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Inflation & Lower Third-Quarter Growth

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September was a difficult month for the major market indices as investors remained concerned about the possibility of inflation and the nation’s difficulty with achieving a vaccination rate that could somewhat stabilize the economic picture. Marking the worst month of performance in 2021, markets fell in the fourth week and locked in lower Q3 growth than anticipated.

“The broader market stumbled through September as investors tried to get a clearer picture of the economy’s path amid inflation concerns and uncertainty about how COVID-19 will continue to impact industries and consumers. In recent weeks, economic data has revealed that the highly contagious delta variant has crimped consumer spending and the job market’s recovery.  The weak signals for economic growth continued Thursday as the Labor Department reported that unemployment applications rose for the third straight week and were higher than economists anticipated. Inflation concerns that had been weighing on the market earlier in the year returned in September as a wide range of companies issued more warnings about the impact of rising prices on their finances.” (USA Today, September 30, 2021.)

U.S. Markets

U.S. Markets

Signaling the end of the third quarter with a disappointing close at 33,843 and a throwback to market levels at the end of April, the Dow Jones Industrial Average surrendered -1,517 points but held a +9.5% YTD. Following the leader, the S&P 500 shed -215 points and ended the month at 4,307 with a +13% YTD. Unable to sustain its gains in the last two months, the NASDAQ forfeited -811 points and closed the ninth month at 14,448 points with a YTD of +11%. Also under duress, the Russell 2000 gave back -69 points for a month-end reading of 2,204 points representing a +10.5% YTD.

 

European and Asian Markets

Markets in Europe experienced the same downturn with the FTSE 100 losing -33 points and closing September at 7,086 with a +9% YTD. The Engine of Europe also revisited late April with a loss of -575 points as the DAX greeted autumn weather at 15,260 points and a YTD of +10%. The French had a CAC loss of -160 points, starting October at 6,520 and a first-place +15% YTD. Asian markets told a different story as the Shanghai Stock Exchange gained +25 points and greeted the fourth quarter at 3,568 with a lowly +3% YTD. It was a disaster, though, in Hong Kong as the Hang Seng added its fourth consecutive month of decline, ending September with its lowest reading during 2021 at 24,575, suffering a loss of -1,232 points and a -11% YTD. The Nikkei, however, enjoyed an increase of +594 points and a YTD of +5% when September’s door closed at 28,932.

 

News from China

As reported by the BBC, China announced it will open a new stock exchange. “President Xi Jinping said the new share market will be in the capital Beijing. Mainland China currently has two major markets based in the Shanghai financial hub and the southern city of Shenzhen. While President Xi did not elaborate on the plan, the China Securities Regulatory Commission (CSRC) published a statement shortly after his speech that said its leadership was "excited" at the prospect. "Small and medium-sized enterprises can do great things," the CSRC added. In recent months, Chinese authorities have announced a series of measures that have had a major impact on large parts of the country's private sector - from tech giants and tutoring firms to music streaming platforms and TV companies.”

 

Fixed Income

Fixed Income

The Federal Reserve Bank of San Francisco released a statement on September 29 clarifying the intentions of the Federal Open Market Committee during their meeting of September 21-22, specifically “that strong policy support and progress on vaccinations have benefited the economy, and the sectors most adversely affected by the pandemic have improved in recent months. The path of the economy continues to depend on the course of the virus. If the economy’s progress continues broadly as expected, the Fed said that a moderation in the pace of asset purchases may soon be warranted.


The Committee kept the target range for short-term interest rates near zero and expects it will be appropriate to maintain this target until it meets the goals of maximum employment and price stability.”


10-Year Treasuries

Adding +22 basis points during September, 10-Year Treasuries benefited with a +38% increase YTD, closing September with a yield of 1.52.

 

Commodities

Commodities

September marked the second consecutive month when Comex gold lost value, surrendering -$61 per ounce for a month-end close of $1,744.40 and a +8% YTD. West Texas Intermediate Crude oil reversed last month’s losses by gaining +$6.29 per barrel and settling at the midpoint of the $70 – $80 range at $75.03 with an envious +35% YTD.  The average national price for a retail gallon of unleaded gasoline jumped up +12 cents, rising from $3.15 to $3.27 at the pump and scoring, for most of us, an unwelcome +34% YTD.

 

U.S. Economy

U.S. Economy

GDP

The Bureau of Economic Analysis released its third estimate of the Q2 2021 GDP, reporting “Real gross domestic product (GDP) increased at an annual rate of 6.7 percent in the second quarter of 2021 according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 6.3 percent. The "third" estimate of GDP is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 6.6 percent.”

Conjecture about Q3 GDP performance is presently based on “sustained strength in business investment (which) is expected to limit the hit on economic growth from an anticipated slowdown in consumer spending in the third quarter as the boost from fiscal stimulus fades and COVID-19 infections flare-up. Demand for goods is being driven by businesses desperate to replenish inventories, but strained supply chains remain a challenge.” (Reuters, 9.27.21.)

