ECONOMIC COMMENTARY  | PUBLISHED BYRAYMOND JAMES & ASSOCIATES

Scott J. Brown, Ph.D. | (727) 567-2603 | scott.j.brown@raymondjames.com AUGUST 13, 2021 | 2:54 PM EDT

Weekly Economic Monitor -- Turning the Corner?Turning the Corner? – Year-over-year inflation remained elevated in July, but the monthly data moderated, providing support to the view thathigher inflation will be likely be transitory. Still, it’s only one month and we won’t know for sure until well into 2022. Inflation may end up higherthan where it was before the pandemic, but that’s kind of what the Fed is shooting for. Meanwhile, the surge in cases of the delta variant threatensto dampen growth in the near term.

The 2Q21 surge in inflation reflected base effects, restart pressures, and a few anomalies. Inflation was low a year ago – so some of the increasereflects a “catching-up.” These base effects are fading quickly now, and we may see some reverse base effects in the months ahead as elevatedprices return to normal. Production bottlenecks and materials shortages occur in every economic recovery, but have been especially pronouncedthis time due to the strength of the economy in the first half of the year (which was much stronger than the 6.4% average of 1Q21 and 2Q21GDP would suggest – private domestic final purchases averaged a 10.8% annual rate). In addition, we’re seeing an ongoing shift from servicesto goods (retail sales remain far above the pre-pandemic trend, services remain below the pre-pandemic trend). Auto production fell during lastyear’s lock down and there was reduced demand from rental agencies. In turn, fewer vehicles were sent to the used car market this year, just asdemand was rising with the re-opening of the economy. However, used car prices edged up just 0.2% in July and appear to have fallen into August.Transportation services (including airfares, care rentals, car insurance, etc.) turned lower in July.

There are still a few questions about wage pressures and whether firms will have the ability to pass higher costs along. It’s also unclear whatwill happen to rents, a major CPI component, as eviction moratoriums end. Inflation headlines may have given cover to firms wanting to raiseprices and there may have been some hoarding of materials to get ahead of expected price increases (making those price increases self-fulfilling).Lumber prices are back down. However, transportation remains an issue and the semiconductor shortage is still having a major impact on motorvehicle production.

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COVID-19 cases are on the rise again, especially in regions with low vaccination rates. The delta variant is much more transmissible, kids areshowing more vulnerabilities, and schools are re-opening. What could go wrong? The University of Michigan’s consumer sentiment survey showeda large drop in expectations in the report for mid-August, reflecting the delta surge. Declines were widespread across income, age, and educationsubgroups and losses covered all aspects of the economy, from personal finances to views on inflation and the national economy. Hopes that thepandemic would soon be over have been dashed.

Hospitals in Texas and Florida are filling up. For the vaccinated, there’s a much smaller chance of hospitalization, but there’s reduced scope fortreating other health emergencies due to a lack of beds in intensive care. Vaccination rates have picked up and self-protection should help toreduce cases, but we’re likely to see somewhat slower growth (although still strong) in the near term.

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Recent Economic Data

The Consumer Price Index rose 0.5% in July (+5.4% y/y, vs. +1.0% y/y in July 2020), up 0.3% (+4.3% y/y) ex-food & energy. Many of the areas that had experienced rapid inflation in recent months showed signs of moderation. Transportation services fell 1.1% (+6.4% y/y, vs. -3.7% y/y in July 2020). Car and truck rental prices fell 4.6% (+73.5% y/y, vs. -3.4% y/y in July 2020). Motor vehicle insurance fell 2.8% (+1.6% y/y, vs. -1.9% y/y a year ago). Airfares edged down 0.1% (+19.0% y/y, vs. -23.7% y/y a year ago).

The Producer Price Index rose 0.9% in July (+7.8% y/y), partly reflecting a 17.4% widening in retail margins in autos. Ex-food, energy, and trade services, the PPI rose 0.9% (+6.1% y/y).

Import prices rose 0.3% in July (+10.2% y/y, vs. -0.3% y/y in July 2020), down 0.1% (+6.0% y/y) ex-food & fuels. Non-fuel industrial supplies and materials fell 1.7% (possibly turning the corner, although +29.3% y/y). The price index for imported capital goods and autos picked up (each up 0.4%), but prices of imported consumer goods rose modestly (+0.1% m/m, +1.0% y/y).

