Economic Outlook – 12 September 2021


• The Producer Price Index (PPI) for final demand jumped 0.7% MoM, one tick more than expected by consensus. This gain came in the wake of seven solid prints in January (+1.2%), February (+0.7%), March (+0.8%), April (+1.0%), May (+0.5%), June (+1.0%) and July (+1.0%). Goods prices rose 1.0% on a healthy gain for food (+2.9%). Meanwhile, the energy segment saw a 0.4% progression. Prices in the services category, for their part, rose 0.7% MoM. The core PPI, which excludes food and energy, climbed 0.6% on a monthly basis. Year over year, the headline PPI advanced from 7.8% in July to 8.3% in August, marking its biggest leap on record. Excluding food and energy, it rose from 6.2% to 6.7%, another all-time high. Momentum has grown even stronger recently, with headline and core prices rising an annualized 10.4% and 9.4%, respectively, over the past six months. Higher input prices, longer shipping delays, and rising labour expenses are to blame for the surge in producer prices

• The Job Openings and Labor Turnover Survey (JOLTS) showed that positions waiting to be filled rose from 10,185K in June to a new all-time high of 10,934K in July. This represents 1.26 job offers per unemployed person in the United States, the highest ratio ever and another sign that employers are having a hard time attracting suitable candidates to fill vacant positions. Sizeable gains for health care/social assistance (+294K), leisure/hospitality (+134K), finance/insurance (+116K) and professional/business services (+114K) in the month were offset only in part by declines in retail trade (-95K) and construction (-17K). The JOLTS report also showed that hires edged down from 6,827K to a still elevated 6,667K. Total separations, for their part, sprang 174K to 5,786K. Quits, which are generally voluntary separations initiated by employees, jumped 107K to 3,977K, the second-highest number in the series going back to 2000. (The quit rate, the number of voluntary separations/total employment stayed put at 2.7%, which is just one tick below April’s record.) The high number of quits is encouraging in that it may reflect growing confidence among employees and stiffer competition among employers. Finally, layoffs and discharges increased 105K but remained near an all-time low of 1,459K

• Initial jobless claims decreased from 345K to a post-pandemic low of 310K in the week to September 4. Continued claims, meanwhile, edged down from 2,805K to 2,783K, their lowest level since March 2020. Another 8.9 million or so people received benefits in the week ended August 20 under two emergency programs: Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation. As these extraordinary programs expired on September 4, millions of Americans may suffer an income shock unless they find work. Though the outlook for hiring is encouraging (see JOLTS report above), total employment demand (jobs + job openings) in sectors such as resource extraction, arts/entertainment/ recreation, and accommodation/food services remains far short of pre-pandemic levels. People who used to work in these sectors may have a harder time rejoining the labour force

• According to the latest edition of the Fed’s Beige Book, overall economic activity in the United States expanded at a “moderate” pace in early July through August, a slight downgrade from the “moderate to robust” clip reported in the prior iteration of the survey. The deceleration was largely attributable to the services sector, where “safety concerns due to the rise of the Delta variant, and […] international travel restrictions” continued to weigh on spending. Auto and home sales slowed as well but not because of lack of demand. Rather, these sectors bore the brunt of supply chain disruptions and labour shortages. Elsewhere (e.g., manufacturing, transportation, non-financial services) growth remained solid

• Data released this week from the Federal Reserve showed that consumer borrowing slowed in July after two record increases. While both revolving—mostly credit card debt—and nonrevolving—most other forms of non-mortgage debt (e.g. auto loans, student loans, etc.)—debt balance growth declined in July, the slowing in revolving credit is perhaps more telling. Nonrevolving credit hardly retrenched in the wake of the pandemic, declining only in April and August of last year, as consumers shifted spending to cars and other durable goods. Revolving credit, on the other hand, declined in all but one month from March 2020 to January of this year, as consumers used stimulus payments to pare down debt balances, and pandemic-related restrictions forced people to curtail their normal spending patterns. Slower credit card spending in July jibes with other measures of consumer spending that pulled back toward the end of the summer. Moreover, sentiment measures suggest that the spending slowdown in August may be even sharper

• At the Jackson Hole Economic Symposium, Fed Chair Jerome Powell surprised many in his speech by commenting that tapering could start this year. This was the first time that Powell acknowledged that he is among the group of participants that believed it could be appropriate to start reducing the pace of asset purchases this year (extract from the July minutes):

• “Most” of the officials “judged that the standard set out in the committee’s guidance regarding asset purchases could be reached this year”.

