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Weekly Economic & Financial Commentary: Powell Keeps an Open Mind to Tapering

Summary

United States: Output Continues to Ramp Up as COVID Surges Higher

  • Output continues to ramp up across the U.S., even as the resurgence in COVID cases is leading to some pullback in consumer engagement. The need to rebuild inventories should keep production rising, even if consumer spending moderates a bit further. Housing is already beginning to move into better balance, with rising inventories of existing homes beginning to moderate soaring home prices. Inventories of new homes have also increased, although most of the gain is in developed lots and homes under construction.
  • Next week: Construction Spending (Wed), ISM Manufacturing (Wed), Employment (Fri)

International: Eurozone Economy Still Showing Solid Momentum

  • After the Eurozone economy enjoyed solid growth in Q2, August PMI data indicate that momentum has carried into Q3. The services PMI was virtually unchanged at 59.7, still a historically elevated level, while the manufacturing PMI fell to 61.5. We expect Eurozone Q3 GDP to rise 2.5% quarter-over-quarter, even stronger than the Q2 gain.
  • Next week: China PMIs (Tues), Eurozone CPI (Tues), Canada GDP (Tues)

Interest Rate Watch: Powell Keeps an Open Mind to Tapering

  • It does not seem that the Fed chair has made up his mind yet about when to taper, and he will continue to watch incoming data. The labor market report for August, which is slated for release on Friday, September 3, will be an important marker for the beginning of tapering.

Credit Market Insights: Red-Hot CLO Market

  • This past year has been a banner year for fundraising and deal activity, with demand booming for collateralized loan obligations (CLOs). The low interest rate environment has supported record-breaking deal flow as firms have been able to borrow cheaply coming out of the pandemic.

Topic of the Week: The Economics of College Football: Season III

  • We are again publishing our series on college football this year. Each week of the season, we will be highlighting a key matchup, covering the history behind each university’s football program, local economy and school community, and of course, giving predictions about the upcoming game.

U.S. Review

Moving Back into Balance

Shortages, supply-chain bottlenecks and higher prices have been a hallmark of this economic recovery, with some of the most notable shortages and price hikes occurring in housing and motor vehicles. This week’s economic data provide some hints that the economy is moving toward some sense of better balance, with the rise in COVID infections causing consumers to tap the brakes and allow production to catch up with consumption. Many forecasters have slashed their estimates for third quarter economic growth due to the recent slide in consumer sentiment and some moderation in the high-frequency data that focus on consumer spending and economic engagement. Real GDP measures the production of goods and services, however, which appears to be less affected by the resurgence in COVID infections. The revised Q2 GDP data also show that inventories fell even more than previously reported, which likely sets up an even larger swing back in Q3.

Consumers took a breather in July, with today’s personal income and spending data showing a 0.1% drop in real personal consumption outlays for the month. Real outlays for durable goods fell 2.6%. Spending on motor vehicles and parts fell 3.7%, largely due to the lack of cars and SUVs available for sale. Dealer lots are nearly empty, with several dealerships down to just a handful of cars on their lots. New cars are also selling at a premium. Consumers certainly have the ability to continue spending. Personal income rose 1.1% in July, wit