Economic Outlook – 15 August 2021


• According to the Job Openings and Labor Turnover Survey, the number of available jobs to be filled totaled
10.07 million as at the last business day of June, a new record high, up 590K from an upwardly revised 9.48 million in May. Job openings were up in all industries but manufacturing, with trade (+197K), leisure (+139K), retail (+133K), and accommodation/food services (+121K) leading the way. There were 553K more job openings in the private sector in the month and 37K more in the government sector. June’s print dragged the ratio of unemployed persons to job openings back below 1.0, which indicates that labour is in short supply. Total hiring was stronger in June, climbing to 6.72 million from 6.02 million the previous month. Total separations rose 254K to 5.58 million. Quits, which are generally voluntary separations initiated by employees, jumped 239K to 3.87 million, which translated into a quits rate of 2.7% (vs. 2.5% the previous month). Layoffs and discharges fell 3.2% to 1.31 million, and other separations sprang 16.7% to 405K

• The NFIB Small Business Optimism Index practically reversed all of June’s progress, sliding 2.8 points to 99.7. The net percentage of polled firms that expected the economic situation to improve plunged eight points to -20%. The net percentage of respondents who expected higher sales declined sharply as well, sinking into negative territory to -4%. Given these pessimistic sales prospects, the ratio of businesses that deemed now to be a good time to expand fell two points to 13%, which is below this indicator’s historical average. Rather surprisingly at a time when jobs remain 5.7 million below their pre-crisis level in the United States, 49% of small firms reported not being able to fill one or more vacant positions, an all-time high for this indicator
• Nonfarm business sector unit labour costs grew 1.0% on a quarterly annualized basis in the second quarter of the year on the back of a 3.3% annualized jump in compensation per hour, which outran a 2.3% annualized increase in productivity. Both compensation per hour and productivity stood at all-time highs in the second quarter of the year. In real terms, however, hourly compensation was down 2.7% compared with its level 12 months earlier and down 4.8% annualized compared with its level the previous quarter. The business sector reported an annualized 0.9% gain in unit labour costs with hourly compensation growth (+3.7%) outpacing productivity growth (+2.7%). In the manufacturing sector, unit labour costs showed a downward quarterly trend, decreasing an annualized 1.9% as productivity gains (+6.9%) exceeded increases in hourly compensation (+4.9%)

• The Consumer Price Index rose 0.5% MoM in July after climbing 0.9% the prior month, a result exactly in line with consensus expectations. The energy component rose 1.6% on a 2.4% gain for gasoline. The cost of food increased 0.7% as the food away from home segment rose 0.8%, a record since 1981. The core CPI, which excludes food and energy, was up a still-strong 0.3% after climbing 0.9% the prior month, a result that was boosted by used vehicle prices. Prices for ex-energy services rose 0.3% on strong gains for shelter (+0.4%) and medical care services (+0.3), while the transportation segment retreated (-1.1%) for the first time since February 2021. The price of core goods, meanwhile, grew 0.5% on gains for new vehicles (+1.7%), motor vehicle parts (+1.1%), education commodities (+0.8%), and tobacco/smoking products (+0.5%), while the apparel segment was unchanged. Year on year, headline inflation clocked in at a 13-year high of 5.4% for the second consecutive month. The core index, meanwhile, grew 4.3% year on year after climbing an impressive 4.5% the previous month. This was exactly in line with consensus expectations

• Housing needs be kept in mind in estimating future inflation. Shelter costs are calculated by asking landlords what they expect to collect at the end of the month. In the past months, the housing components included in the CPI have been subject to eviction moratoria imposed by Washington, a measure that was prolonged until October. Meanwhile, house prices have been surging: The Case-Shiller index was up 17.0% YoY in May, the most since 2004. Shelter is already showing a strong progression (+5.0% on a three-month annualized basis) and a vigour that could persist, given that rents tend to lag higher home prices and that some catch-up will inevitably occur when the eviction moratoria are lifted

• In terms of data release, CPI report is out on Wednesday. The underlying details of the report should continue to show price pressure broadening out beyond categories most acutely associated with the reopening. Shelter inflation, for example, likely continued to rise in June and will be a source of upward pressure on prices for some time to come as the run-up in home prices over the past year filters into the CPI and rents are quickly bouncing back. Similarly, food prices were still poised for some considerable strength in July based on the recent run up in food-related commodity prices and average hourly earnings at restaurants