Job openings surged to another record high in June (10.1 million, vs. 9.5 million in May and 6.1 million in June 2020). The quit rate rose to 2.7%, from 2.5% (it hit a record 2.8% in April).

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Gauging the Recovery

The New York Fed’s Weekly Economic Index fell to +7.63% for the week ending July 31, vs. +8.83% a week earlier (revised from +8.29%), reflecting decreases in tax withholding, railroad traffic, fuel sales, and electricity output. The WEI is scaled to year-over-year GDP growth (GDP fell 9.1% y/y in 2Q20 and rose 12.2% y/y in 2Q21).

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- to 10-year outlook remains consistent with the Fed’s long-term goal of 2%.

Jobless claims fell by 12,000, to 375,000 in the week ending July 31. Seasonally-adjusted figures have been trending about flat in the last several weeks.

In the fourth week in July, the Chicago Fed Advance Retail Trade Summary (CARTS) index (a composite of multiple retail gauges) showed a 0.6% increase in retail sales (ex-autos), following a 0.9% rise in the previous week. July retail sales (ex-autos) were projected to be up 0.2% from June.

The University of Michigan’s Consumer Sentiment Index fell to 70.2 (below the April 2020 low of 71.8) in the mid-month assessment for August (the survey covered July 28 to August 11), vs. 81.2 in July and 85.5 in June. Expectation sank to 65.2, from 79.0, reflecting concerns about the delta surge.

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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 -8.9 7.5 1.1 1.5 1.6 1.4 1.4 1.0 0.8 0.7 0.7

GDP q/q, annual rate -5.1 -31.2 33.8 4.5 6.3 6.5 5.6 5.8 3.9 3.2 3.0 2.8

GDP y/y 0.6 -9.1 -2.9 -2.3 0.5 12.2 5.7 6.0 5.4 4.6 3.9 3.2

Unemployment Rate, % 3.8 13.0 8.8 6.7 6.2 5.9 5.4 5.1 4.9 4.6 4.4 4.2

CPI, y/y 2.1 0.4 1.3 1.2 1.9 4.8 5.1 5.0 4.6 3.0 2.1 2.2

ex-f&e 2.2 1.3 1.7 1.6 1.4 3.7 4.1 4.2 4.4 2.8 2.1 2.1

PCE Price Index, y/y 1.7 0.6 1.2 1.2 1.8 3.8 3.9 4.0 3.6 2.4 1.9 2.0

ex-f&e 1.8 1.0 1.5 1.4 1.7 3.4 3.4 3.5 3.3 2.2 1.8 1.9

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 0.20 0.26 0.32 0.40 0.54 0.60 0.66

10-yr Treasury note 0.87 0.73 0.68 0.93 1.61 1.52 1.56 1.70 1.87 2.02 2.15 2.25

Source: Raymond James

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

There is a high level of uncertainty in the economic outlook and the rise of the Delta variant poses a near-term risk. A rebound in consumer services should drive strength, more than offsetting a moderation in consumer goods. The job market is expected to strengthen, but labor market frictions could create difficulties, restraining output growth in some areas. Inflation is higher, reflecting base effects and re-start pressures. Bottleneck pressures should correct over time, but may be longer-lasting. A hike in short-term interest rates is a long way off, but the Fed may reduce the monthly pace of asset purchases later this year.

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This Week – The focus will likely be split between the retail sales report and the FOMC minutes. Retail sales softened in the first half of the month, but picked up in the second half, reflecting strength in back-to-school shopping (often a harbinger of a robust holiday shopping season). Note that August retail sales (to be reported on September 16) are likely be affected by the delta surge. FOMC minutes should show differences of opinion on the timing of Fed tapering (which is already apparent in officials’ public speeches). The minutes should highlight the degree of that difference. Quantity descriptions (“few” / “some” / “several”) will be key. (M21-3716031)

