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The U.S. economy passed a key milestone in the second quarter as it more than recouped output lost during the Covid-induced recession. On the heels of a 6.5 percent increase, real GDP rose to $19.4 trillion in the April-June period, topping the $19.2 trillion that prevailed in the final quarter before the onset of the pandemic. The six-quarter turnaround is not particularly rapid compared to past recovery cycles - it’s about equal to the average time it took for past nine recoveries to regain their prerecession peaks - but it is impressive considering the depths the economy had to climb out of. The pandemic recession may have been the shortest on record, but it was also the harshest, sending output - and employment - plunging by the greatest amount since the Great Depression.
The economy is coming off the second strongest growth rate since 1978 in the just completed quarter, and the powerful post-pandemic reopening boost is still unfolding. But the rapid reopening has brought with it a host of problems, highlighting the fact that the road to normalcy is unlikely to be smooth. Thanks to labor shortages and supply-chain disruptions, the nation’s output is not keeping up with demand, resulting in consumer prices that are rising far more quickly than expected. Over the last four months, the consumer price index has increased at the fastest annual rate since the early 1980s.
With the Delta variant generating ever-more uncertainty into the growth outlook investors may be poised to take some risk off the table. Indeed, that appeared to be the case this week, as stock prices fell for five consecutive days, posting its first weekly decline in three weeks. What’s more, the underlying reasons for a more risk-averse mindset remains firmly in place..
The Jackson Hole symposium, featuring the highly anticipated address by Fed Chairman Powell, was the main event in the financial markets this week, but rapidly unfolding geopolitical and health developments stole the headlines and may ultimately render Powell’s message moot. That said, the markets were braced for any indication as to when, and under what circumstance, would the Fed begin to taper its asset purchases, setting in motion the unwinding of emergency support for the economy in effect for the past 18 months. To no surprise, the chairman was noncommittal about the timing but strongly suggested that tapering could begin by the end of the year.
The calendar says that we are smack in the middle of the “dog days of August”, but there’s nothing languid about the barrage of conflicting influences buffeting the economic landscape. To be sure, the swirl of events for which we have hard data primarily took place in July. But the catalyst for much of the turmoil – the upsurge in Covid case counts, led by the Delta variant – just about assures that things got even more complex this month. In keeping with climactic metaphors, it’s fair to say that Delta is throwing a chill on the overheating fears so rampant a few weeks ago.
Has the tapering begun? No, the question is not about monetary policy, but whether the blistering inflation rate seen in recent months is starting to ease up. Of course, the answer to that question feeds directly into the tapering issue that is at the forefront of the Federal Reserve’s current deliberations. Unfortunately, recent events do not make the task any easier. Both the hawks advocating an early tapering of asset purchases and the doves arguing for more patience can draw support from the latest batch of data, as well as unfolding developments.
Amazon is the latest among several high-profile firms to push back return-to-office plans for its corporate workers, highlighting the disruptive impact the surge in Covid cases is having on the labor market. But while the spread of the Delta variant is creating turmoil in the job market, it has yet to slow the growth in corporate hiring. That was clearly evident in the latest jobs report released on Friday. If anything, the reopening of the economy continues to generate a huge demand for labor, and many companies still cannot find enough workers to fill positions. Among small businesses, for example, a record 49 percent of owners have at least one unfilled job opening, according to the National Federation of Independent Businesses.
The Commerce Department closed the books on the second quarter, releasing its first estimate of GDP for the period as well as the all-important report on household income and spending for June. As expected, the economy turned in a robust performance, powered by a muscular pace of consumer and business outlays. Since the results were generally in line with expectations and reflected past events, they had little impact on the financial markets. Instead, investors turned their attention to monetary and fiscal policy developments and, more importantly, to the disturbing upsurge in Covid cases.
While there was no market-moving data released this week, investors nonetheless experienced one of the more turbulent rides seen this year. The roller coaster moves in both stocks and bonds reflect the dizzying array of uncertainties that overhangs the economic landscape. Topping the list – and casting a shadow over the other influences – is the volatile path of the health crisis. With vaccination rates stalling and the Delta variant gaining a foothold in the nation, what seemed like a successful campaign to extinguish Covid-19 has suddenly run into trouble. More than anything, news of rising infections and the growth-dampening prospect this implies sent stock prices and bond yields tumbling early this week, with the 10-year Treasury yield hitting its lowest point since February.
Definition of transitory
1: of brief duration: TEMPORARY
//the transitory nature of earthly joy
2: tending to pass away: not persistent
Ok, so if even Merriam-Webster can’t be more specific regarding the duration of “transitory,” isn’t it time to cut the Fed chairman some slack? And what’s with the “earthly joy” reference? In the scheme of things, it suggests the Fed chief’s material pleasures last only as long as inflation remains well-behaved. In all fairness, no one really knows when an event morphs from transitory to permanent. To inflation hawks, the past several months have seemed almost like a lifetime, and only swift corrective measures would prevent inflation from becoming permanently embedded in the economic landscape. To inflation doves, the recent period is merely a hiccup following two decades of low inflation that will soon be stifled when pandemic-related forces run their course.
The economy delivered a red-hot performance in the just completed second quarter, but investors are not feeling the sizzle. With a nod to Peggy Lee, market participants are asking, “is that all there is?” Such a question would have been unthinkable a short while ago when the economy seemed to be riding a clear path towards a hot summer, resulting in overheated conditions that would stoke an undesirable inflation outbreak. Worse, the Federal Reserve, the nation’s primary defender of stable prices, appeared to be looking the other way, willing to accept higher inflation for the sake of more employment, particularly among marginal, less educated and low-skilled workers who were severely impacted by the pandemic.
All eyes were on the monthly jobs report this week, the signature release that best describes the health of the economy and the pace at which it is moving towards maximum employment, one of two ultimate objectives of the Federal Reserve – the other being stable inflation around two percent. While the report contains some murky details, there is little question that things are moving in the right direction. At the same time, it provides no compelling reason for the Fed to alter its policy intentions, at least over the next few months. The economy is healing at a steady pace, but the wounds are still visible and workers have a ways to go before recovering the job losses during the pandemic.