by Louis Navellier
July 7, 2021
The Atlanta Fed bases its “GDPNow” model on a market basket of the actual economic components that make up the final GDP number. During much of last quarter, their “GDPNow” model indicated an annual rate over 10% for the second quarter, but last Friday they downgraded their estimate to the lowest number we’ve seen since the quarter began – an annual pace of just 7.8%, down from +8.6% on July 2.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Frankly, I was surprised by this downward revision, since the Conference Board on Tuesday announced that Consumer Confidence surged to 127.3 in June, up from a revised 120 in May. Consumer confidence is now at its highest level since March 2020 – before the pandemic adversely impacted consumer sentiment. Especially impressive was the present situation component, which soared to 157.7 in June, up from 148.7 in May. Naturally, this bodes well for continued strong consumer spending and GDP growth.
Basically, we haven’t seen U.S. GDP above 7.2% (1984’s rate) for a full year since 1951, so this could be a history-making recovery year after the short and sharp pandemic-caused recession of 2020.
One indication of the rapid recovery is the continuing double-digit annual-pace rise in home prices. The National Home Price Index produced by S&P CoreLogic Case-Shiller accelerated to a 14.6% annual growth rate in April, up from a 13.3% annual rate in March – the fastest appreciation rate in over 30 years. Phoenix, San Diego, and Seattle are now the fastest appreciating metro areas, with annual appreciation rates of 22.3%, 21.6%, and 20.2%, respectively. The National Association of Realtors reported that median home prices through May have now risen by 23.6% in the past year to $350,300, up from $283,500 a year ago. Any way you analyze it, inflation is alive and well in the housing market.
Good News Returns to the Labor Market
The Labor Department reported on Thursday that weekly unemployment claims declined to 364,000 in the latest week, down from an upwardly revised 415,000 in the previous week. Continuing unemployment claims rose slightly in the latest week to 3.469 million (vs. an upwardly revised 3.413 million in the latest week). I should add that unemployment claims tend to be somewhat distorted in late June and early July, since the automotive industry likes to “retool” their manufacturing plants for the new 2022 model year at that time, so there may be some “noise” in the unemployment data for a couple more weeks.
Then on Friday, the Labor Department announced that 850,000 new payroll jobs were added in June, which was substantially higher than the economists’ consensus expectation of 720,000. The May payroll report was also revised up to 583,000 jobs from the 559,000 first estimated. Despite the strongest payroll growth since last August, the unemployment rate rose to 5.9% in June, up from 5.8% in May as more people are looking for work. This was a big surprise, since economists expected a decline to a 5.6% rate.
The labor force participation rate was unchanged at a depressed 61.6%, which is 2% below where it was pre-pandemic. A whopping 6.8 million jobs are gone since the pandemic began! However, average hourly earnings rose by 10 cents, or 0.3%, to $30.40 per hour in June and have risen 3.6% in the past 12 months.
Due to a rising unemployment rate and the fact that 6.8 million jobs have disappeared in the pandemic, the Fed now has more room to be accommodative, since unemployment is one of its two major mandates.
I should add that ADP reported on Wednesday that 692,000 new private payroll jobs were created in June, which was significantly higher than economists’ consensus estimate of 600,000, while May’s payroll gain was revised lower to 886,000 – so that’s 1,578,000 new jobs in two months. The ADP report was positive. (Here are my comments about jobs and jobless claims on Fox Business last Wednesday.)
I also mentioned on Fox Business News that robust demand for corporate bond debt may be pushing Treasury bond yields lower. Our friends at Bespoke Investment Group on Wednesday documented that junk bond yields just fell below the Consumer Price Index (CPI) for the first time in history, so now both junk bonds and Treasury bonds have negative yields relative to inflation.
What a strange new world we are living in! I am becoming increasingly convinced that Treasury bond yields will be following their European peers and eventually offer absolute negative yields in our lifetime!
Naturally, low mortgage rates stimulate housing sales. The National Association of Realtors announced Wednesday that pending home sales surged 8% in May to their highest level since 2005. This was a big surprise, since economists were expecting pending home sales to decline 0.8% in May. In the past 12 months, pending home sales are up 13.1% and homes for sale are at an ultra-tight 2.5-month supply.
Strong housing demand is good for the manufacturing industry. The Institute of Supply Management (ISM) said last Thursday that its manufacturing index slipped to 60.6 in June, down from a robust 61.2 in May. Since any reading over 50 signals manufacturing expansion, the June reading was still very positive. Especially encouraging is the production component, which rose to 60.8, up from 58.5 in May.
The primary reason that the ISM manufacturing index declined a bit in June was that the backlog of orders declined to 64.5, down from an incredibly strong 70.6 in May. There is still a significant order backlog, which bodes well for continued strong manufacturing activity in the upcoming months.
This is yet another sign that third-quarter GDP may follow the second quarter’s sizzling growth rate.