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Recovery ends and expansion begins

August 17, 2021

Economic Review: The recovery is over; the expansion has begun (Page 3)

The economy had a consistent theme in July: solid data that could have been even stronger but for persistent supply-side constraints in both materials and labor. Real GDP and nonfarm payrolls experienced rarely-seen growth, but GDP gains were below expectations and payrolls continued to be limited by stagnant labor force participation. Moreover, while strong growth continued in the manufacturing sector, the ISM survey slipped to a six-month low. Even the service sector, where the ISM survey rose to an all-time high, was held back by supply-side limitations.

Financial Markets Review: Stocks up and rates down (Page 4)

The yield on the ten-year U.S. Treasury note nosedived in July while the S&P 500 Index posted yet another gain. Since peaking at the end of the first quarter, the benchmark note yield dropped by more than 50 basis points (although it has edged higher again since the strong July employment report). Robust earnings and plentiful liquidity moved broad equity index prices higher despite another jump in inflation. Looking ahead, the further rise in earnings expectations for the third quarter should be positive for equity markets.

The Outlook: Latest COVID surge a modest headwind (Page 5)

After receding noticeably in the late spring and early summer, the new COVID infection rate has spiked again. The case count rose by an average of more than 42,000 per day in July, up from 13,350 in June, and continued to pick up steam in early August (climbing to more than 100,000 per day). The pandemic is again rising as a near-term downside risk to the economy.

Go deeper with the full August report linked below.