Economic Review: Demand is booming, but still held back by supply constraints (Page 3)
Economic data were strong for May, although mostly below expectations. Demand is robust throughout the economy, but many industries have been limited on the supply side. For example, job openings are at an all-time high, but employers are having trouble filling them; orders are rising rapidly for both manufacturing and service industries, but so are delays in supplier deliveries; and house prices are soaring in part due to record-low supply. Even very strong light vehicle sales are now being held back by computer chip shortages. While efforts are being made by employers and state governments to bring workers back into the labor market, other supply issues may take longer to resolve.
The S&P 500 index eked out a modest gain last month, as investors fought the usual temptation “to sell in May and go away.” Growth stocks were the most susceptible to selling pressure as the S&P 500 Growth Index fell for the first time in four months. Interest rates meandered while market expectations of inflation edged lower, perhaps signaling a peak in inflation expectations. Commodity prices were mixed with metals higher as the global growth rebound continued and agricultural prices lower with optimism rising about this year’s planting season.
The Outlook: Fed to tiptoe into tighter policy (Page 5)
After a year of unprecedented monetary stimulus, there have been signs in recent months that the Federal Reserve is inching toward a less accommodative stance. At the March Federal Open Market Committee meeting, four out 18 participants indicated an expectation that an increase in the federal funds target would be appropriate next year, up from just one out of 17 three months earlier. At the subsequent meeting in April, “a number” of policymakers suggested that it might soon be time to begin discussing reducing the pace of asset purchases. The first steps toward tighter policy are already underway.