by Blaine Dickason
Senior Vice President,
Trading and Fixed Income Portfolio Management

“Are we there yet?” is a familiar back seat refrain that often occurs during long, summertime road trips involving bored children and their beleaguered parents. As we transition through our second COVID-affected summer, this frustration is also felt by investors and other market participants who long for some return to “normal.” Surely, we must all be there by now, right?

Some good news includes this week’s U.S. second quarter GDP report which showed the economy growing at a 6.5% annual rate. This is a historically strong report, attributable to the resurgent and reopening economy. Despite this apparent strength, the report was notably below expectations for over 8% growth. The ‘miss’ was due to inventory drawdowns as strong consumer demand continues to overwhelm supply chains and the current productive capacity of the economy. Also notable in this week’s report is the U.S. economy finally eclipsed its pre-pandemic high as measured in real dollars. Relative to the initial question posed: yes, we are nearly “there,” and we can view the entire pandemic hit to real GDP in our collective rearview mirrors.

This morning’s U.S. personal income and spending reports for June were stronger than anticipated and maintained the steady momentum generated in prior months. The personal savings rate declined slightly but remained well above historical averages. American households in aggregate continue to have strong balance sheets that should continue to fuel consumption and the ongoing recovery. The chart below shows personal income less government transfer payments and clearly we are well ahead of pre-pandemic levels.

The labor market has been another story. The U.S. economy is still down nearly seven million jobs versus its pre-pandemic peak. The most recently reported unemployment rate of 5.9% is well above the low of 3.5% reported in February 2020. If the estimates for a gain of nearly one million jobs in next week’s July jobs report are accurate, it will be the second strong month of gains in a row and contribute meaningfully towards the Federal Reserve’s goal of a complete jobs recovery.

The Federal Open Market Committee met this past week and noted they had not yet cleared the self-imposed “substantial further progress” hurdle they are targeting before beginning to withdraw stimulus measures. Fed Chair Jay Powell knows that our central bank’s challenge over the coming months is not only to get this policy and timing right, but to get the communication right as well. The Fed’s goal is to execute this normalization of monetary policy all without spooking markets or setting off another “Taper Tantrum” similar to 2013 when interest rates spiked, and financial conditions tightened abruptly. We wish them luck.

September may be the most significant inflection point in the trajectory of the labor market. A return to full time and in-person education will ease the burden for many caregivers seeking a return to work. The expiration of enhanced unemployment benefits in September will reduce the incentive to not seek new employment. Gradually increasing vaccination rates should incrementally build confidence towards interacting safely. It may not feel like we are “there” yet, but the economy continues to be at least headed in the right direction.

Week in Review and Takeaways

The S&P CoreLogic Case-Shiller 20-City Composite Home Price Index reported this week was +17.0% year-over-year. The Pacific Northwest was represented by Seattle in fourth place at +23.4% year-over-year and Portland in seventh place at +17.5% year-over-year
Of the 296 companies in the S&P 500 that have reported earnings to date for second quarter 2021, 88.5% have reported earnings above analyst estimates

Disclosures