 

Job Growth

The Bureau of Labor Statistics will release its next Job Openings and Labor Turnover Survey data (JOLTS) for August 2021 is scheduled to be released October 12, 2021. Additional July data indicates “Job openings increased to a series high of 10.9 million on the last business day of July. Hires and total separations were little changed at 6.7 million and 5.8 million, respectively.”

 

Existing Home Sales

Sales of previously owned homes declined -2% in August from July to a seasonally adjusted annualized rate of 5.88 million units - National Association of Realtors.

Sales were 1.5% lower than August 2020 for the first annual decline in 14 months. Sales, however, are still above pre-pandemic levels. These numbers are a count of home closings and are based on contracts likely signed in June and July.

“The housing sector is clearly settling down,” said Lawrence Yun, chief economist for the Realtors, who called last year’s super surge “an anomaly.”

The supply of homes for sale fell 1.5% month to month to 1.29 million at the end of August. Compared with August 2020, inventory is down 13%, but that comparison has been steadily shrinking for several months. At the current sales pace there was a 2.6-month supply. “We do expect more inventory coming up, maybe with the end of the eviction moratorium,” Yun said.

Tight supply pushed the median price of an existing home sold in August to $356,700, an increase of 14.9% from August of 2020. While the gain is very large, the annual comparisons are moderating as sales slow down. The median is also being skewed by stronger activity on the higher end of the market.

Sales of homes priced below $250,000 fell compared with a year ago, while sales of those priced above $1 million jumped 40%.

First-time buyers are clearly struggling with higher prices, falling to just a 29% share of all sales, the lowest since January 2019. Historically, first-time buyers usually make up 40% of buyers. Yun said the market is becoming less competitive overall, with buyer traffic declining and the number of buyers waiving inspections, a competitive tactic, also falling. The number of offers on a typical home is now 3.8 compared with 4.5 a month ago.

Mortgage rates began falling in June from 3.25% down to a low of 2.78% on the popular 30-year fixed by the start of August, according to Mortgage News Daily.

The drop would have helped first-time buyers most, as they tend to have the least wiggle room financially and are the most sensitive to interest rates, but clearly they are not helping enough.


Sales of newly built homes in July, which are based on signed contracts, not closings, and therefore would match up with the latest existing-home sales numbers, rose slightly month to month but were down 27% from July 2020, according to the U.S. Census.


Builders have been raising prices to keep up with soaring costs for land, labor and materials. Recent earnings reports and guidance from several of the nation’s largest builders note supply chain issues that are hampering production and leading to fewer new home closings.” (CNBC, September 22, 2021.)

 

New Home Sales

“Sales of new U.S. single-family homes increased for a second straight month in August, but demand for housing has probably peaked after a COVID-19 pandemic-fueled buying frenzy. The report from the Commerce Department on Friday also showed the supply of new homes on the market last month was the largest in nearly 13 years, with prices unchanged on a monthly basis. It followed on the heels of news on Wednesday that sales of previously owned homes fell in August. "These data suggest that the surge in new home sales during the pandemic has ebbed and inventories of unsold homes have risen to a more normal level in relation to sales," said Conrad DeQuadros, senior economic advisor at Brean Capital in New York. "This report and the existing home sales data for August suggest that a considerable portion of the flow adjustment of sales to higher demand may have taken place."
 
New home sales rose 1.5% to a seasonally adjusted annual rate of 740,000 units last month. July's sales pace was revised up to 729,000 units from the previously reported 708,000 units. Sales increased 6.0% in the populous South and gained 1.4% in the West. They soared 26.1% in the Northeast but tumbled 31.1% in the Midwest. Economists polled by Reuters had forecast new home sales, which account for about 11.2% of U.S. home sales, increasing to a rate of 714,000 units. Sales decreased 24.3% on a year-on-year basis in August. They have struggled to post significant gains since surging to a rate of 993,000 units in January, which was the highest since the end of 2006. Builders have been constrained by higher prices for inputs, as well as shortages of land and labor.

New Homes Sales

About 78% of homes sold last month were either under construction or yet to be built. "This report continues to highlight the ongoing difficulties that homebuilders are facing as they attempt to work through their current construction backlog, due to a shortage of labor and elevated material costs and outright shortages," said Mark Palim, deputy chief economist at Fannie Mae in Washington.
 
