Economic Outlook – 10 October 2021


• Non-farm payrolls rose just 194K in September, a lot less than the +500K print expected by consensus. Partially compensating for this disappointing result, the prior month’s results were upgraded by a sizeable 169K. The private sector added 317K jobs. Employment in the goods sector sprang 52K thanks to gains in manufacturing (+26K), construction (+22K) and mining/logging (+4K). Services-producing industries, meanwhile, expanded payrolls by 265K, with notable increase for leisure/hospitality (+74K), professional/business services (+60K), retail trade (+56K) and transportation/warehousing (+47K). Employment in the public sector retraced no less than 123K after a massive 309K progression in the previous two months. Average hourly earnings rose 4.6% YoY in September, in line with the median economist forecast and up from 4.0% the prior month

• Released at the same time, the household survey (similar in methodology to Canada’s LFS) reported a 526K job gain in September. This increase, combined with a one-tick decrease in the participation rate (to 61.6%) meant the unemployment rate fell from 5.2% to post-pandemic low of 4.8%. Full-time employment advanced 591K, while par time positions fell 36.0K

• The September employment reports were eagerly awaited, with economists keen to see the impact of the end of the extended unemployment benefits on job creation. The reports were mixed at best, with disappointing non-farm payrolls being compensated in part by bigger gains in the household survey. The finer details allowed for cautious optimism, however. Much of the disappointment in non-farm payrolls reflected a steep decline in the public sector. Which can largely be explained by a decline of 161K in state and local education employment. This was way below what might be expected at this time of the year, suggesting seasonal adjustment factors likely weighed on the reported data. Private sector payrolls, meanwhile, continued to advance, albeit at a reduced pace. It is also worth noting that the sectors that had been most affected by social distancing measures – notably leisure/hospitality (+74K) and education/health (-7K) – registered only small gains, a sign that high COVID-19 caseloads in the country continued to weigh on the re-opening process

• Factory orders rose 1.2% in August to US$515.7 billion, according to the U.S. Census Bureau. This followed a revised 0.7% increase in July, which was initially reported as a gain of 0.4%. New orders for manufactured durable goods grew 1.8% to US$263.6 billion in the month, as previously reported

• Initial jobless claims fell 38K to 326K (seasonally adjusted) in the week ending October 2. Partially reversing California’s large increase in claims the previous week (17K), unadjusted initial claims in the Golden State decreased 10.5K. Michigan, a state that had to cope with supply shortages in the auto industry in September, saw unadjusted claims fall 3K after having recorded a jump of 6.4K the prior week. Large declines in unadjusted claims were recorded, also, in the District of Columbia (-3.95K) and Texas (-3.10K). The advance number for seasonally adjusted insured unemployment (i.e., continued claims) fell 97K to 2,714K in the week ending September 25

• The jobless claims report shows that, in the week ending September 18, the total number of people receiving benefits under all programs, including those introduced since the start of the health crisis (i.e., Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation), dropped 854K to 4.17 million. This followed a 6.2-million decline the prior week as special federal pandemic programs wound down nationwide

• The goods and services deficit widened from US$70.3 billion in July to US$73.3 billion, reversing the previous month’s improvement. Imports of goods increased US$2.7 billion to US$239.1 billion in the month, driven by pharmaceutical preparations (+17.7% or +US$2.2 billion), followed in dollar terms by toys, games and sporting goods (+15.6% or +US$625 million, and computer accessories (+US$560 million). Imports of cellphones and other households goods shrank US$1.472 billion (-15.5%) and those of passenger cars contracted US$1.260 billion (-10.1%). Exports of goods increased US$1.1 billion to US$149.7 billion in August. Non-monetary gold exports were up US$1.6 billion, accounting for 46% of the US$3.5-billion jump in industrial supplies and materials exports. In the meantime, exports of automotive vehicles, parts, and engines decreased (-US$1.0 billion), as did exports of capital goods (-US$0.8 billion) and of foods, feeds, and beverages (-US$0.6 billion)

• The ISM Services PMI edged up 0.2 point to 61.9. Business activity (+2.2 points) and new orders (+0.3) picked up to 62.3 and 63.5, respectively. The supplier deliveries index remained high at 68.8 relative to its long-term average of 53.4, suggesting that supply constraints persisted. The 2.1-point increase in the price paid index (77.5) reinforced this view. The employment sub-index slipped 0.7 point to 53, just below its year-to-date average of 54.3

