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MARK-TO-MARKET: Inflation taking a painful toll on consumers
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MARK-TO-MARKET

MARK-TO-MARKET: Inflation taking a painful toll on consumers

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In the 10 years (2010-19) since the 2007-09 Great Depression, the average annual pace of U.S. economic growth has been 2.25%. In 2020, economic growth declined by 3.4%, as the global pandemic forced the American economy to a grinding halt. In the April-June 2020 second quarter, the economy shrank at a massive, annualized rate of 31.2%.

But the economy quickly rebounded. In the 2020 third quarter, economic growth soared by an annualized rate of 33.8%. In fact, the National Bureau of Economic Research reported that the pandemic-fueled recession, which started in February 2020, lasted just two months — the shortest recession in U.S. history.

On Thursday, the U.S. Bureau of Economic Analysis reported that in the recent April-June second quarter the economy grew at an annualized rate of 6.5%, slightly above the first quarter’s pace of 6.3%. It also marked a full return of economic output to its pre-pandemic level. The 6.5% growth rate, however, was well below the 8% rate that Wall Street had forecast.

But Wall Street didn’t appear too fazed by the weaker-than-expected report. On Thursday, the Dow Jones Industrial Average gained 153 points to close within 59 points of its all-time high. Both the S&P 500 and NASDAQ also posted gains and ended Thursday’s trading session just shy of their respective record highs.

For Wall Street, the focus was on consumer spending, which accounts for 68% of our nation’s economic growth. In the second quarter, consumer spending rose at a highly robust annualized rate of 11.8%, exceeding the first quarter’s stellar rate of 11.4%. Moreover, the report showed that further economic growth remains impeded not by a lack of consumer demand but by continuing supply-side constraints. Disruptions to global supply chains, combined with the ongoing labor shortage, have impeded manufacturers’ and producers’ ability to meet a strong consumer demand for goods and services.

Now that the economy has reached its pre-pandemic level, where does it go from here? For now, Wall Street is betting that consumer spending remains strong enough to help power the economy through a myriad of obstacles, including a 30-year-high level of inflation. But a tremendous caveat to this sustainability exists in the delta variant, a highly contagious strain of the COVID virus.

According to the latest data from the Centers for Disease Control and Prevention, since June 27 the number of new daily cases of COVID-19 has surged more than 800% from 9,331 to 86,058. The current seven-day average of new hospitalizations has increased 46.3% over the past week to 5,475 per day.

Despite the expected reality of greater mask mandates, Wall Street assumes a very high bar to be met for state governors and officials to reinstate tighter restrictions on businesses. However, as we saw during the height of the global pandemic, a tremendous disparity exists among the governors and officials within each of the 50 states on just how strict or lenient they are in imposing COVID mandates. Consequently, we could see several states and municipalities be quick to place tighter restrictions on business hours, customer volume or even the types of services being offered. And that would throw a major cloud of uncertainty on the future outlook of the U.S. economy.

Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the U.S. Securities Exchange Commission.

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