Economic Outlook – 18 April 2021


• In March, housing starts rose 19.4% to a 15-year high of 1,739K (seasonally adjusted and annualized), exceeding by far the median economist forecast of 1,613K. Adding to the good news, the prior month’s result was revised up from 1,421K to 1,457K. The increase in March was driven by the multifamily category, where starts soared 30.8% to a 14-month high of 501K. Starts in the singles segment, meanwhile, advanced 15.3% to 1,238K. In Q1 as a whole, total starts sprang an annualized 7.3%

• The latest data showed that building permits, too, registered an increase in March, with total applications rising 2.7% to 1,766K. Permits issued for single-family dwellings progressed 4.6% to 1,199K, while those for multi-unit dwellings pulled back 1.2% to 567K.

• Housing starts bounced back strongly in March as builders tried to catch-up with construction backlogs accumulated during February’s “deep freeze”. Both the multifamily segment and the single-detached segment showed strength. Advanced indicators were also upbeat. The NAHB Housing Market Index remains elevated, with traffic of prospective buyers near an all-time high. Building permits, for their part, stand close to the multi-year high they struck in January. Inventories on the resale market remains extremely depressed. All this, combined with the extra stimulus rolled out by the Biden administration and the progressive re-opening of the economy, should help keep homebuilders busy going forward

• The NFIB Small Business Optimism Index continued to improve in March, climbing 2.4 points to a four-month high of 98.2. The net percentage of polled firms that expected the economic situation to improve went up but remained negative at -8% (up from -19%). Lingering pessimism among U.S. small businesses is a bit surprising given that rapid vaccine rollouts have helped reduce uncertainty considerably. The ratio of firms planning to hire in the coming months rose from 18% to 22%, but capital investment intentions remained pretty depressed at just 20% (historical average ~29%). Sales expectations, meanwhile, bounced back from -8% to 0%

• Rather surprisingly at a time where jobs remain 8.5 million below their pre-crisis level in the United States, a record 42% of small firms reported not being able to fill one or more vacant positions. Several reasons might explain why businesses are already struggling to find suitable workers. The first is lack of skill transferability. For the most part, the people who had yet to return to work after losing their job during the pandemic used to be employed in the sectors hardest hit by social distancing measures. Their skill sets might not fit the industries that have fully recovered from the crisis and where demand for workers is high at the moment. In sectors where wages are relatively low, the generous unemployment handouts provided by Washington might also be acting as a disincentive to return to work

• The Empire State Manufacturing Index of general business conditions picked up from 17.4 in March to a 42-month high of 26.3 in April. This was significantly above consensus expectations (20.0) and consistent with a healthy pace of growth at factories operating in New York State and surrounding areas. The new orders sub-index (26.9 vs. 9.1 the prior month) and the shipments sub-index (25.0 vs. 21.1) climbed to multi-month highs, while the employment gauge (13.9 vs. 9.4) showed payrolls expanding at a decent clip. Supply chain pressures were evident in the report, with supplier delivery times (28.1 vs. 11.4) lengthening the most on record and input prices (71.2 vs. 64.4) climbing at the fastest pace in 13 years. Business optimism for the next six months continued to improve: The corresponding index sprang from 26.4 to a seven-month high of 39.8. Capex (31.5 vs. 26.8) and technology spending intentions (21.9 vs. 2001) rose even further above their long-term average

• The Philly Fed Manufacturing Business Outlook Index painted a similarly optimistic picture, with the headline index rising from 44.5 in March to a 38-year high of 50.2

• According to the latest edition of the Fed’s Beige Book, overall economic activity in the United States accelerated to a moderate pace from late February to early April. Consumer spending strengthened, with the tourism sector benefiting from spring break and easing of pandemic-related restrictions. The manufacturing sector, meanwhile, expanded further despite widespread supply shortages. The residential real estate segment experienced sustained high demand and home prices progressed further as a result. The Beige Book also showed employment picking up in the survey period. Most Districts noted modest to moderate rises in headcounts, with the pace of job growth strongest in manufacturing, construction, and leisure/hospitality. Echoing the findings of the NFIB survey (see above), business contacts all over the country said hiring remained a challenge, especially for low-wage and hourly positions. To attract employee, some contacts were raising starting pay and offering signing bonuses