• Logistic constraints were also evident in the August trade report. Tangled supply chains and severe transportation bottlenecks continued to pressure the U.S. trade deficit, which widened to $73.3 billion in August. COVID outbreaks across the globe have led to temporary port closures, while capacity limitations at domestic ports also added to delays. The severe lack of labor in key logistic industries in the United States is delaying the smooth delivery of product to and from ports. Despite these headwinds, both exports and imports rose during the month, although imports saw a larger gain amid still-strong domestic demand. All told, the better-than-expected outturn for imports suggests that net exports will be less of a boost to growth than the half-a-percentage point

• The semiconductor chip shortage that is hamstringing the production of products ranging from cars and computers to appliances and toothbrushes will extend into 2022 and potentially beyond that, the CEO of semiconductor company Marvell Technology said. Any chip inventory relief would be welcomed by the automobile industry, which has been perhaps the hardest hit by the lack of semiconductors. Overall, US auto sales are expected to drop at least 13% in the third quarter due to disrupted production tied to the chip shortage, according to industry estimates. The shortage of semiconductors has also shifted some of the planning as it relates to the supply chain

• US Senate Minority Leader Mitch McConnell offered a short-term suspension of the US debt ceiling to avert a national default, which Senate Democrats accepted. The deal raised the debt ceiling to allow the government to keep operating until 3 December. The bill now moves to the House, where Speaker Nancy Pelosi (D-CA) is expected to take up the legislation early next week. Earlier in the week, Secretary of the Treasury Janet Yellen said that the economy would fall into a recession if Congress failed to address the borrowing limit before an unprecedented default on the US debt

• The Consumer Price Index is out Wednesday. The pace of consumer price inflation continued to cool from its summer highs. While prices for used vehicles and travel services saw outright declines in August, prices for other items, namely food, energy, housing and other goods picked up the slack, suggesting that inflation may be coming off the boil, but is still quite hot. Similar dynamics are likely at play in September. A 0.4% MoM is a likely increase in the headline consumer price index (CPI) and a 0.3% increase in core CPI, which would bring the YoY rates to 5.3% and 4.0%, respectively

• Retail sales is out on Friday. It slipped 0.3% in September, largely due to softer auto sales. Sales at motor vehicle & parts dealers have fallen for four months straight. With production problems limiting selection and pushing up prices, consumers may be holding off until buying conditions improve. That said, the recent decline also likely reflects some normalization in the level of sales after vehicle spending surged this spring

• Most of the major benchmarks recorded gains, with the S&P 500 Index recovering a portion of the previous week’s losses. Energy stocks led the gains as natural gas prices reached record highs in Europe and major oil exporters decided not to increase production more than their modest previously agreed-upon amount, sending crude oil prices to a seven-year high on Monday. The small real estate sector lagged with modest losses. Investors prepared for the unofficial kickoff of third-quarter earnings reporting season, set to begin with some major bank announcements the following week


• Inflation running above the Bank of England’s target of 2.0% is concerning and must be managed to prevent it from becoming permanently embedded, the bank’s governor, Andrew Bailey, said in an interview with The Yorkshire Post newspaper. “We are going to have a very delicate and challenging job on our hands so we have got to in a sense prevent the thing becoming permanently embedded because that would obviously be very damaging,” Bailey told the newspaper. “Unfortunately, if you look at our last forecast, it is going to go higher, I am afraid.” Bailey’s comments appeared to favour the more hawkish side of the debate regarding the outlook for interest rates in Britain, despite growing signs of a slowing economy. Bank of England (BoE) Governor Andrew Bailey said that UK gross domestic product probably won’t recover to pre-pandemic levels until early next year—a few months later than previously predicted. He said the BoE will keep a “close watch” on inflation expectations and the labor market for signs that temporary price pressures are becoming more persistent

• Britain’s most energy intensive manufacturers, including producers of steel, glass, ceramics and paper, have warned the government that unless something is done about soaring wholesale gas prices they could be forced to shut down production. Wholesale gas prices have increased 400% this year in Europe, partly due to low stocks and strong demand from Asia, putting particular pressure on energy intensive industries. Industry bosses held talks on Friday with business minister Kwasi Kwarteng but said these ended with no immediate solutions. “If the government doesn’t take any action then basically what we’ll see for the steel sector is more and more pauses of production in certain times of the day and those pauses will become longer,” Gareth Stace, director general of UK Steel told ITV News. Similarly, Andrew Large, director general of the Confederation of Paper Industries, told the same broadcaster that he could not rule out factories having to suspend production due to increased energy costs

