The United States Reassumes Its Position as the Engine of the World Economy
Earlier this week, we discussed our view on inflation rates in the United States. Today we'll discuss our outlook for growth. This is important because there are only three primary factors that determine performance for investment portfolios: inflation, growth, and regime stability.
The Three Primary Factors
Inflation, as we've discussed before, is simply the change in the general price level. Prices go up and down depending upon supply and demand. These prices are measured in money, and so the supply of money directly impacts the direction and magnitude of changes in the general price level. The United States and other governments of the world have recently increased the supply of money to counteract the adverse impacts of the COVID-19 pandemic. This has necessarily resulted in an increase in the general price level, some of which we are witnessing now in higher month-over-month (and certainly year-over-year) increases in prices for goods and services.
In addition to inflation, growth is another primary factor. Growth, insofar as it needs to be defined, is the increase in intrinsic value of goods and services. It is defined in contradistinction to inflation, as it pertains to the increase in the amount of goods and services an economy produces, rather than the units in which those items are measured. A further clarification is necessary to distinguish growth from real growth, which is nominal growth less the change in inflation. Imagine inflation as yardstick that expands and shrinks, and growth as the vertical increase in stature of a child who ages from five to ten.
Today we'll be focusing on growth, but to round out our discussion, regime stability refers to the persistence of the political accommodation within which economic actors transact. Developed countries typically have a high degree of regime stability, whereas emerging and frontier ones typically have less. It is the pediment upon which the height scale rests, and on which the child stands. It can be firm or precarious, subject to sudden violent change or enduring placidity.
Growth Continues Apace, Albeit Haltingly
Recent releases of economic data for the United States have been positive, broadly painting a picture of an economy in expansion. First, initial claims for unemployment fell this past month, signaling continued improvement in the labor market.
The unemployment rate ticked slightly higher from 5.8% to 5.9%, indicating that the economy is not far off from full employment, generally considered to be 4%-5%. Prior to the forced shutdown of the American economy, the jobless rate stood at a multi-decadal low of 3.5%, a continuation of the downward trend which began in late 2009.
The United States economy relies to a large extent upon consumer spending, about 70% of its economic activity. Advance Monthly Sales for Retail and Food Services surprised analysts by registering an increase of .6% over the prior month. When removing the effects caused by the fall in automobile sales, which are due primarily to supply constraints and supply chain disruption, the expansion in retail sales was a more impressive 1.3%.
And while consumers felt comfortable enough to spend on goods and services in June, consumer sentiment--a measure of consumer's confidence in their financial wellbeing and economic prospects--unexpectedly fell. These two differing readings are surprising to say the least, as they generally coincide. It could be media fascination with the inflation narrative, the continued spread of the delta variant of the coronavirus, or else the lived experience of higher prices for food and fuel, have contributed to deflate a bit the animal spirits that drive consumption. The decline of 5.5%, although not large, is significant enough to suggest that conflicting currents are swirling beneath the surface, and will bear further scrutiny as more data become available over the coming weeks.
Importantly, these indicators occur against a backdrop of a lack of housing in the United States, which we will revisit in the coming week. For those of us who believe that the economy is tightly coupled with supply and demand for its largest single household asset--housing--we'll examine the current state of the market for housing, both buying and renting. It is our opinion that increasing consumer demand, moderating inflation, and a housing construction supercycle, as well as the potential replacement of the country's gasoline-powered automobile fleet, favor continued and sustained real productivity growth. In the meantime, we wish you well and a good weekend.