• Initial jobless claims decreased from an upwardly revised 769K to a post-pandemic low of 576K in the week to April 10. Continued claims, meanwhile, were roughly unchanged at 3,731K. We must add to these the roughly 12.2 million people who received benefits in the week ended March 26 under emergency pandemic programs (Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation). The recent confirmation by the Biden administration’s stimulus package that these would be extended until September was no doubt greeted with relief by the millions of people still unemployed because of the pandemic

• Again in March, industrial production rose 1.4% MoM but still stood 3.4% below its pre-crisis level. As factories continued to deal with swollen work backlogs and lean inventories, manufacturing output sprang 2.7% for a tenth increase in eleven months. Production of motor vehicles and parts expanded 2.8% albeit after collapsing 10.0% the prior month owing in part to a shortage of semi-conductors. Excluding autos, factory output advanced 2.7% on gains for machinery (+2.9%) and computers/electronics (+2.0%). Production in the utilities segment slid 11.4% as temperatures climbed from February’s record lows. Finally, mining output jumped 5.7% as oil and gas well drilling prolonged its rebound (+3.1% MoM).On a quarterly basis, industrial production progressed 2.5% in annualized terms in Q1 as a whole after a 9.5% spike in the three months to December

• Capacity utilization in the industrial sector improved from 73.4% in February to 74.4% in March. In the manufacturing sector, it rose from 71.9% to 73.8%. In both cases, capacity usage was recovering fast but still remained below pre-pandemic levels

• The Consumer Price Index rose 0.6% in March after climbing 0.4% the prior month. Consensus expectations were for an increase of 0.5%. The energy component sprang 5.0% thanks in part to a 9.1% jump in the gasoline segment. The cost of food, for its part, climbed 0.1%. The core CPI, which excludes food and energy, beat consensus expectations as well, progressing 0.3% MoM. Prices for ex-energy services were up 0.4% on gains for shelter (+0.3%) and transportation services (+1.8%). The price of core goods, meanwhile, edged up 0.1%, as increases for used vehicles (+0.5%) and alcohol/smoking products (+0.6%) more than made up for a 0.3% decline in the apparel segment. Year on year, headline inflation clocked in at 2.6%, up from 1.7% in February. The core CPI index gained three ticks to 1.6%

• As expected, the annual inflation rate strengthened sharply in March, with the headline figure benefiting from a substantial positive base effect, as inflation was negatively impacted last year by the imposition of COVID-19 containment measures. Consequently, the increase in March reflected last year’s weakness as much as the current strength in prices. A better idea of underlying price movements can be got from monthly stats, which came in stronger than expected in March. Indeed, headline prices registered their strongest monthly gain since 2009 in the month (+0.62%). Though this was partly due to a marked increase in the energy components, other categories recorded healthy increases, too, as evidenced by the fact that the core CPI advanced at its fastest monthly rate since August (+0.34%)

• As strong as the March CPI report turned out to be, the real question is whether inflationary pressure can be sustained. The Federal Reserve believes that the inflation overshoot is merely temporary. According to the central bank, prices will slide back towards 2.0% once the base effect wears off and higher energy prices are absorbed into the data

• The Import Price Index (IPI) jumped 1.2% MoM after surging 1.3% the prior month. The headline print was positively affected by a 6.7% spike in the price of petroleum imports. Excluding this category, import prices nonetheless sprang 0.9%. On a 12-month basis, the headline IPI went from 3.1% to 6.9%, the highest level recorded since January 2011. The less volatile ex-petroleum gauge vaulted from 3.0% to a 113-month high of 4.1%

• Retail sales soared 9.8% in March, blowing past consensus expectations calling for a +5.8% print. The prior month’s result, 4Economics and Strategy Weekly Economic Watch meanwhile, was revised up from -3.0% to -2.7%. Sales of motor vehicles/parts sprang 15.1% and stood 26.8% above their pre-pandemic level. Excluding this segment, consumer outlays jumped 8.4% on gains for sporting goods (+23.5%), clothing (+18.3%), eating/drinking establishments (+13.4%), building materials (+12.1%), electronics (+10.5%), and general merchandise (+9.0%). All 13 retail segments saw higher sales in the month, with 12 sitting above last year’s February level. Core sales, which are used to calculate GDP and exclude food services, auto dealers, building materials and gasoline stations, were up 6.9% in the month and tracking annualized growth of 27.5% in Q1 as a whole

