August 23, 2021

Economy Slowing, but Growing

By Michael McKeown, CFA, CPA - Chief Investment Officer

Economy Slowing, but Growing

A few concerns about the economy have popped up recently. Supply chain issues, geopolitics, the delta variant, and tapering asset purchases by the Federal Reserve are the major headline risks today.

The strong economic data finally caught up to expectations. The chart below takes economic data across labor, corporation, and households to see if these categories are above or below what economists estimate.  When above zero, it is outperforming. This is where it has been from June 2020 until July 2021.  Lately, data were below expectations in aggregate.

Economic Surprise Index

The Economic Surprise Index ebbs and flows over time as forecasters attempt to calibrate where the economy will be going.

In the big picture, following employment trends is a good indicator. If businesses are confident about the outlook in the economy, hiring will continue.

U.S. Unemployment Rate

Last September, the Federal Reserve said that unemployment could have fallen even further in the last cycle. This means the Fed will likely remain accommodative longer with its interest rate policy. The unemployment rate is at 5.4% currently. There is certainly room for it to fall further at as we reached 3.5% less than two years ago.

The economy remains on track to get back to the trend Gross Domestic Product (GDP) it was on prior to the pandemic and recession. It is already above the levels of the fourth quarter of 2019.

U.S. Nominal and Trend GDP

Markets and the economy usually do not grow in a straight line. It almost looks that way since the recession ended in April 2020. There really have been ebbs and flows in markets and the news flow since that time. With a seasonally weak period for markets ahead, preparing for potential volatility while thinking about the big picture remains important.

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