Despite significant economic news this week, investors saw little reason to change their outlook for economic growth, remaining increasingly concerned over the effect of the pandemic on consumer behavior.
Retail sales data–considered a key indicator of growth, with consumer spending accounting for over two-thirds of U.S. economic activity–show that in July, sales fell 1.1% from the previous month. As the consensus forecast predicted a decline of just 0.3%, this rise suggests that the impact of Covid-19 may be larger than expected. Still, retail sales hold at a rate that is 16% higher than a year ago, which is well above rates seen even before the pandemic.
Consumer trends also show a shift in spending from goods–which are included in retail sales–to services such as travel and entertainment.
And while auto sales appear to be on the decline, lack of demand is not to blame; rather, a chip shortage has compromised the supply of new vehicles.
Given the critical need for homes in many areas of the country, investors watching monthly reports find the latest news mixed. In July, housing stats fell 7% from June yet remain higher than a year ago; by contrast, the number of building permits increased 3%, which is a promising indicator of future activity. Rising prices as well as shortages of land, materials, and skilled labor continue to create obstacles to an efficient pace of construction. Mortgage rates remained fairly flat this week, as well.
The recent Federal Reserve meeting contained no significant surprises. According to minutes released Wednesday, the Fed’s inflation goals had been achieved, and officials were “close to being satisfied” with their employment goals; while reinforcing the prediction that elevated levels of inflation will be mostly transitory, they also noted risks that remain to the upside. Investors now expect the Fed to announce at the September meeting ta plan to begin to taper bond purchases during the fourth quarter, although the effects of the pandemic on future economic activity continues to be the biggest wildcard.
Existing Home Sales will be released Monday, and New Home Sales is expected on Tuesday. The core PCE price index–the inflation indicator favored by the Fed–and Personal Income will come out on Friday.
Looking ahead, investors will continue to monitor national and international Covid case numbers closely and will watch for signs regarding the timing of changes in monetary policy.
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