As we move through mid-August, the economic data stream continues to give Fed officials reason to stay on task with an expected shift to dial back monetary accommodation. We learned this week that there are well over 10 million unfilled job openings in the US, and labor supply is expected to increase in coming months as supplemental federal jobless benefits expire and schools reopen. Still, the rapidly spreading Delta variant of COVID-19 could delay more significant progress in labor market participation if growing health concerns spur Americans to delay returning to work.
We also learned that core consumer price inflation is on a downtrend while producer price inflation remains hot. The core consumer price index fell to 4.3% year-over-year from 4.5% previously, but the same version of producer prices came in over 6%, the highest level since 2008. Continued pandemic-related supply chain disruptions and sclerotic trade flows are delaying deliveries, keeping prices elevated and forcing substitution of higher cost sources. Assuming an eventual resolution of the COVID disruption, all of this should normalize and inflation will revert to the mean. That, anyway, is what the Fed tells us and what markets appear to believe as breakeven inflation rates embedded in the Treasury market show expected inflation to remain well-behaved between 2 and 2.5% in coming years.
This morning the University of Michigan Consumer Sentiment Survey showed an ugly drop in confidence. The index plummeted to the lowest level in a decade. That doesn’t portend good things for consumption expenditures and GDP.
Fed officials continue to offer a steady drumbeat of opinions on whether and when to begin tapering down their asset purchase program, now totaling $120 billion a month. Chair Powell suggests that we’re still “a ways off” from the necessary “substantial further progress” needed to justify a policy change. Several other FOMC members however (Kaplan, Bullard, Bostic, and Daly to name a few) seem ready at least to sketch out and communicate a plan that will give clarity to markets without causing a tantrum of the sort we saw in 2013. Their Jackson Hole retreat later this month is the perfect venue to formally announce such a change.
Next week we can look forward to plenty of new data: retail sales, capacity utilization, building permits and housing starts among others. Oh, and pre-season football… we can’t forget that. Yes, all of the signs are here. The end of summer is upon us.
University of Michigan Consumer Sentiment Survey: 2001 – Today
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