Economic Trends  July 2021 | Creighton Institute for Economic Inquiry

Greetings! Welcome to our July report covering results from Creighton’s two June economic surveys.    Creighton’s monthly survey of supply managers and procurement experts in nine Mid-America states indicates economic growth is in a range indicating the regional economy is experiencing a very strong economic rebound with significantly elevated inflation. The overall index from Creighton’s monthly survey of bank CEOs in rural areas of 10 states declined to a still strong reading with expanding farmland prices and agriculture equipment sales.

Professor Ernie Goss, PH.D. Creighton University Jack MacAllister Chair in Regional Economics

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From the Desk of Professor Ernie Goss Federal Government & Federal Reserve Supercharge the Economy: When & How Does It End? The U.S. pandemic, beginning in early 2020, ushered in an unmatched flood of federal government overspending and record Federal Reserve (FED) stimulus.  With a compliant Congress, the Trump Administration increased an already bloated federal deficit by $1.22 trillion in one year. Not to be outdone, the Biden Administration expanded the deficit by more than $2.1 trillion in only six months. During this period of time, the FED slashed short term interest rates from 1.75% to 0.0% and purchased $4.3 trillion of federal debt and mortgage-backed securities in order to reduce long-term interest rates to record lows. During the pandemic, these actions increased the money supply by 28.1% and reduced the value of the U.S. dollar by 3.4%. So, what were some of the other outcomes. Inflation and asset bubbles sprouted. The year-over-year consumer price index (CPI) climbed from a pre-pandemic 2.3% to the most recent reading of 5.5%, well above the FED’s pre-pandemic target of 2%. Additionally, the record high spending, low interest rates, and surging inflation have pushed investors into riskier bets. For example, in only 12 months, the Case-Shiller national home price index soared by 14.0%, the S&P stock index rocketed by 38.6%, bitcoin ballooned by 270.1%, and gold increased by 12.6%. Meantime, the overall U.S. economy barely nudged with the inflation-adjusted GDP actually down by 0.9%. So, what’s the problem? The FED cannot sit idly by as inflation rips through the U.S. economy. Higher Inflation and interest rates will degrade U.S. stock prices forcing stocks to a more reasonable price to earnings ratio. Meanwhile, inflation will be supportive of cryptocurrency, gold and silver prices, even as higher interest rates moderate their gains.             Despite the evidence, the FED continues to plead their case that year-over-year CPI growth was just as high in July 2008. However, they fail to also acknowledge the FED’s short-term interest rate was 2.0% in July 2008 compared to today’s 0%. Thus, there is currently much more FED stimulus for even higher inflation. To quote Eisenhower Administration economist Herb Stein, “If something can’t go on forever, it will stop.” So, what will stop or thwart these Goldilocks investment gains? Higher interest rates as early as Q4, 2021, that’s what! Many economists, including yours truly, expect these out-sized gains to be flattened or even reversed when the FED begins raising long-term interest rates (tapering) as early as Q4, 2021. Strap on your financial seat belt-the economic landscape will get bumpy. Number of the Month $1,700 Norwegian women's beach handball team was fined $1,700 (1,500 Euros) for not playing in bikinis in the sport’s Euro 2021 Tournament. Male players are allowed to play in tank tops and shorts, while women are required to wear bikini bottoms “with a close fit and cut on an upward angle.” Goss Eggs  Recent Dumb  Economic Moves The Federal Reserve continues to purchase $40 billion per month in mortgage-backed securities (MBS). These purchases artificially lower mortgage rates, stimulate home buying and have produced the fastest home price increase in 30 years (a bubble). The purchases need to immediately tapered allowing the market to set rates. 3 of 5 Goss eggs.