• British soldiers have begun delivering fuel in the United Kingdom as the panic buying of gasoline continues in some parts of the country. While the situation has begun to improve in most parts of the country, shortages remain acute in London and England’s southeast. The U.K. has an estimated shortage of 100,000 truck drivers, which has disrupted the delivery of fuel, food and goods around the country


• Wholesale natural gas prices surged to record levels in Europe amid global fuel shortages, threatening to increase costs significantly for households and to curb industrial production. Stronger global demand as economies reopened after the pandemic, lower Russian supplies to Europe, greater competition from Asia and Brazil for liquefied natural gas cargos, and depleted reserves after a cold winter and spring were among the many reasons cited for the shortage. Prices declined somewhat after Russian President Vladimir Putin hinted that Gazprom, Russia’s state-backed gas company, might increase supplies of the thermal fuel to Europe

• European Central Bank (ECB) policymakers viewed the recent surge in inflation as temporary but acknowledged that the risks to the outlook “were widely regarded as being tilted to the upside,” according to the minutes from its September meeting. Some policymakers were also worried by “upside risks” to inflation, the minutes indicated. They expressed doubt that the forecasting models were accurately capturing changes in the economy and argued that closer attention must be paid to a possible “regime shift” in prices.

• In speeches during the week, ECB officials diverged over the official forecast, which sees inflation abating next year. ECB President Christine Lagarde reiterated that “we should not overreact to supply shortages or rising energy prices, as our monetary policy cannot directly affect those phenomena.” At a conference organized by the Cleveland Federal Reserve and the ECB, Chief Economist Philip Lane and Executive Board Member Isabel Schnabel disagreed over the risks surrounding the forecast. Schnabel warned of “more persistent inflationary pressures,” while Lane said there were forces that could drag down price growth. He said that recent higher energy costs were pushing up headline inflation, but together with the rolling back of fiscal support, they were also a headwind for economic growth

• German industrial production in August fell the most in 17 months due to supply chain disruptions, particularly in the auto industry

• Shares in Europe ended higher despite significant volatility. In local currency terms, the pan-European STOXX Europe 600 Index advanced 0.97%, with the financials sector faring well, likely on expectations that potentially higher interest rates and a steepening yield curve would help to boost banks’ net interest margins. Germany’s Xetra DAX Index added 0.33%, France’s CAC 40 Index gained 0.65%, and Italy’s FTSE MIB Index climbed 1.70%


• On the heels of developer Evergrande’s debt crisis, there have been increasing signs of stress in China’s property market. Credit rating agencies have downgraded developers Fantasia Holdings and Sinic Holdings over risks from their strained cash flow situations. Fantasia did not repay the principal amount of $206 million of a bond that matured on Monday, it said in a filing to the Hong Kong exchange. Also, Evergrande is set to sell part of its stake in its property services unit, the second asset sale in as many weeks as the liquidity-squeezed property giant scrambles to raise cash. Bondholders are concerned that Evergrande is close to defaulting on debt payment obligations as it faces nearly $150 million in offshore payment obligations next week

• Beijing ordered an immediate increase in coal output to fight the nationwide power crunch, Reuters reported. China has been gripped by power shortages, which hurt production in industries across several regions of the world’s second-largest economy

• Chinese markets rose Friday following the weeklong Golden Week holiday as the CSI 300 Index advanced 1.31% and the Shanghai Composite Index added 0.67%, according to Reuters. Investors looked past the government’s regulatory crackdown, property sector turmoil, and a nationwide power crunch and focused on positive economic data. Data released Friday showed the Caixin/Markit services Purchasing Managers’ Index rose to 53.4 from 46.7 in August, rebounding from the lowest level seen since the height of the 2020 pandemic. The 50-point mark separates growth from contraction monthly. Tourism revenues in China during Golden Week fell 5% from the prior-year period, state media reported, which analysts said pointed to a weak outlook for October retail sales

Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, Reuters, MFS Investment Management, M. Cassar Derjavets