The median new house price shot up 20.1% in August to $390,000 from a year ago. Prices were unchanged on a monthly basis. Last month, new home sales remained concentrated in the $200,000-$749,000 price range. Sales in the under-$200,000 price bracket, the sought-after segment of the market, accounted for just 3% of transactions.
There were 378,000 new homes on the market in August. That was the most since October 2008, and up from 366,000 in July. Houses under construction made up 62.7% of the inventory, with homes yet to be built accounting for a record 27.8%. "The need to work through these backlogs should support new home construction in the months ahead even if the pace of sales moves sideways," said Nancy Vanden Houten, a U.S. economist at Oxford Economics in New York. At August's sales pace it would take 6.1 months to clear the supply of houses on the market, up from 6.0 months in July.” (Reuters, September 24, 2021.)

 

Manufacturing

“New orders and shipments of key U.S.-made capital goods increased solidly in August amid strong demand for computers and electronic products, keeping business spending on equipment on track for another quarter of robust growth. "The outlook for business equipment investment remains bright, with the latest business surveys suggesting growth will be sustained close to the pace seen in recent quarters," said Michael Pearce, a senior U.S. economist at Capital Economics in New York. "The resilience of investment is one reason why we expect overall GDP growth will slow marginally in the third quarter, despite a bigger slump in consumption growth."

Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rose 0.5% last month, the Commerce Department
 
Data for July was revised higher to show these so-called core capital goods orders gaining 0.3% instead of the previously reported 0.1%. Economists polled by Reuters had forecast core capital goods orders increasing 0.4%. Orders shot up 16.4% on a year-on-year basis and are 18% above their pre-pandemic level. That is boosting manufacturing, which accounts for 11.9% of the economy, though an acute shortage labor, as well as raw materials such as semiconductors, are making it harder for factories to fulfill orders. Last month, orders for computers and electronic products rose 1.4%. There were also increases in orders for electrical equipment, appliances, and components, as well as fabricated metal products. But orders for machinery fell as did those for primary metals. Business spending on equipment has logged four straight quarters of double-digit growth.” (Reuters, September 27, 2021.)

 

Trade Deficit, Exports and Imports

The Bureau of Economic Analysis (BEA) announced in its July 2021 report that “The U.S. monthly international trade deficit decreased in July 2021 according to the U.S. BEA and the U.S. Census Bureau. The deficit decreased from $73.2 billion in June to $70.1 billion in July as exports increased and imports decreased. The previously published June deficit was $75.7 billion. The goods deficit decreased $5.5 billion in July to $87.7 billion. The services surplus decreased $2.4 billion in July to $17.7 billion.

 

Exports

Exports of goods and services increased $2.8 billion, or 1.3 percent, in July to $212.8 billion. Exports of goods increased $2.7 billion and exports of services increased $0.1 billion.

  • The increase in exports of goods reflected increases in capital goods ($1.0 billion), in consumer goods ($0.8 billion), and in automotive vehicles, parts, and engines ($0.6 billion).
  • The increase in exports of services reflected increases in other business services ($0.2 billion) and in charges for the use of intellectual property ($0.1 billion). A decrease in travel ($0.2 billion) partly offset the increases.

 

Imports

Imports of goods and services decreased $0.4 billion, or 0.2 percent, in July to $282.9 billion. Imports of goods decreased $2.9 billion and imports of services increased $2.4 billion.

  • The decrease in imports of goods reflected decreases in consumer goods ($2.1 billion) and in industrial supplies and materials ($1.7 billion). An increase in automotive vehicles, parts, and engines ($1.1 billion) partly offset the decreases.
  • The increase in imports of services reflected increases in travel ($1.0 billion); in charges for the use of intellectual property ($0.9 billion), which included payments for the rights to broadcast the 2020 Summer Olympic Games; and in transport ($0.4 billion).” (BEA, September 2, 2021.)

 

Retail Sales

Released on September 16, 2021, the August 2021 Advance Monthly Sales for Retail Trade and Food Services report stated the following, in part: “Advance estimates of U.S. retail and food services sales for August 2021, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $618.7 billion, an increase of 0.7 percent from the previous month, and 15.1 percent above August 2020. Total sales for the June 2021 through August 2021 period were up 16.3 percent from the same period a year ago. The June 2021 to July 2021 percent change was revised from down 1.1 percent to down 1.8 percent. Retail trade sales were up 0.8 percent from July 2021, and up 13.1 percent above last year. Clothing and clothing accessories stores were up 38.8 percent from August 2020, while gasoline stations were up 35.7 percent from last year.”

 

Consumer Prices

The Consumer Price Index report for August 2021 was issued by the U.S. Bureau of Labor Statistics on September 14, 2021. “The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in August on a seasonally adjusted basis after rising 0.5 percent in July, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 5.3 percent before seasonal adjustment.
 
The indexes for gasoline, household furnishings and operations, food, and shelter all rose in August and contributed to the monthly all items seasonally adjusted increase. The energy index increased 2.0 percent, mainly due to a 2.8-percent increase in the gasoline index. The index for food rose 0.4 percent, with the indexes for food at home and food away from home both increasing 0.4 percent.
 
