Eurozone Growth Accelerates to 15-year High

Markets were in a steady upward trend through the week as several encouraging signs about the pace of economic growth in the U.S. and abroad emerged. News of a bipartisan infrastructure deal, as well as signs that consumers may be taking a closer look at spending, provided an additional boost. And, in the eurozone, the economy is following the U.S. and leaving the launch pad as the vaccine rollout catches up and restrictions lift. Let’s take a closer look at some key events from last week and look to the week ahead.

WALL STREET WRAP

Consumers Pare Spending a Bit: Consumers may be taking closer note of prices and pulling back slightly on spending. Data from the U.S. Bureau of Economic Analysis show consumer spending was essentially flat in May, but there are two things to consider. First, the level of spending remains above pre-pandemic levels. Second, the spending tally from April was revised upward, from 0.5 to 0.9 percent. In other words, consumers are still spending more than enough to keep the economy growing. A little moderation in spending may also bode well for inflation pressures, as it could provide some breathing room for businesses to replenish supplies.

About Inflation: In the same report, the core PCE price index (the Fed’s measure of inflation) rose 0.5 percent in May from the month prior. That brings the year-over-year core PCE to 3.4 percent in May. While that’s above the Federal Reserve’s 2 percent inflation target, remember that’s an average, not a boundary. The Fed wants to see inflation average 2 percent for “some time” (and full unemployment) before thinking about a policy shift. But let’s take a closer look.

The Dallas Fed’s trimmed mean PCE excludes prices for volatile goods and services, which removes outliers and provides a better look at the underlying inflation trend. That measure was up only 1.85 percent year over year, which indicates headline inflation is really being driven by price increases in a small, volatile basket of goods.

Services, Manufacturing in the U.S.: The U.S. economy continues to expand at a vigorous pace in June, although the IHS Markit U.S. Composite PMI pulled back to 63.9 from 68.7 in May (anything above 50 indicates expansion). Sure, that’s a bit of a deceleration, but this remains a historically high read for this index. The manufacturing PMI subcomponent hit 62.6, a record for the index. That lofty manufacturing read comes even as manufacturers encounter significant supplier delays. And as the restrictions lift abroad (particularly in the eurozone; see below), manufacturers in the U.S. are seeing an uptick in export orders.

Eurozone Staging a U.S.-like Recovery: Business activity in the eurozone accelerated at the fastest rate in 15 years in June, driven by rollbacks in pandemic restrictions throughout the region. The IHS Markit Eurozone Composite PMI reached 59.2 in June, up from 57.1 in May (again, anything over 50 indicates expansion). The services PMI reached 58, a 41-month high, an indication that the recovery is broadening; and the manufacturing PMI hit 63.1. Demand is robust, and businesses (much like here in the U.S.) are having a hard time keeping up despite hiring extra staff at the sharpest clip in three years. Backlogs are also at a record, which tends to be a solid leading indicator of revenues and sales down the road. However, as in the U.S., prices are rising quickly as demand (for now) outstrips supply.

As outlined in our recent Asset Allocation Focus, we expected to see a sharp, U.S.-style snapback to growth in the eurozone through 2021, as the setup is basically what Americans experienced in spring: vaccines driving a wide-scale reopening in an economy juiced with stimulus. While the vaccine rollout has lagged the pace set in the U.S., the eurozone has already coordinated on a massive aid package and is now catching up on vaccines and lifting restrictions. We think this will provide a potent economic catalyst in the region, so don’t be surprised if the eurozone grabs a larger share of the global growth story in the months ahead.  

THE WEEK AHEAD

Hard-hit Industries Nearing 2019 Levels: This week we’ll keep an eye on TSA throughput numbers and OpenTable reservation data. Since the pandemic’s peak impact on the economy in March, the number of air passengers has risen steadily, and data show that number is now reaching pre-pandemic levels. The Independence Day travel surge could complete the round trip back to 2019 numbers. Similarly, we’ll check into OpenTable data of dining reservations, which has also completed its own round trip and is back near 2019 levels. These were two of the hardest-hit industries during the pandemic, and both appear to have regained ground lost in 2020.

A Few More: Consumer confidence numbers are due this week, and it’ll be interesting to see how consumers, flush with savings from stimulus and reduced 2020 spending, balance rising prices amid an economy that’s broadly reopened. Pending home sales will also offer another glimpse into the push and pull between prices and demand. Have rising home prices slowed sales in some areas? Lastly, the government will release June unemployment and payroll figures.

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