• Powell backed up his view at the symposium by assessing the progress on the labour market, delivering on the Fed’s promise to assess this topic in future meetings (extract from Powell’s Jackson Hole speech): “My view is that the “substantial further progress” test has been met for inflation. There has also been clear progress toward maximum employment. At the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year”

• However, looking at the “if” in this statement, which reflects the uncertainty surrounding the Delta variant and its impact and confirms that the tapering decision will remain data rather than date dependent. This is despite the fact that the Fed is eager to move away from this policy tool as it does not add much to the unemployment goal in this economic phase. Nonetheless, assuming an improvement in the data in the autumn, the probability of tapering starting before the end of the year is still very high.

• Time is running out for the US Congress to raise the national debt ceiling, Secretary of the Treasury Janet Yellen warned this week. Yellen said that conservation measures being undertaken by her department to preserve cash will run out next month. If the debt ceiling, a perennial political hot potato in Washington, is not raised, the US government risks defaulting on its debt. President Joe Biden is said to be contemplating coupling raising the debt ceiling with hurricane relief legislation to garner support from reluctant Republican senators

• On Wednesday, the website Axios reported that Democratic Senator Joe Manchin backs as little as USD 1 trillion of Biden’s USD 3.5 trillion spending plan, highlighting the wide gap between moderates and progressives, although other sources indicated later in the week that Manchin might be willing to go as high as USD 2 trillion. Manchin’s vote will be critical in passing the legislation in the evenly divided U.S. Senate (with Vice President Kamala Harris able to break the deadlock)

• The major indexes retreated over the shortened trading week—markets were closed on Monday in observance of Labor Day. The small real estate sector led the declines in the S&P 500 Index as longer-term interest rates increased, while consumer staples and utilities stocks held up best. The small-cap Russell 2000 Index fared worst after two consecutive weeks of outperforming the large-cap benchmarks, and value stocks trailed growth shares

• In terms of data release, Tuesday brings the CPI reading. Last month’s CPI report had something for both sides of the “transitory” debate. Both the headline and core softened in July, as used vehicle prices leveled off and travel-related prices eased a bit. However, another big gain in food prices and pressure on core goods ex-autos suggest inflation is not about to quietly fade away

• Industrial Production is out on Wednesday. The July industrial production report offered a glimpse of what manufacturing output might look like were it not for supply shortages holding activity back. Total production rose 0.9%, as solid gains in the mining and manufacturing industries offset a 2.1% drop in utilities output. The manufacturing sector’s strength was driven in large part by an 11.2% surge in motor vehicles & parts, as supply issues eased slightly and seasonal factors gave some additional lift


• UK GDP for July has been released at 7.5% YoY down from 15.2% YoY last month, 24.5% YoY in May and 27.6% YoY in April, all numbers dramatically effected by being measured against the depths of the first lockdown last year, known as the base effect. Given the circumstances of the recovery and the Delta variant, a miss of this scale is not surprising. The good news is that the opening up of the economy is progressing, ONS’ Business Impact of Covid-19 survey points to a 1.2% MoM increase in business turnover in August, having signalled only a 0.6% rise in July. The slowdown to more normal levels of growth is going to be a central part of developments over the course of the autumn, and is most likely to be reflected in the data for September (recalling that last year it was the September data that disappointed and suggested a longer-term path to recovery, before the autumn lockdowns put paid to the idea of any recovery at all). Concerns are now turning to those issues which were present at the end of 2019, but have been overshadowed by the pandemic, namely: productivity, the level of debt and dependence on the zero interest rate policy and the move to net zero