The index for all items less food and energy rose 0.1 percent in August, its
smallest increase since February 2021. Along with the indexes for household
operations and shelter, the indexes for new vehicles, recreation, and medical care also rose in August. The indexes for airline fares, used cars and trucks, and motor vehicle insurance all declined over the month. 
 
The all items index rose 5.3 percent for the 12 months ending August, a smaller increase than the 5.4-percent rise for the period ending July. The index for all items less food and energy rose 4.0 percent over the last 12 months, also a smaller increase than the period ending July. The energy index rose 25.0 percent over the last 12 months, and the food index increased 3.7 percent; both were larger than the increases for the 12-month period ending July.”

 

Unemployment

“The unemployment rate declined by 0.2 percentage point to 5.2 percent in August 2021. The number of unemployed people edged down to 8.4 million, following a large decrease in July 2021. Both measures are down considerably from their highs at the end of the February-April 2020 recession. However, they remain above their levels before the COVID-19 pandemic (3.5 percent and 5.7 million in February 2020). Among the major worker groups, the unemployment rates for adult men (5.1 percent) and Whites (4.5 percent) declined in August 2021, while the rate for teenagers (11.2 percent) increased. The unemployment rates for adult women (4.8 percent), Blacks (8.8 percent), Asians (4.6 percent), and Hispanics (6.4 percent) showed little change over the month.” (Bureau of Labor Statistics, September 9, 2021.)

Unemployment

 

Consumer Sentiment

“The Conference Board Consumer Confidence Index® declined again in September, following decreases in both July and August. The Index now stands at 109.3 (1985=100), down from 115.2 in August. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—fell to 143.4 from 148.9 last month. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—fell to 86.6 from 92.8.
 
“Consumer confidence dropped in September as the spread of the Delta variant continued to dampen optimism,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Concerns about the state of the economy and short-term growth prospects deepened, while spending intentions for homes, autos, and major appliances all retreated again. Short-term inflation concerns eased somewhat, but remain elevated. Consumer confidence is still high by historical levels—enough to support further growth in the near-term—but the Index has now fallen 19.6 points from the recent peak of 128.9 reached in June. These back-to-back declines suggest consumers have grown more cautious and are likely to curtail spending going forward.” (The Conference Board, September 28, 2021.)

 

Odd News

“Responding to an escalating crisis, Prime Minister Boris Johnson of Britain reversed course this weekend and offered thousands of visas to foreign truckers to combat a driver shortage that has left some supermarket shelves empty and caused long lines at gas stations. So great is the concern that there has been speculation that the military could be called up to drive trucks.
 
Since January, after Britain completed the final stage of Brexit, employers have been unable to freely recruit European workers, as was previously the case. The coronavirus pandemic has also exacerbated the crisis that stems from a long-term shortage of British truck drivers. The British Department for Transport said in a statement that 5,000 fuel tanker and food truck drivers would be allowed to work in the country for three months in the prelude to Christmas to provide short-term relief for the commercial hauling industry. The department also noted that letters would be sent to truck drivers in Britain who hold licenses but are not currently working, appealing to them to return.
“It’s going to be part of a learning process that the U.K. has to go through,” said David Henig, a London-based expert on British trade policy for the European Center for International Political Economy, a research institute. He noted that when Britain was operating under E.U. economic rules, workers could move freely between countries in the bloc. “We had a high-flow labor economy, and we are changing to a static one,” Mr. Henig said. He added that the panic buying of fuel was not irrational, especially after it became clear that some gas stations were running dry. Britons have for months seen periodic shortages of goods on supermarket shelves, he noted. Countless industries in Britain have complained recently about lagging deliveries, with shortages of McDonald’s milkshakes and roasted chicken at Nando’s restaurants generating headlines.


The Road Haulage Association, which represents the British road transportation industry, has estimated that there is a shortage of 100,000 drivers. “Ninety-five percent of everything we get in Britain comes on the back of a truck,” Rod McKenzie, the association’s director of policy, said recently.” (NY Times, September 26, 2021.)

 

Final Reflections

As autumn signals the beginning of the forthcoming winter cycle with the start of the rainy season and cooler temperatures, this is a great time to prepare for winter weather that could be either mild or severe, given the changes we’ve witnessed in our local weather during the last 12 months or longer. Being prepared is always a helpful attitude to adopt so that, much like preparing for your financial future, you can be assured your family is safe from unpredictable events. Anticipation and preparation will carry all of us through whatever comes our way, keeping us strong, healthy, and in the most positive spirits. Best wishes to you and your family from all of us at Carlton Wealth.

 

Joe Maas

Information contained herein is based on data obtained from sources believed to be reliable, however, such information has not been verified by Carlton Financial Group, LLC d/b/a Carlton Wealth or Synergy Financial Management, LLC. The information provided has been prepared and distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy or an offer of advisory services.

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