ECONOMIC COMMENTARY  | PUBLISHED BYRAYMOND JAMES & ASSOCIATES

Scott J. Brown, Ph.D. | (727) 567-2603 | scott.j.brown@raymondjames.com JUNE 25, 2021 | 3:14 PM EDT

Weekly Economic Monior -- The Consumer OutlookThe Consumer Outlook – We are still in a peri-pandemic economy. That is, we aren’t done with COVID-19. The virus is still affecting economicbehavior. It seems clear now that the post-pandemic economy is going to differ from the pre-pandemic economy. Work-from-home is going tobe a longer lasting phenomena. Consumer spending patterns are also likely to undergo permanent changes. Recent data suggest that 2Q21 GDPgrowth remained brisk (advance estimate due July 29), but it appears likely that the pace of growth will moderate in the second half of the year– still strong, but slower than in the blistering first half pace.

Personal income and spending exhibited patterns that were not expected at the start of the pandemic. Income has been well above the pre-pandemic trend, reflecting fiscal policy support (and especially the direct payments that went out in April and May last year and in January andMarch this year). Spending has remained below the pre-pandemic trend, but mixed. Spending on consumer durables is still far above the pre-pandemic trend. Spending on consumer services, which is much larger than spending on consumer goods, has remained soft, but is improvingas the economy opens up.

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As more people go out to restaurants, sporting events, and other things they couldn’t do during the pandemic, spending on goods shouldmoderate. We may have seen a little of this in May, when motor vehicle sales declined (although a large part of that likely reflects productionissues). Keep an eye on vehicle sales over the summer months.

A new economic indicator was released last week, the Chicago Fed Advance Retail Trade Summary (CARTS). The index is based on severalindicators and tracks the Bureau of Census retail sales data (ex-autos) well. The CARTS data is tracking at a June increase of 0.1%, not exactlyrolling over, but consistent with a slowing in the pace of growth in consumer spending on goods.

The University of Michigan’s consumer sentiment survey had some interesting points in the latest narrative. Consumer expectations of inflationare declining and most see the recent increase in inflation as transitory. Consumers are concerned about COVID variants. That would imply that afull recovery in consumer services will be delayed (services will continue to rebound as the economy reopens, but not as quickly as was hoped forearlier). Additionally, the report noted that consumers may maintain increased household savings as “precautionary funds,” rather than spend.Now there is a wide range of behavior across households. Some spent their direct payments right away. Some banked them. Most of the increasedsavings is concentrated among upper income households. However, bankers note that savings and checking accounts for low- and middle-incomeaccounts have remained flush. While this could provide fuel for consumer spending strength in the months ahead, we may not see the first halfsurge in spending carry through at a similar pace in the second half of the year.

Consumer spending will be supported by continued growth in jobs, but labor market frictions could limit the pace of improvement in the secondhalf of the year. However, we are merely talking about the difference between very strong growth and extremely strong growth.

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Recent Economic Data

Real GDP rose at a 6.4% annual rate in the 3rd estimate for 1Q21 (same as in the advance and 2nd estimates). Private Domestic Final Purchases (consumer spending, business fixed investment, residential fixed investment) rose at an 11.5% pace (vs. 10.6% in the advance estimate and 11.3% in the 2nd estimate).

Personal income fell 2.0% in May (+2.8% y/y), reflecting an 11.7% decline in transfer payments. Private-sector wages and salaries rose 0.8% (+15.7% y/y). Personal spending was flat (+18.9%), down 0.4% adjusting for inflation, but that followed strong gains in March (+5.0%) and April (+0.9%). The PCE Price Index rose 0.4% (+3.9% y/y, vs. +0.5% y/y a year ago), up 0.5% ex-food & energy (+3.4% y/y). The Dallas Fed’s Trimmed-Mean PCE Price Index rose 1.8% y/y in May.

Durable goods orders rose 2.3% in May, reflecting a 27.4% jump in civilian aircraft orders. Ex-transportation, orders rose 0.3% (following +3.3% in March and +1.7% in April). Orders for nondefense capital goods ex-aircraft edged down 0.1% (following 1.6% in March and 2.7% in April).

Existing home sales fell 0.9% in May, to a 5.80 million seasonally adjusted annual rate (+44.6% y/y).

