Last week saw a number of important economic data releases. Highlights included better-than-expected results for service sector confidence and hiring in July. This will be another busy week for updates, with a focus on July’s Consumer Price Index and Producer Price Index reports, as well as a first look at consumer confidence in August.
Last Week’s News
On Monday, the ISM Manufacturing index for July was released. This widely monitored gauge of manufacturer confidence declined modestly, falling from 60.6 in June to 59.5 in July against forecasts for an increase to 61. As this is a diffusion index, where values above 50 indicate expansion, the result demonstrates continued strength in manufacturer production despite the miss against expectations. Supply constraints remained a headwind for production growth in July, as order backlogs increased. Rising material costs, tangled supply chains, and labor shortages have negatively affected manufacturers over the past few months. Nonetheless, throughout the year, high levels of consumer demand have supported increased output. In addition, the July report showed a welcome pickup in manufacturing employment, demonstrating that manufacturers succeeded in finding workers to address the high levels of consumer demand. Overall, this report was relatively encouraging, signaling continued growth despite the headwinds facing the manufacturing sector.
Wednesday saw the release of the ISM Services index for July. Service sector confidence increased by more than expected, rising from 60.1 in June to 64.1 in July against calls for a more modest increase to 60.5. This result brought the index to its highest level since records started in 1997. This is another diffusion index, where values above 50 indicate expansion, so this strong result indicates that service sector businesses have continued to grow despite headwinds created by rising prices and medical risks. During the month, service sector confidence was supported by high consumer demand for services such as dining out and travel. The service sector accounts for the majority of economic activity in the country, so this report is a good signal for the pace of the overall economic recovery. Looking forward, high prices and supply chain constraints may serve as a headwind for faster service sector expansion. As long as consumer demand remains strong, however, the service sector should see continued growth.
On Thursday, the June international trade report was released. The trade deficit widened by more than expected during the month, rising from $71 billion in May to $75.7 billion in June. Calls were for a more modest increase to $74.2 billion. The June result brought the monthly trade deficit to its widest level on record. The widening was driven by a 2.1 percent increase in imports during the month, due to businesses rushing to import goods to meet rising consumer demand. Exports increased by 0.6 percent during the month, but this was not enough to offset the surge in imports. Due to logistical bottlenecks, domestic producers have struggled to increase production to levels that can meet the current surge in demand. Accordingly, more import growth is expected in the months ahead. Net trade served as a headwind for overall economic growth in the second quarter, but continued global economic recovery should support export growth throughout the rest of the year.
Thursday also saw the release of the initial jobless claims report for the week ending July 31. There were 385,000 initial unemployment claims filed during the week. This result is down from the downwardly revised 399,000 initial claims filed the week before, but slightly higher than economist estimates for 383,000 claims. Marking two consecutive weeks with declining initial claims, the July 31 report signaled a continued recovery for the labor market. We’ve made solid progress in getting the number of initial jobless claims down throughout the course of the year, driven by improvements on the public health front and the associated nationwide reopening efforts. With that said, the pace of layoffs has remained rangebound since the start of June, as rising medical risks from the Delta variant have negatively affected the labor market recovery. While economists expect to see further declines in initial claims throughout the rest of the year, the rising medical risks may serve as a headwind for significant short-term improvements.
We finished the week with Friday’s release of the July employment report. The report showed that 943,000 jobs were added during the month, in an increase from the upwardly revised 938,000 jobs added in June and above economist estimates for 870,000 additional jobs. This result marks the best month for job growth since last August. It also signals that the labor market recovery continued to pick up steam in July despite rising medical risks. Nationwide reopening efforts have spurred accelerated job growth over the past few months, as businesses have scrambled to hire enough workers to meet high levels of pent-up consumer demand. The underlying data was strong as well, highlighted by the unemployment rate falling from 5.9 percent in June to 5.4 percent in July. Calls were for a more modest decline to 5.7 percent. Average hourly earnings increased by 4 percent on a year-over-year basis, slightly higher than the 3.9 percent increase economists expected. Overall, this encouraging report showed the economic recovery continuing unabated in July despite the headwinds created by rising prices and medical risks.
What to Look Forward To
On Wednesday, the Consumer Price Index for July is set to be released. Consumer prices are expected to increase by 0.5 percent during the month and 5.3 percent on a year-over-year basis. If estimates prove accurate, the July result would represent a modest slowdown compared with data from the previous month. In June, consumer prices went up by 0.9 percent during the month and 5.4 percent on a year-over-year basis. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to increase by 0.4 percent in July and 4.3 percent year-over-year. Over the past few months, consumer prices have seen upward pressure due to high levels of pent-up consumer demand, low levels of business inventories, and tangled supply chains. Still, despite the inflationary pressure, the Fed continues to view the price increases as a transitory result of the ongoing reopening efforts, rather than a major risk.
On Thursday, the Producer Price Index for July is set to be released. Producer prices are expected to increase by 0.6 percent during the month, in a step down from the 1 percent increase in producer prices in June. Headline producer prices are expected to increase by 7.1 percent on a year-over-year basis, down from the 7.3 percent annual increase in June. Core producer prices, which strip out the impact of food and energy costs, are expected to increase by 0.5 percent during the month and 5.6 percent year- over-year. As was the case with consumer prices, producer prices have seen notable upward pressure over the past few months as reopening efforts have accelerated. Rising material and labor costs have also contributed to the increase in producer prices.
Thursday will also see the release of the initial jobless claims report for the week ending August 7. Economists expect to see 375,000 initial claims filed during the week, in an improvement from the 385,000 initial claims filed the week before. If estimates prove accurate, this report would mark three consecutive weeks with declining initial claims. In addition, it would bring the level of initial claims near the post-pandemic low of 368,000 we saw in the first week of July. The July employment report showed that the labor market recovery accelerated during the month. A continued decline in initial claims to start August would bode well for further improvements to overall hiring in August. Given the importance of the labor market to the overall economic recovery, this weekly release will continue to be widely monitored.
We’ll finish the week with Friday’s release of the preliminary estimate for the University of Michigan consumer sentiment survey for August. This widely followed gauge of consumer confidence is expected to decline from 81.2 in July to 80.8 to start August. The anticipated result would follow a larger-than-expected decline from 85.5 in June to 81.2 in July. The survey’s decline in July was primarily driven by increased consumer concerns over rising medical risks and consumer prices. Despite the drop in confidence in July and forecasts for another decline in August, confidence is expected to remain well above the lockdown-induced lows recorded last spring. This is an encouraging sign that consumer confidence is showing more resilience to the current wave of infections compared with earlier in the pandemic. Historically higher levels of consumer confidence have driven faster consumer spending growth. Accordingly, the anticipated decline in confidence in August will be well worth monitoring given the importance of consumer spending to the overall economy.
That’s it for this week—thanks for reading!