• Producer Price Index (PPI) for final demand jumped 1.0% MoM, four ticks more than expected by consensus. This gain came in the wake of solid prints (at least +0.7% each month) since the beginning of the year. Goods prices rose 0.6% MoM on a healthy gain for energy (+2.6%), while food registered a decline
(-2.1%). Excluding these two categories, prices still advanced 1.0%, which is high by historical standards. Prices in the services category, for their part, rose 1.1% Mom. The core PPI, which excludes food and energy, climbed 1.0%. Year over year, the headline PPI advanced from 7.3% in June to 7.8% in July, the most on record. Excluding food and energy, it still went from 5.5% to 6.1%, another all-time high. Momentum has been even stronger recently, with headline and core prices rising an annualized 10.3% and 8.8%, respectively, over the past six months. Higher input prices, longer shipping delays, and rising labour expenses have been to blame for the surge in producer prices

• The Import Price Index (IPI) came in at 0.3% MoM, a result below consensus (+0.6%). Partially compensating for the miss, the prior month’s growth was revised from +1.0% to +1.1%. The growth stemmed from petroleum prices, which grew 2.1% in the month. Excluding this category, import prices remained essentially unchanged in the month at +0.1%, a progress that still brought the index to an all-time high. On a 12-month basis, the headline IPI went from an elevated 11.2% in June to 10.2% in July, a print that remains high by historical standards. The less volatile ex-petroleum gauge remained essentially unchanged from its
13-year high of 6.9% in June at 6.8% in July. Obviously, the drop in the value of the U.S. dollar continues to be largely responsible for higher import prices

• University of Michigan Consumer Sentiment Index came in at 70.2 in August, its lowest level since 2013 and well below consensus expectations calling for an 81.2 showing. The decrease stemmed from consumer expectations dropping 13.8 points to 65.2, while the index for current conditions plunged 6.6 points to 77.9, its lowest level since April 2020. The drawback in confidence was concentrated among republicans, whose index dropped 19 points to a record low of 46.7 since 2017, when monthly data became available

• Initial jobless claims decreased from 387K to 375K in the week to August 7. Continued claims, meanwhile, continued their downtrend, dropping from 2,980K to a post-pandemic low of 2,866K. Another 8.7 million or so people, down from 9.4 million the previous week, received benefits in the week ended July 24 under two emergency programs: Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation. The phasing out of emergency benefits—a process that has already begun in some states and that will continue until September 6 in others—has certainly been a major factor in this decline

• The Senate passed a $1 trillion infrastructure package, sending the provision to improve the nation’s roads, bridges and broadband to the House for approval. The 2,700-page infrastructure bill now makes its way to the House, where it and a $3.5 billion budget resolution (focused on poverty, climate change and health care) are not likely to pass for months as Speaker Nancy Pelosi says she will not take up one plan without the other. If the House’s version of the infrastructure legislation includes material changes to the Senate’s, lawmakers from both chambers would then work together in a conference committee to reconcile their differences and produce a final bill. That bill would then return to each chamber for a vote before heading to President Joe Biden’s desk

• US Federal Reserve officials said that the US economy is growing rapidly and that while the labor market still has room for improvement, inflation is already at a level that could satisfy one leg of a key test for the beginning of interest rate hikes. Atlanta Federal Reserve Bank President Raphael Bostic said he is eyeing the fourth quarter for the start of a bond-purchase taper but is open to an even earlier start if the job market keeps up its recent pace of improvement. Dallas Federal Reserve President Robert Kaplan said that the central bank should begin tapering its monthly purchases of Treasury bonds and mortgage-backed securities in October. Correspondingly, the US Department of Labor reported that the consumer price index rose 5.4% in July from a year earlier, in line with estimates and June’s growth. Excluding energy and food, the CPI rose by 0.3% last month, shy of economist expectations of a 0.4% increase and well below June’s rise of 0.9%. Used car prices, which rose rapidly between April and June, gained just 0.2% in July after a climb of more than 10% in the prior month

• U.S. equities gained ground with the market shrugging off the renewed spread of the coronavirus and its possible implications for future economic activity. In the S&P 500 Index, value stocks outperformed their growth counterparts. Most sectors advanced, led by materials. Energy stocks slipped on concerns that oil producers’ discipline on the supply side and worries that the upsurge in coronavirus infections could weigh on global demand. Information technology stocks also lagged, driven by the pullback in the semiconductors and semiconductor equipment industry, which came under pressure from concerns about potential weakness in memory prices

