The Independent Market Observer

Monday Update: Service Sector Expands in June

Posted by Sam Millette

This entry was posted on Jul 12, 2021 12:20:30 PM

and tagged In the News

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In his Monday Update, Commonwealth’s Sam Millette explains the latest data on service sector confidence, industrial production, inflation, and more. Last week was relatively quiet in terms of economic updates, with only three major data releases. In June, service sector confidence remained in healthy expansionary territory despite a slightly larger-than-expected pullback for the ISM Services index during the month. This week will be packed with updates, with June’s inflation and industrial production reports and the first look at consumer sentiment in July serving as highlights.

Last Week’s News

Tuesday saw the release of the ISM Services index for June. This widely followed measure of service sector confidence declined by more than expected, dropping from 64 in May to 60.1 in June. The forecasts were for a more modest drop to 63.5. This is a diffusion index, where values above 50 indicate expansion, so this report signals continued growth for the service sector despite the decline for the index. Service sector confidence remains well above the pre-pandemic high of 56.7 we saw in February 2020. This fact highlights the positive impact of the ongoing economic recovery for service sector businesses. Service sector confidence was supported in June by high levels of consumer demand, especially in previously hard-hit sectors such as in-restaurant dining, hotels, and air travel. Material and labor shortages continued to serve as headwinds for service sector growth, however. Still, the expansion for the service sector was an encouraging sign that businesses are operating successfully despite these headwinds.

On Wednesday, the FOMC meeting minutes from the Fed’s recent June meeting were released. The Fed previously cut interest rates to virtually zero last March in response to the pandemic, and there were no changes to the federal funds rate at this meeting, as expected. The minutes showed that Fed members remained committed to providing supportive monetary policy. The central bank continues to believe that substantial further progress toward the FOMC’s goals is necessary before tightening its policy. During the meeting, the members discussed potentially tapering asset purchases, which are currently $120 billion per month. But no changes were made to the purchase program, and the minutes made it clear that the Fed intends on providing notice of any tapering plans well in advance. All in all, these minutes were largely seen as dovish. They indicated that the Fed remains committed to supportive monetary policy for the immediate future, despite the recent rise in inflationary pressure.

We finished the week with Thursday’s release of the initial jobless claims report for the week ending July 3. The report showed that 373,000 initial claims were filed during the week. This result was slightly higher than the upwardly revised 371,000 initial claims filed the week before and above economist forecasts for 350,000 claims. Despite the modest increase during the week, however, the pace of initial claims remains near the pandemic-era low, signaling continued progress for the labor market recovery. We’ve seen a noted improvement in the pace of initial claims compared with data from earlier in the year. This trend has been driven in large part by improving public health and the nationwide reopening efforts. Looking forward, economists expect to see further improvements for the labor market throughout the rest of the year. Pent-up consumer demand should support faster hiring. Additionally, the expiration of enhanced federal unemployment benefits may also drive additional job gains. Ultimately, the pace of the economic recovery will likely depend in large part on the pace of the labor market recovery. Accordingly, this report will continue to be widely monitored.

What to Look Forward To

On Tuesday, the Consumer Price Index for June is set to be released. Economists have forecasted a 0.5 percent and a 4.9 percent increase in consumer prices during the month and year-over-year, respectively. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to rise by 0.4 percent during the month and 4 percent year-over-year. Part of the anticipated year-over-year growth for both headline and core consumer prices can be attributed to base-effect comparisons with data from last summer, when initial lockdowns led to deflationary pressure. But, in addition, consumer prices have seen upward pressure over the past few months. High levels of consumer demand, low business inventories, and tangled supply chains have contributed to the rising prices. Despite the growing inflationary pressure, Fed members have continued to indicate they view inflation as largely transitory, which supports the Fed’s supportive monetary policy.

Wednesday will see the release of the Producer Price Index for June. Producer prices are expected to increase by 0.5 percent during the month, following a 0.8 percent increase in May. On a year-over-year basis, producer prices are slated to rise by 6.8 percent in June, up modestly from May’s 6.6 percent year-over-year rate. The forecasts for core producer prices, which strip out the impact of volatile food and energy prices, are for a increase of 0.4 percent in June, following a 0.7 percent gain in May. On a year-over-year basis, core producer prices are expected to increase by 5.1 percent. As was the case with consumer inflation, the anticipated rise for year-over-year producer prices can be attributed to base-effect comparisons and rising price pressure. Rising material and labor costs have been driving these trends. As a result, we’re starting to see producers pass on some of these rising prices to customers, which is reflected in the forecasts for June.

On Thursday, the initial jobless claims report for the week ending July 10 will be released. Economists expect to see 350,000 initial claims filed during the week, in an improvement compared with the 373,000 initial claims filed the week before. If estimates prove accurate, this report would represent the fewest number of initial unemployment claims in a week since the start of the pandemic. Still, although we’ve made notable progress in reducing initial claims this year, they remain relatively high on a historical basis. In addition, the pace of improvement has slowed over the past few weeks. So, despite the support high demand and successful nationwide reopening efforts should provide to the labor market in the months ahead, the pace and path of the recovery is uncertain. Given this uncertainty, economists will continue to monitor this weekly release to gauge the status of the labor market recovery.

Also on Thursday, the June industrial production report is set to be released. Economists expect to see production increase by 0.6 percent during the month, following a 0.8 percent rise in May. If estimates hold, this report would mark four straight months with increased production following the weather-related slump in February. The solid growth we’ve seen this year has been driven in large part by high levels of pent-up consumer demand and low business inventories. These trends have also contributed to a rebound in manufacturing output, which is slated to increase by 0.3 percent in June, following a 0.9 increase in May. Still, despite the high demand, rising material costs, shipping delays, and supply shortages are headwinds for faster growth for manufacturing and industrial production. Nonetheless, given the high consumer demand and continued global recovery, economists expect to see industrial production continue to expand throughout the year. The total level of industrial production is expected to reach pre-pandemic levels in upcoming months.

On Friday, the June retail sales report is set to be released. Retail sales are expected to fall by 0.6 percent during the month, following a 1.3 percent decline in May. Recently, headline retail sales have been pressured by declining auto sales, as the semiconductor shortage has led to lower inventories and rising prices for cars. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to increase by 0.2 percent in June, following a 0.8 percent drop in May. The anticipated decline in headline retail sales would be a modest disappointment. Nonetheless, a return to core retail sales growth in June would be a sign that consumers remain willing and able to spend, despite the previous rebound past pre-pandemic levels for overall sales. Given the high consumer confidence we’ve seen, as well as the continued economic recovery, further retail sales growth is expected.

Speaking of consumer confidence, we’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for July. This widely followed measure of consumer confidence is expected to increase from 85.5 in June to 86.5 in July. If estimates hold, this release would mark two consecutive months with improving confidence. It would also bring the index near the pandemic-era high of 88.3 we saw in April. Historically, high consumer confidence has supported consumer spending growth, so any improvement for the index would be seen as a positive development for the overall economy. June’s release showed that consumers remained worried about rising inflationary pressure in June, which held back overall confidence during the month. While the headline number will garner most of the attention regarding this release, the underlying data that looks into consumer inflation expectations and big ticket spending plans will also be worth monitoring. They will provide a glimpse into consumer spending plans in the upcoming months.

That’s it for this week—thanks for reading!

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