This Week’s Economic Update, August 30, 2021

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The last week of unofficial Summer begins.  For some school begins this week, for others it will be right after Labor Day.  It used to be a wonderful time of year for our parents who gladly watched our downtrodden faces go out the door and to the school bus, likely toasting their renewed freedom of not having us under foot or wondering what we were up to while they were at work.  There was always a part of me that secretly thought the smiles on their faces as we trudged down the street was evidence of a self-satisfaction that they were not the only ones who had their freedom curtailed by life’s obligations. 

Like many of you, I will be taking next Monday off to celebrate Labor Day.  My next update will be on Monday September 13.

Federal Reserve Chairman Powell shared his comments on the state of the economy on Friday.  The anticipation was he would provide insight into the moves the Federal Reserve will be making based on the state of the economy.  As with many economists, even though Chairman Powell does not have an Economic degree, he was using both hands to explain whether or not the taper will continue.  On the one hand we are seeing improved economic indicators that things are getting better.  On the other hand, we are still too far away to expect any rate increases in the near future. 

The Federal Reserve use of Monetary Policy to adjust the speed of the economy had entailed increasing or decreasing the money supply through banks as well as adjusting short term interest rates in the past.  With quantitative easing the Fed found new ways to impact not just short term rates but long term rates by purchasing both public bonds and private bonds.  The more bonds they purchase the lower the interest rates, the more stimulus would be produced in the economy.  While the Federal Reserve Chairman indicated that they may start a slight taper late this year, it would not be enough to push market interest rates higher.  The level of future economic activity would likely not support a interest rate increase until 2023.  While the idea of lower rates pushed the market up, there is a coming dark side.

By holding off on moderating the economy with higher rates, the government risks turning what is currently expected to be a transitory inflation period into one that becomes more systemic, possibly returning us to the 1970’s experience.  This is compounded by the fiscal policy stimulus of Congress possibly passing two of the largest spending bills in our history.  By having a double barrel stimulus shot coming at us with low interest rates and high spending, we could expect a long period of stagflation.  Like the 70’s, we could have lethargic economic growth along with expansive inflation and high interest rates. 

Of course, on the other hand, our economy is already showing some early signs of softening.  The August Manufacturing reports from the Richmond Fed and Kansas Fed are showing slower growth.  Durable goods orders for July were down.  Consumer confidence is off the peak of June and the jobs reports, new positions, as well as jobless claims, have flattened and are not improving.  The Fall is typically a time of slower spending for most families after school starts.  If Congress is unable to pass both spending bills in October and the economy continues to do a soft landing, maybe the Fed’s moves will prove out as correct, time will tell.

The August ISM report on manufacturing will be released on Wednesday.  It is again likely to be flat revealing a slowing of the growth due to the impact of the supply chain issues, consumer pull back and the continued pandemic resurgence.

We will pass the 20th anniversary of 9/11 before my next update.  Please take the time to recognize those that were taken from us on that horrible day, as well as those heroic men and women who served our country in the wars that were brought about by the attack.  One way to recognize the sacrifice is to donate $10 for which you can receive a lapel pin recognizing the 20th anniversary of 9/11.  The pin is very nice, one inch by one inch.  100% of the profits of the pin go toward the Garden Of Reflection, the Official Pennsylvania Memorial. 

You can see the pin and choose to donate at https://www.ihatestevensinger.com/charitable-donations/bigfisharchive-8/911-never-forget-pin/PFC01057.html?lang=en_US

Have a wonderful Labor Day Weekend.

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