GDP DISAPPOINTED BECAUSE OF SUPPLY CONSTRAINTS

GDP expanded at a 2.0% annualized rate during the third quarter following a 6.7% pace in the second quarter.  The deceleration reflected a sharp slowdown in personal consumption, which grew at just a 1.6% pace after a rapid 12% jump in the prior period.  Shortages, transportation bottlenecks, rising prices and the delta variant weighed upon the data.

The personal consumption expenditures price index, excluding food and energy costs, an inflation measure followed closely by Federal Reserve officials, remained elevated, met expectations growing an annualized 4.5% last quarter after a 6.1% jump in the prior period.  The 5.7% headline rate exceeded expectations of a 5.3% increase but was lower than last quarter’s 6.1% jump.

The issue at hand are supply woes.  Motor vehicle output slumped 41.6%; excluding autos, GDP rose 3.5%.  Inflation adjusted business investment declined, the result of production bottlenecks and the inability to finish products or projects.

The debate is rising as to why these supply issues exist.  For the first time in at least three generations there are shortages.  I rhetorically ask how broken are our supply channels?  How are these shortages morphing into the methods of production?   How will this impact the electorate?

Unfortunately, economics and politics are closely connected.  Many times, one cannot discuss one without discussing the other.   The President’s infrastructure bill is fluid.   The President reportedly stated that his presidency will be determined by what happens in the next week.

One of the terms that is consistent with past proposals is taxing share repurchases.  The current bill will levy a 1% surcharge on all repurchases.  This is a compromise from a 2.0% levy.

If passed, will corporations increase dividend payouts?   The corporation and its owners should make this decision.

Waxing politically, President Biden and Congressional Democrats consistently say to Americans that higher taxes are the only answer.  Will one more government program solve most problems or will one more government regulation make life fair?  While the Administration is not solely to blame for the generational high inflation rate, the question is are its policies partially responsible for current shortages.

As widely discussed, Virginia is in the midst of an election for its next governor. As recently as two months ago the reelection of former Democratic Governor Terry McAuliffe was all but a certainty.  Today he is locked in a dead heat with Republican Glen Younkin.

Almost all believe this is a litmus test for next year’s Congressional election where the Administration’s agenda can either be repudiated or vindicated.

Commenting upon yesterday’s market action, led by earnings equities rallied.  Treasuries rose in yield perhaps under the guise that the Fed might not act prematurely.

After the close both AMZN and AAPL posted results.  AMZN disappointed sending shares down over 4.5%. APPL also disappointed and is down 3.4% premarket.

Commenting upon the impact that the largest companies have upon the indices, according to Bloomberg, Wednesday’s advance in the NASDAQ 100 was entirely the result of the 5% plus surge in both MSFT and GOOG.  If these companies were omitted, the NASDAQ 100—or the 100 largest companies in the NASDAQ—would have declined 1.1%.

Wow!  This places the term “Big is better” in an entirely different context.  To quote Ross Perot, this is one “Giant Sucking Sound.”

Will the inverse occur today?

Last night the foreign markets were mixed.  London was down 0.21%, Paris down 0.40% and Frankfurt down 0.83%.  China was up 0.82%, Japan up 0.25% and Hang Seng down 0.70%.

The Dow should open mixed.  NASDAQ futures are down about 1%.  The 10-year is off 6/32 to yield 1.61%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.