• Consumer spending rebounded strongly in March after suffering from the cold snap that hit the Midwest in February. Excluding the period immediately following the COVID-19 outbreak, when consumer spending collapsed and then rebounded stiffly, the retail sales growth in March 2021 was the steepest on record. What’s more, there were gains across the board, as all 13 segments covered registered advances, a feat observed only six times since data collection began in 1992. Moreover, only one category had yet to recover the losses it suffered during the pandemic: food services (-4.8% from their 2020M02 level)

• Growing regulatory scrutiny on special purpose acquisition companies (SPACs) has resulted in a sharp slowdown in the registration of these vehicles in recent weeks. Month-to-date, only 12 new SPACs have filed to go public, down from an average of five a day in the first quarter. Regulators have begun focusing on optimistic revenue projections used by startups acquired by SPACs. This week, the US Securities and Exchange Commission said it may also require that warrants issued to early investors be classified as liabilities rather than equity, forcing SPACs to restate their financial results. Also this week, the US Senate confirmed Washington and Wall Street veteran Gary Gensler as SEC chair

• Fed representatives Powell, Clarida and Williams re-iterated that the Fed wants to see actual inflation rather than pre-empting a probable rise in inflation, which was the paradigm before. As we head into a summer of inflated inflation prints, it is useful to remind oneself that inflation is by definition a persistent rise in prices. A mere base effects or transitory demand supply imbalance will not be deemed a real rise in inflation. They also stated that monetary policy will follow the post-GFC playbook, that tapering will precede rate hikes

• Most of the major benchmarks recorded their fourth consecutive week of gains and moved to record highs. The technology-heavy Nasdaq Composite index and the small-cap Russell 2000 Index slightly lagged the large- and mid-cap benchmarks and stayed below their recent highs. Health care shares were particularly strong within the S&P 500 Index, helped by gains in insurance stocks, while rising gold and copper prices boosted mining shares. Energy shares were roughly flat after retreating late in the week.

• In terms of data release, the Leading Index is out on Thursday. The Leading Economic Index (LEI) rose 0.2% during February. The modest gain occurred alongside harsh winter storms that disrupted economic activity throughout much of the central United States. Looking ahead, the LEI should see a more robust gain in March. Retail sales surged almost 10% during the month, which points to a rebound in the consumer expectations component as well as a solid rise in the consumer goods orders. Jobless claims continued to drift lower in March, while a solid rise in average weekly hours worked points to a similar gain in the average workweek component. What’s more, ISM new orders beat expectations and jumped to 68 during the month, the highest since 2004. In short, the March LEI should takeoff alongside the ramp-up in economic activity that appears to already be under way


• UK GDP was reported at 0.4% MoM (consensus: 0.6%) and -7.8% YoY (consensus: -8.3%). The hard-hit service sector grew 0.2% in February, as wholesale and retail trade sales picked up a little but, overall, consumer-facing services industries remain well below pre-pandemic (February 2020) levels. These numbers will not receive all that much attention, given they are tracking the last days of lockdown before restrictions began to be eased. Looking ahead, initial results from the ONS regular Business Conditions Survey from March found that 40% of businesses currently trading reported a negative impact on their turnover, compared to 44% in February. There is a lot of hope for the future, and it does not seem misplaced

• The goods trade balance numbers were more of a surprise. The trade figures had caused a lot of excitement last month, when they showed a big dip (GBP -9.8bn) in Jan, triggering fears of a significant downturn in trade post-Brexit. This month, transport difficulties persisted (and they are going to persist in the data for another month, with the Suez canal blocked). The numbers were GBP -16.4bn (consensus: GBP -10.4bn), with the overall trade balance decreasing to GBP -7.1bn. While it might appear that more store should be put into the forecast that post-Brexit trade has been impacted more than might have been hoped, it is notable that exports of goods to the EU partially rebounded in February 2021, increasing by GBP 3.7bn (46.6%) after a record fall of GBP 5.7bn (-42.0%) in January. This increase was driven by exports of machinery and transport equipment and chemicals, particularly cars and medicinal and pharmaceutical products. Imports of goods from the EU showed a weaker increase of GBP 1.2bn (7.3%) in February 2021 after a record fall of GBP 6.7bn (-29.7%) in January