New homes sales fell 5.9%, to a 769,000 seasonally adjusted annual rate in May (+9.2% y/y).

The Advance Economic Indicators report showed a wide merchandise trade deficit in May ($88.1 billion, vs. $85.7 billion in April). Inventories were mixed (wholesale up 1.1%, retail down 0.8%), but retail auto inventories continued to fall sharply (-5.3% m/m, -18.9% y/y).

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Gauging the Recovery

The New York Fed’s Weekly Economic Index edged down to +9.96% for the week ending June 19, vs. +10.50% a week earlier (revised from +10.35%), signifying strength relative to the depressed level of a year ago. The WEI is scaled to year-over-year GDP growth (GDP was down 9.0% y/y in 2Q20).

Breakeven inflation rates (the spread between inflation-adjusted and fixed-rate Treasuries, not quite the same as inflation expectations, but close enough) continue to suggest a moderately higher near-term inflation outlook. The 5-10-year outlook had crept above the Fed’s long-term goal of 2%, but has since moderated.

In the second week of June, the Chicago Fed Advance Retail Trade Summary (CARTS) data (based on multiple sources) showed a 0.2% increase in retail sales (ex-autos), following a 1.2% increase in the previous week. June sales are projected to rise 0.1% from May.

Jobless claims fell by 7,000, to 411,000 in the week ending June 19. Claims figures are often subject to distortions at the end of the school year, but the trend is lower.

The University of Michigan’s Consumer Sentiment Index was 85.5 in the full-month assessment for June (the survey covered May 26 to June 21), vs. 86.4 at mid-month and 82.9 in May. The June increase was concentrated among households with incomes above $100,000. The report noted a decrease in inflation expectations, while consumers generally believe higher inflation will be transitory. Consumers also expressed concerns about COVID variants and will likely maintain precautionary funds rather than spend down household savings.

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General Outlook:

year.quarter (YY.Q) 20.1 20.2 20.3 20.4 21.1 21.2 21.3 21.4 22.1 22.2 22.3 22.4

GDP q/q % -1.3 -9.0 7.5 1.1 1.6 1.9 1.4 1.1 0.9 0.7 0.7 0.7

GDP q/q, annual rate -5.0 -31.4 33.4 4.3 6.4 7.9 5.8 4.6 3.6 2.9 3.0 2.8

GDP y/y 0.3 -9.0 -2.8 -2.4 0.4 12.4 6.1 6.2 5.5 4.2 3.5 3.1

Unemployment Rate, % 3.8 13.0 8.8 6.7 6.2 5.9 5.6 5.3 4.9 4.6 4.4 4.2

CPI, y/y 2.1 0.4 1.3 1.2 1.9 4.5 4.1 4.1 3.7 2.5 2.3 2.3

ex-f&e 2.2 1.3 1.7 1.6 1.4 3.5 3.3 3.4 3.7 2.5 2.3 2.2

PCE Price Index, y/y 1.7 0.6 1.2 1.2 1.8 3.7 3.5 3.7 3.3 2.3 2.1 2.1

ex-f&e 1.8 1.0 1.4 1.4 1.6 3.2 3.0 3.2 3.1 2.1 2.0 2.0

Federal funds rate 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25

2-yr Treasury note 0.45 0.19 0.13 0.14 0.15 0.16 0.20 0.26 0.34 0.48 0.54 0.62

10-yr Treasury note 0.87 0.73 0.68 0.93 1.61 1.56 1.76 1.90 2.02 2.12 2.22 2.32

Source: Raymond James

Unemployment rate is the quarterly average, interest rates are the average for the final month of the quarter

GDP growth is expected to remain strong as the economy reopens, but growth may be constrained by labor market frictions (difficulties matching millions of unemployed workers with millions of available jobs). Consumer spending on goods is likely to moderate as spending on services rebounds. Restart inflation pressures have exceeded expectations, and could persist, but inflation is likely to moderate as supply catches up with demand. The Fed is still in no hurry to raise short-term interest rates.

