Have We Breached Peak Economic Growth?

Look beyond the headlines to discover the driving forces behind market trends and consider how they impact a credit union’s investment portfolio.

We are past the halfway point of 2021, and the year has been anything but a flat road for the U.S. economy and broad fixed income. Regarding the latter, the Bloomberg Barclays US Aggregate Index generated a -1.6% return through the first two quarters, with higher Q1 yields overwhelming the positive impact of tighter spreads throughout much of the period. Bond yields traded in a tighter range for much of Q2, and with spreads continuing to firm amid a heavy Fed presence, performance was generally better.

3 Takeaways From July

  • Now past the halfway point of 2021, have we breached peak economic growth for the cycle?
  • Fueled by extraordinary fiscal and monetary policy support, personal spending has been strong in 2021, and consumer balance sheets appear well positioned to maintain momentum.
  • The market perceived hawkish signals from the Fed at the June FOMC meeting.

What lies ahead in the second half of 2021? No one knows with certainty, but we can make some general observations.

For the U.S. economy, growth is expected to have peaked in the most recent quarter, with many economists calling for a double-digit GDP gain (annualized) before slowing toward longer-term averages over time. No additional fiscal stimulus packages are expected, and the current infrastructure spending plans have been largely priced into financial markets. The Fed is finally talking about talking about tapering asset purchases, and the updated Summary and Economic Projections (SEP) from the June FOMC meeting showed a hawkish shift in participant forecasts for the first rate hike. The economy still appears to have strong momentum, and the bigger question at this point for economists and market participants alike is whether permanent, above-target inflation is taking hold.

Two of the big drivers of consumer inflation in recent months have been airfare and lodging, as Americans move further away from peak COVID worries and unleash an abundance of pent-up demand.

Summer travel plans are funded by consumer balance sheets that are as healthy as they have been in many years, according to Fed data. Using the most recent household finance report for Q1, the Fed shows household assets rose another $5 trillion to more than $150 trillion in aggregate, whereas household liabilities rose just $200 billion over the quarter. Not surprisingly, most of the asset gains came from real estate ($900 billion) and equities ($2.4 trillion), which increase consumer wealth but are not necessarily a source of significant future consumption, a lesson learned from the financial crisis.

This market commentary is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Visit trustcu.com to read about the latest economic data and overall market trends.

July 26, 2021

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