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Mixed Signals on U.S. Economy Add to Volatility

Published 10/01/2021, 12:58 PM
Updated 10/01/2021, 04:30 PM
© Reuters.  Mixed Signals on U.S. Economy Add to Volatility

© Reuters. Mixed Signals on U.S. Economy Add to Volatility

Several statistics released by the U.S. government and private organizations on Friday gave mixed signals on the direction of the U.S. economy, adding to Wall Street volatility.

On one hand, data show that the rise in household spending that powered the economic recovery so far may be running out of steam.

Personal consumer spending rose faster than personal income. As a result, consumers either used credit, or dug up on their savings to pay for the extra spending, which is not a good sign for the ongoing economic recovery.

In addition, credit could become more expensive once the Fed begins tapering and savings are depleted. Both developments could slow down the pace of economic recovery.

Personal income in the United States increased at a monthly rate of 0.2% in August 2021, down from a 1.1% rise in July, slightly below the market expectations of a 0.3% gain. Disposable income (DI) — income after taxes — increased at a meager 0.1%, while Real DI — DI adjusted for inflation -- decreased by 0.3%.

Personal consumer spending increased at a monthly rate of 0.8% in August. That's up from a 0.1% drop in July, and ahead of a 0.6% gain markets expected.

These gains may not be sustainable given the decrease in real disposable income, though.

On the other hand, data show that the manufacturing sector continued to pick up steam, according to two industry reports. The September IHS Markit U.S. Manufacturing PMI report came at 60.7, up from a preliminary of 60.5 — a reading above 50 indicates that the manufacturing sector is expanding.

Then there's the September Institute of Supply Management Index (PMI), which was 61.1 in September 2021, up for a second straight month, and ahead of market expectations of 59.6.

Wall Street didn't know what to do with these numbers. Thus, the volatility in early morning trade, when traders and investors looked for clues as to what's coming next.

Compounding early morning volatility was the tug of war between the industries benefiting from the opening of the economy, and the industries benefiting from the closing of the economy, following Merck's (MRK) announcement that it applied for emergency FDA approval of its COVID-19 treatment pill.

The bottom line: Volatility is here to stay on Wall Street until we get better visibility on the spread of COVID-19, the direction of the economy, and the status of monetary and fiscal policy.

Disclosure: At the time of publication, Panos Mourdoukoutas had a position in Merck.

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