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This Week – Fresh economic data for June arrive. The focus will likely be on the Employment Report. Nonfarm payrolls are expected to post a strong gain (around 550,000 ± 200,000), but seasonal adjustment (the end of the school year) could be an issue. Note that prior to seasonal adjustment (and before the pandemic), we would normally lose around 900,000 education jobs and add over 1.5 million non-education jobs each June. So, the job recovery faces an uphill battle (again) in June. We are trying to add a lot of jobs during the time of year when we are naturally adding a lot of jobs. That won’t be the case in the second half of the year.

This Week: forecast last last –1 comments

Monday 6/28 Fed VC Supervision Quarles on Central Bank Digital Currencies

Tuesday 6/29 10:00 CB Consumer Confidence Jun 118.5 117.2 117.5 strong

Wednesday 6/30 8:15 ADP Payroll Estimate, th. +510 +978 +654 strong 9:45 Chicago Business Barometer Jun 66.2 75.2 72.1 likely to moderate 10:00 Pending Home Sales Index May NF -4.4% +1.7% supply constraints

Thursday 7/01 8:30 Jobless Claims, th. 6/26 380 411 418 trending lower 10:00 Construction Spending May NF +0.2% +1.0% mixed, but generally strong 10:00 ISM Manufacturing Index Jun 60.2 61.2 60.7 strong

Friday 7/02 8:30 Nonfarm Payrolls, th. Jun +550 +559 +278 fewer seasonal losses in education private-sector +500 +492 +219 strong, but with labor frictions Avg. Weekly Hours 34.9 34.9 34.9 steady Avg. Hourly Earnings +0.3% +0.5% +0.7% moderate, with compositional issues year-over-year +3.6% +2.0% +0.4% distorted Unemployment Rate 5.7% 5.8% 6.1% trending lower employment/population 58.1% 58.0% 57.9% trending higher 8:30 Trade Balance, $bln May -71.3 -68.9 -75.0 goods only -89.1 -86.7 -92.9 wider in the advance estimate 10:00 Factory Orders May +1.3% -0.3% +1.4% orders for durables reported up 2.3%

Next Week:

Monday 7/05 Independence Day Holiday markets closed

Tuesday 7/06 10:00 ISM Services Index Jun 62.0 64.0 62.7 still strong

Wednesday 7/07 10:00 JOLTS survey May quit rates trending higher 2:00 FOMC Minutes 6/16 not even talking about a rate hike

Thursday 7/08 8:30 Jobless Claims, th. 7/03 360 380 411 trending lower

Friday 7/09 10:00 CARTS data 6/30 NF +0.2% +1.2% expecting about +0.1% in June

Coming Events and Data Releases

July 13 Consumer Price Index (June)

July 16 Retail Sales (June)

July 28 FOMC Policy Decision

July 29 Real GDP (2Q21, advance estimate)

August 6 Employment Report (July)

August 26-28 KC Fed Economic Symposium (Jackson Hole)

September 6 Labor Day (Markets closed)

September 22 FOMC Policy Decision

M21-3648236

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The NYSE Alerian MLP is the leading gauge of energy infrastructure Master Limited Partnerships (MLPs). The capped, float-adjusted,capitalization-weighted index, whose constituents earn the majority of their cash flow from midstream activities involving energy commodities,is disseminated real-time on a price-return basis (AMZ) and on a total-return basis (AMZX).

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The Euro Stoxx 50 Index is a market capitalization weighted stock index of 50 large, blue-chip European companies operating within Eurozonenations. Components are selected from the Euro STOXX Index which includes large-, mid- and small-cap stocks in the Eurozone.

The China CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of top 300 stocks traded in the Shanghaiand Shenzhen stock exchanges. It had a sub-indexes CSI 100 Index and CSI 200 Index.

The S&P 500 Futures is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domesticeconomy through changes in the aggregate market value of 500 stocks representing all major industries.

The DJIA Futures is a stock market index futures contract traded on the Chicago Mercantile Exchange`s Globex electronic trading platform. Dow

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Futures is based off the Dow 30 stock index.

The Nasdaq 100 Futures is a modified capitalization-weighted index of the 100 largest and most active non-financial domestic and internationalcompanies listed on the NASDAQ.

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Asia: Nikkei is short for Japan's Nikkei 225 Stock Average, the leading and most-respected index of Japanese stocks. It is a price-weighted indexcomposed of Japan's top 225 blue-chip companies traded on the Tokyo Stock Exchange.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, whichwill affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Futureinvestment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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