Mid-America Wholesale Price Soar to Another Record High: Expect 2021 Prices to Expand by Additional 9% June survey highlights: Creighton’s regional Business Conditions Index climbed into a range indicating very strong growth for next three to six months.   The wholesale inflation gauge surged to a record high. On average, supply managers expect prices to advance by another 8.6%, annualized, for the rest of 2021. Nine of 10 supply managers reported supply bottlenecks slowed deliveries to their firms.  The top 2021 economic challenges named by supply managers were supply bottlenecks, price increases and worker shortages. View the complete Mid-America Business Conditions Report. Rural Mainstreet  Index Remains in Solid Growth Territory: Only 30% of Bankers See Inflation June survey results at a glance: Overall index remains at a high level indicating strong growth.  Despite recent solid job gains, U.S. Bureau of Labor Statistics data indicate the Rural Mainstreet nonfarm employment remains 2%, below its pre-COVID-19 level. In three states, Kansas, Missouri and Nebraska, current employment exceeds pre-pandemic levels.  For the first time since 2013, Creighton’s survey has recorded nine straight months of farmland prices above growth neutral. Survey is tracking the best growth in agriculture equipment sales since 2012. Only 30% of bankers expect the current increase in inflation to be transitory. More than three-fourths of the bankers think the Federal Reserve should begin raising interest rates before the end of 2021.      View the complete Rural Mainstreet Report.

The Outlook Professor Goss' Forecast - July 2021: Expect the Federal Reserve (Fed) to begin to taper its purchases of U.S. Treasury Bonds and Mortgage-Backed Securities no later than Q4 2021. The Fed will begin raising short-term interest rates in the second half of 2022. The CPI to continue to expand at an unsustainable (and uncomfortable) pace.  Conference Board - June 2021: “US View: Prospects for Economic Recovery Continue to Strengthen. Strong macroeconomic indicators are bolstering prospects for economic growth in Q1 2021 and beyond. It is critical, however, that US consumers continue to dip into large pools of savings to finance spending, especially on in-person services. Inflationary pressures related to high demand for durable goods may begin to ebb soon but will likely be replaced by service sector-oriented price pressures. While we expect elevated inflation to be transitory, it does pose a risk to the Federal Reserve’s “low for long” monetary policy stance. Finally, while the prospects for the Administrations proposed $2.3 trillion infrastructure and tax plans remain uncertain it does pose an upside risk to economic growth in 2022.”

The Good The U.S. added 850,000 jobs in June, which was much better than expected. Leisure and hospitality was the major beneficiary notching a gain of 343,000 jobs. June’s Purchasing management indices (PMI) of supply managers for both ISM’s national survey and Creighton’s Mid-America were very strong indicating continuing manufacturing expansion.  Home prices in April saw an annual gain of 14.6%, up from a 13.3% increase in March, according to the Case-Shiller National Home Price Index. This is the strongest reading in more than 30 years. The Bad Creighton’s wholesale inflation gauge from the June Mid-America manufacturing supply manager survey soared to another record high.  For the first 5 months of 2021, the nation’s consumer price index has soared by 2.7%. Annualized, that is 6.0% and too high to be ignored by the Federal Reserve. In June, the number of long-term unemployed (those jobless for 27 weeks or more) increased by 233,000 to 4.0 million, following a decline of 431,000 in May. This measure is 2.9 million higher than in February 2020. The Congressional Budget Office projects that the U.S. budget deficit will exceed $3.0 trillion for fiscal 2021, and the nation’s debt held by the public (not counting internal) will total $23.0 trillion.

Keep An Eye On U.S. Inflation Report. On August 11, the U.S. Bureau of Labor Statistics (BLS) releases its consumer price index (CPI) for July. Recent readings are signaling well above the Federal Reserve’s acceptable level (transitory or not). U.S. Jobs Report. On August 6, the BLS releases its job numbers for July. Another stronger than expected reading (above 700,000) report will very bullish for the U.S. economy.         Case-Shiller Home Price Index. On July 27, S&P CoreLogic Case-Shiller will release its home price index for May. The price bubble is inflating at an unsustainable pace.

Ernest Goss, Ph.D.  Email: [email protected]