• In terms of data release, retail sales are out on Tuesday. Retail sales were generally expected to slow this summer after their rapid recovery, as consumers shifted more spending toward services and experiences and away from goods. Data for June pushed back at this, as sales rose 0.6%, beating expectations for a 0.3% decline. Rather than a turn back toward stay-at-home habits, the details of the report showed that people were getting back out, with sales at clothing stores, gas stations, restaurants and bars all contributing to the top-line beat

• Industrial production is out on Thursday. It increased 0.4% in June as gains in mining and utilities production helped offset a slight decline in manufacturing output. The slip in manufacturing output was largely driven by a 6.6% drop in motor vehicle and parts production, excluding autos manufacturing output increased 0.4%. Activity at the nation’s auto plants has been incredibly choppy in 2021, with output up one month and down the next. The back and forth is primarily a result of continued supply shortages. Demand for cars, while cooling, remains strong as evidenced by the run-up in prices over the past few months


• UK GDP for Q2 has come out at 4.8% MoM, 22.2% YoY. These figures make abundantly clear the impact of the base effect, e.g. measuring todays output against that of a year ago in the midst of the depths of the first lockdown. The MoM GDP figure has also come out at 1.0% MoM and 15.2% YoY, this is still well above the average monthly growth rate (which is 0.15%) although well below April’s figure of 27.4%. These numbers have largely been driven by services and construction.

• Accommodation and food service activities increased by 87.8% in Q2, while wholesale and retail trade increased by 12.8%, in response to the re-opening of indoor hospitality, Euro 2020 and the reopening of non-essential retail. Accommodation will receive a further boost in the months to come as international travel remains more difficult than it was pre-pandemic and many people are “staycationing” in the UK this summer; although, staff shortages may become problematic as the summer progresses. Education also received a big boost (+27.1%) as schools reopened, albeit relatively briefly before the summer holidays. Construction output increased by 3.3% in Q2, reflecting a rise in new work (3.7%), particularly infrastructure, and repair and maintenance (with growth of 1.7%), but some businesses reported limited availability of certain construction products, most notably timber, steel, cement and tiles


• Industrial production in the eurozone fell 0.3% sequentially in June, as supply bottlenecks weighed on German factory output. Revised data from the EU’s statistics office pegged the sequential contraction in eurozone industrial production in May at 1.1%, down from the previous estimate of a 1.0% drop

• Shares in Europe advanced as investors focused on the economic recovery and shrugged off worries about surging coronavirus infections in key markets and signs of slowing growth in Asia. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.25% higher. France’s CAC 40 Index gained 1.16%, Germany’s Xetra DAX Index advanced 1.37%, and Italy’s FTSE MIB Index climbed 2.51%. The UK’s FTSE 100 Index added 1.34% on strong corporate earnings and the British pound’s decline relative to the U.S. dollar


• China reported that total social financing—a broad measure of new credit in the economy—rose 10.7% year over year in July, its slowest pace since February 2020 and down from 11% in June. Analysts attributed the latest month’s decline to a decrease in shadow banking activity and government bond issuance, though the latter was seen as a temporary drop due to calendar effects. Inflation trends were broadly unchanged in July, with a 9.0% year-over-year surge in the producer price index driven by higher commodity prices and a 1.3% increase in core CPI, which excludes food and energy

• China’s central bank said it would keep monetary policy flexible and appropriate to maintain stability as the pandemic persists and domestic economic recovery is uneven. In its second-quarter monetary policy implementation report, the People’s Bank of China said it would keep liquidity reasonably ample and step up support for technology innovation, small firms and the manufacturing sector. China has tightened COVID-19 measures to combat an uptick in daily cases, a move that could inhibit the country’s economic growth and impact global growth

• China released a five-year blueprint calling for increased regulation affecting key parts of the economy. The document signaled Beijing’s intention to draft new laws covering national security, technology, monopolies, and education. In the technology sector, new legislation will cover areas such as online finance, artificial intelligence, big data, and cloud computing

• Chinese stocks recorded modest gains despite worries that increased government oversight of the country’s technology and private education industries would spread to other sectors. The large-cap CSI 300 Index added 0.5% and the benchmark Shanghai Composite Index gained 1.7%, according to Reuters. In the bond market, the yield on the 10-year government bond rose 6 basis points to 2.90%. The renminbi currency was unchanged relative to the U.S. dollar. The official trade-weighted currency index—which measures the renminbi’s value against a basket of foreign currencies—was close to a five-year high

Sources: T. Rowe Price, MFS Investment Management, Handelsbanken Capital Market, National Bank of Canada, M. Cassar Derjavets