June 2021 U.S. Economic Outlook

Robert A. Dye, Ph.D.

,

Daniel Sanabria

Economic Chart

Anecdotal and survey data point to a supply constrained economy. Both the ISM Manufacturing and Services Indexes for May were very telling.



The Constrained Economy

Anecdotal and survey data point to a supply constrained economy. Both the ISM Manufacturing and Services Indexes for May were very telling. The headline ISM Manufacturing Index increased to a very strong 61.2 for the month. Sixteen out of eighteen industries reported growth. However, the anecdotal comments were mainly focused on shortages of raw materials, components and labor. Despite the strong headline number for the ISM MF Index, the customers’ inventories sub-index was deeply negative. The list of commodities up in price was extensive, including metals, electrical and electronic components, boxes, lumber, and petrochemical products. Likewise, the list of commodities in short supply was long. The prices sub-index remained very high at 88.0 for the month. 

The ISM Services Index was similar. The headline number increased to a new record high of 64.0 in May. All 18 industries reported growth. Anecdotal comments picked up where the manufacturing comments left off. The inventory sentiment sub-index was in negative territory. Many commodities were listed as being up in price. No commodities were listed as being down in price. Many products were listed as being in short supply. The prices sub-index increased to a very high 80.6. 

Rapid reflation is clearly creating a lot of economic friction, meaning rising prices. The headline Producer Price Index for April was up an eye-catching 6.2 percent year-over-year. The headline Consumer Price Index was up 4.2 percent. Some of the increase is due to base effects, meaning that last year’s prices were low due to the suppression of demand from COVID-related lockdowns. However, if we assumed 0.2 percent monthly growth in the PPI and CPI from February 2020 through April 2020 the PPI this April would be up by 5.9 percent year-over-year, and the CPI would be up by 4.1 percent. The base effect is only a small part of the strong year-over-year gain this spring. See the PDF page 2 for a primer on inflation. 

The good news is that rising prices are motivating increased supply, so the problem is self correcting in the long term. For now, however, we face two key questions. (1) Is the current bout of inflation temporary? (2) What happens to unsatisfied demand? These two questions are obviously inter-related. If we take the Federal Reserve’s current view, inflation will cool down as supply chains catch up, inventories are restocked and prices relax perhaps later this year or next year. Unsatisfied demand simply waits until we achieve a new economic equilibrium at a higher growth rate. However an alternative view is that inflation persists as companies increase prices, scarce labor requires higher wages and the squeeze on corporate profits motivates still more price gains in a supply and capacity constrained environment. Some demand does not wait, but gets shifted, spreading price pressure to other industries. Both scenarios suggest  there is more adjusting for the economy to do in a post-pandemic world. 

As the U.S. economy adjusts to the post-pandemic world, performance in some areas will likely exceed expectations, but performance in other areas may fall short. To reflect the new (insert multiple news here) normal, we are adjusting our rating for the U.S. economy down from A+ to A. Our economic risk assessment is now more balanced relative to the expectation of ongoing strong growth in the near term. We believe that there is some risk that U.S. economic growth could fall short of very strong expectations for any given quarter or even on a more sustained basis. The Senate parliamentarian’s recent ruling that Democrats will have only one more opportunity to use automatic budget reconciliation suggests that growth in federal spending will soon face more meaningful resistance from Republicans.

Treasury Secretary Janet Yellen has announced that G-7 countries are shaping new rules to put a floor under corporate tax rates and they are exploring ways to share corporate tax revenue. This, along with more active trade tariff policy is an interesting potential demarcation in international economics.

For a PDF version of this publication, click here: June 2021 U.S. Economic Outlook



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June 7, 2021
Robert A. Dye, Ph.D., Senior Vice President and Chief Economist at Comerica Bank

Robert A. Dye, Ph.D.

Senior Vice President and Chief Economist
Daniel Sanabria, Senior Economist at Comerica Bank

Daniel Sanabria

Senior Economist

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