• BoE Governor Andrew Bailey revealed at a parliamentary hearing that the policy committee was split 4–4 over whether to raise short-term rates from 0.1% in August. However, BoE officials also maintained that some modest tightening was likely over the forecast horizon. Separately, UK economic growth slowed in July to 0.1%—compared with 1.0% in June—as the spread of the coronavirus prompted millions of people to self-isolate


• As was expected, in its press release the ECB stated that the Governing Council had come to the assessment that “favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the previous two quarters.” Beyond this, the press statement’s policy paragraphs were identical to the one in July. Key policy rates, other aspects of the ECB’s asset purchasing programmes and refinancing operations were unchanged. The euro, bonds and equities strengthened on the decision statement. President Lagarde in her statement said that the rebound phase of the recovery was increasingly advanced, that economies have largely reopened and that the ECB sees the economy returning to its pre-crisis level at year end. In addition, President Lagarde warned that the global spread of the delta variant could yet disrupt a full recovery. The speed of the recovery continues to depend on the cause of the pandemic and vaccinations. Staff projections were updated in association with the meeting. The inflation outlook was revised slightly upwards, whereas in the medium-term inflation was foreseen to remain well below the two per cent target. As for GDP, compared with the June staff projections, the outlook improved for 2021 and remains broadly unchanged for 2022 and 2023. In the Q&A, President Lagarde emphasised that the ECB wasn’t tapering its QE programme, it was recalibrating stimulus, invoking Margaret Thatcher in saying that “the lady isn’t tapering”. She also noted that if supply bottlenecks continue and push up wages, price pressures could be more persistent

• The European Commission (EC) said it planned to launch green bonds in October to fund environmental projects as part of an effort that aims to raise up to EUR 250 billion through 2026. Eleven member states have already issued green bonds, while another four plan to do so

• Shares in Europe weakened amid uncertainty about the economic outlook, the continuing coronavirus pandemic, and central bank policy. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.19% lower. Major stock indexes also fell. Germany’s Xetra DAX Index eased 1.09%, Italy’s FTSE MIB Index slipped 1.45%, and France’s CAC 40 Index lost 0.39%


• Inflation data continued to show elevated producer prices and subdued consumer prices, which have been restrained by lower fuel and pork prices. The producer price index (PPI) rose 9.5% in August from a year ago mostly due to higher commodity prices that have been a major driver of factory gate inflation this year. August’s PPI reached a 13-year high, according to Bloomberg. The recent acceleration in China’s PPI is a growing concern for the government since the widening gap between producer and consumer prices could signal pressure on domestic manufacturers’ profit margins

• China plans to integrate Hong Kong’s economy more closely with the “Greater Bay Area,” a cluster of cities in Guangdong province’s Pearl River Delta that Beijing wants to transform into an economic powerhouse, the South China Morning Post reported. The latest development regarding the Greater Bay Area comes as China announced a major expansion of the Qianhai economic cooperation zone in the southeastern city of Shenzhen. Beijing is positioning the Qianhai economic zone, which was opened in 2009, as a testing area for reform and for further opening up China’s financial sector, according to the Post

• Chinese Vice Premier Liu He tried to assure investors this week that President Xi attached great importance to the country’s digital economy. Beijing’s support for private business had not changed and would never change, Lui said. The comments come after a series of actions by Chinese regulators to rein in China’s Internet giant

• Chinese stocks rose for the third straight week. The Shanghai Composite Index gained 3.4% and the CSI 300 Index of large-cap stocks rallied 3.5%, according to Reuters. Strong trade data and an unexpected yet reportedly candid phone conversation between the U.S. and Chinese presidents lifted investor sentiment. The yield on China’s 10-year government bond increased and ended the week at 2.89%, while the renminbi currency edged up 0.2% versus the U.S. dollar to 6.4423 per dollar, its strongest level since mid-June, according to Bloomberg

Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, MFS investments, Handelsbanken Capital Markets, M. Cassar Derjavets.