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Weekly Economic & Financial Commentary: Less Positive on the U.S. Dollar Outlook


United States: Supply Chain Woes Tug at Growth and Send Prices Higher

  • This week’s light calendar of economic reports showed supply chain disruptions tugging a little at economic growth. New home sales are being held back by record low inventories, as higher construction costs are slowing starts. While a slightly larger drop in consumer confidence and advance durable goods orders garnered headlines, hiring continues to ramp up and business fixed investment advanced solidly, reflecting the urgency of the supply side to catch up with demand.
  • Next week: ISM Manufacturing (Tuesday), ISM Services (Thursday), Employment (Friday)

International: Less Positive on the U.S. Dollar Outlook

  • It was an especially light week on the international economic data front. On Tuesday, however, we released our monthly International Economic Outlook for May. Perhaps the biggest change in our forecast was a somewhat less positive view on the U.S. dollar going forward.
  • Next week: India Q1 GDP (Monday), Canada Q1 GDP (Tuesday), May Eurozone CPI (Tuesday)

Interest Rate Watch: Eye-Popping Inflation Not Widespread, but Driving Inflation Expectations Up

  • Alternative measures of inflation suggest that the April’s leap in inflation is not as widespread as traditional “core” measures indicate. That may boost the Fed’s confidence that the recent strength in inflation is driven by the unique circumstances of restarting activity after a pandemic. However, the hard-to-miss price hikes are lifting inflation expectations, which could lead to inflation becoming more entrenched.

Topic of the Week: The Party’s Just Getting Started for Services

  • Over the past year, we have watched as piled-up excess savings have left consumers flush with cash, and finally, we are on the verge of what we have all been waiting for: the services spending boom. Still 4.7% below its February 2020 level, real services spending fell back during the pandemic, but we expect more than four and a half years of typical spending to occur in the next three quarters.

U.S. ReviewSupply Is Racing to Catch Up with Demand

While first quarter real GDP growth was unrevised at 6.4%, revisions to the underlying components show a widening gap between the resurgence in the demand for goods and services and the supply. Consumer spending rose at an even faster 11.3% annual rate during the first quarter, with the revision showing stronger purchases of big-ticket items such as cars, light trucks and household appliances. Business fixed investment and residential investment were also revised modestly higher, while there was a larger draw down in inventories than first reported and exports were revised lower.

The strength in demand is pulling prices higher. The GDP Price Index rose at a 4.3% pace during the first quarter, and, after excluding food and energy items, core prices rose at a 3.4% annual rate. Both are 0.2 percentage points higher than initially reported. The stronger inflation readings confirm what we have been seeing in much of the survey data, including the NFIB, ISM and Philadelphia Fed surveys, as well as the recent CPI and PPI data. The acceleration in inflation is extending into the current quarter. This morning’s personal income and consumption data showed overall prices rising 0.6% in April and rising 0.7% after excluding food and energy prices. The PCE deflator has risen 3.6% over the past year and core PCE deflator is up 3.1%; both were slightly higher than expected.

Personal income plummeted 13.1% in April, following a 20.9% surge the prior month, which was driven by the distribution of COVID relief checks. Personal income less transfer payments rose a s