This Week: forecast last last –1 comments

Monday 8/16 no significant data

Tuesday 8/17 8:30 Retail Sales Jul -0.0% +0.6% -1.7% unit auto sales fell 4.1% ex-autos +0.2% +1.3% -0.9% higher gasoline prices ex-autos, bld mat, gasoline +0.1% +1.4% -0.6% mixed, but generally lackluster 9:15 Industrial Production Jul +0.9% +0.4% +0.7% subject to seasonal distortions (autos) Manufacturing Output +0.7% 0.0% +0.9% aggregate hours rose 0.5% 10:00 Business Inventories Jun +0.8% +0.6% +0.1% slower in 2Q21 10:00 Homebuilder Sentiment Aug 79 80 81 strong, but fading 1:30 Fed Chair Powell Town Hall with teachers and students

Wednesday 8/18 8:30 Building Permits, th. Jul 1600 1594 1683 housing demand remains strong % change +0.4 -5.3 -2.9 but ongoing supply constraints Housing Starts 1590 1643 1546 these data are erratic % change -3.2 +6.3 +2.1 watch for revisions 2:00 FOMC Minutes 7/28 some differences in tapering views

Thursday 8/19 8:30 Jobless Claims, th. 8/14 370 375 387 seasonal adjustment adds uncertainty 10:00 Leading Economic Indicators Jul +0.7% +0.7% +1.2% most components adding

Friday 8/20 no significant data

Next Week:

Monday 8/23 8:30 Chi Fed Nat Act Index Jul NF +0.09 +0.26 consistent with further growth three-month average NF +0.06 +0.80 but some moderation 10:00 Existing Home Sales, mln Jul 5.80 5.86 5.78 still constrained by supply % change -1.0 +1.4 -1.2 affordability has decreased

Tuesday 8/24 10:00 New Home Sales, th. Jul 710 676 724 this data are noisy % change +5.0 -6.6 -7.8 but there are supply constraints

Wednesday 8/25 8:30 Durable Goods Orders Jul +0.5% +0.9% +3.2% mixed aircraft orders and cancellations ex-transportation +0.5% +0.5% +0.6% moderate nondef cap gds ex-aircraft +0.4% +0.7% +0.6% 1H21 trend was unusually strong 10:00 CARTS Index m-Aug NF

Thursday 8/26 8:30 Jobless Claims, th. 8/21 365 370 375 seasonal adjustment adds uncertainty 8:30 Real GDP (2

nd estimate) 2Q21 +6.6% +6.3% +4.5% +6.5% in the advance estimate

Priv Dom Final Purchases +10.1% +11.8% +6.2% +9.9% in the advance estimate

Friday 8/27 8:30 Advance Econ Indicators Jul early look at 3Q21 wholesale inventories NF +1.1% +1.3% moderate retail inventories NF +0.3% -0.8% auto inventories are very lean merch trade balance, $bln NF -91.2 -88.2 imports strengthening 8:30 Personal Income Jul +0.4% +0.1% -2.2% unemp insurance -, child tax credit + Personal Spending +0.3% +1.0% -0.1% mixed, but good back-to-school shopping PCE Price Index ex-f&e +0.3% +0.5% +0.5% the core CPI rose 0.329% year-over-year +3.5% +3.5% +3.4% peaking, most likely 10:00 UM Consumer Sentiment Aug 70.0 81.2 85.5 70.2 at mid-month

Coming Events and Data Releases

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

September 1 ISM Manufacturing Index (August)

September 3 Employment Report (August)

September 6 Labor Day (Markets closed)

September 22 FOMC Policy Decision

November 3 FOMC Policy Decision

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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

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The MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index's three largestindustries are materials, energy, and banks.

The Russell 2000 index is an index measuring the performance of approximately 2,000 smallest-cap American companies in the Russell 3000Index, which is made up of 3,000 of the largest U.S. stocks.

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).

The Barclays Intermediate Government/Credit Bond index measures the performance of U.S. Dollar denominated U.S. Treasuries, government-related and investment grade U.S. corporate securities that have a remaining maturity of greater than one year and less than ten years.

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.

Europe: DAX (Deutscher Aktienindex (German stock index)) is a blue chip stock market index consisting of the 30 major German companies tradingon the Frankfurt Stock Exchange.

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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