lockdown in 2020. Those will begin to fade in coming months but with staffing challenges applying upward pressure on labor costs at the same time businesses are paying for parts and materials the inflation gauges are likely to stay elevated.

Weekly Jobless Claims

     Hiring also picked up in June, with the largest job gains in the leisure and hospitality sectors. The unemployment rate rose a tick to 5.9% on re-entrants to the labor force. The outlook looks for a strong pace in employment. Filings for unemployment benefits and those that are receiving them are generally trending downward and job openings stand at a record level. Relief from the current labor shortage may emerge once the in-person school year starts and the expanded unemployment insurance benefits stop in September.

Continuing Claims

     The uneven nature of the recovery complicates monetary policymakers’ assessment of what to do, and if and when to do it. With an uptick in global coronavirus cases and concerns about economic headwinds, the Federal Open Market Committee (FOMC) has opted to err on the side of caution and retains its dovish stance. Therefore, it was no surprise there were no major changes at the July 27-28 FOMC meeting. The Fed continues to convey patience, maintaining its accommodative stance. In his testimony before Congressional committees Fed Chairman Powell said reaching the bar of “substantial further progress” toward the Fed’s goals of maximum broad and inclusive employment was still a ways off, but in his post-meeting press conference Chairman Powell acknowledged further strengthening in the economy and downplayed COVID variant uncertainties. Even as inflation has risen faster and further than expected, the Fed is willing to wait and see, believing it is “transitory.” On tapering, the talks about talking about it have begun and the timing is getting nearer and will be well telegraphed.