• London’s FTSE 100 ended above the 7,000 mark on Friday for the first time since the pandemic pummeled risk assets last year and gained for the second consecutive week as falling coronavirus infections lifted optimism about a stronger economic recovery. The blue-chip index (.FTSE) climbed 0.5%, led by gains in precious metal and base metal miners (.FTNMX551030), (.FTNMX551020), which rose 1.7% and 0.7% respectively and heavyweight banking stocks (.FTNMX301010) that stand to benefit from an economic re-opening gained 1.7%. “Value-style stocks offering jam today rather than jam tomorrow have been in demand, as well as lots of companies well placed to benefit from the reopening of the economy thanks to the rollout of the COVID vaccines,” said Russ Mould, investment director at AJ Bell

• Britain’s financial regulator called on Friday for the regulatory technology industry to press their own case for the greater adoption of cost-saving ways to automate compliance and spot money laundering, rather than expecting it to do so. A report by the City of London Corporation said that annual cost of compliance for Britain’s top five banks could be cut by at least 0.05%, or a combined 523 million pounds ($720 million), by the greater use of so-called RegTech. The report called on regulators, alongside industry, to step up the use of RegTech to make finance more competitive and said it should be “a regular topic of conversation” between them. But regulators said it was not their place to take the lead. A technology shift that is led by a small number of people in the public sector making choices does not strike me as a good technology shift,” Bank of England Deputy Governor Sam Woods told a launch event for the report. RegTech is part of Britain’s wider so-called fintech sector that is a central plank of the government’s strategy to build a more globally competitive financial sector after the City of London was cut off from Europe by Brexit.


• The euro has had a good run against the greenback in April and the cross flirted with the 1,20 level before backing down in the face of strong US macro data in the form of retail sales and jobless claim

• European Central Bank President Christine Lagarde said the eurozone economy will need both monetary and fiscal support well into the recovery

• Italy has raised its target for this year’s budget deficit to 11.8% of gross domestic product from an 8.8% forecast made in January, a government source told Reuters. The new target includes the impact of a EUR 40 billion stimulus package signed off by the cabinet, the source said

• Italy forecasts that its debt/GDP ratio will hit an all-time high near 160% this year and that growth will rebound less strongly than previously forecast, by about 4.5% in 2021. The country’s deficit will tally around 11.8% of GDP, the government projects

• Shares in Europe rose on hopes of a strong recovery in the global economy and corporate earnings, despite a resurgence in coronavirus infections. In local currency terms, the pan-European STOXX Europe 600 Index posted a seventh consecutive week of gains, rising 1.20%. Germany’s Xetra DAX Index advanced 1.48%, France’s CAC 40 gained 1.91%, and Italy’s FTSE MIB added 1.29%


• The economy surged 18.3% year over year in the first quarter, albeit versus a very low base in 2020, when stringent shutdowns were imposed to contain the initial COVID-19 outbreak. Earlier in the week, China’s Customs reported that exports rose 30.6% in March in U.S. dollar terms. Exports were a key growth driver for China in 2020. Despite the strong headline number, exports slowed in March on a two-year average comparison with 2019. Among the other March data prints, retail sales beat consensus estimates (33.9% versus 28%), while industrial production missed (14.1% versus 18%). Economists pointed to slower-than-expected sequential GDP growth in the first quarter (0.6% versus 3.1%) due to the virus containment measures at the start of this year and an upward revision to the fourth-quarter data

• In China’s bond markets, rumors spread that state-owned asset manager Huarong Asset Management might fail to meet its upcoming bond payments. The price of Huarong’s bonds fell sharply but began to recover on Thursday after Huarong said it would repay an SGD (Singapore dollar) 600 million bond in April. Contagion to other bonds (and equities) due to Huarong has been relatively mild, seemingly due to expectations that Beijing will step in with financial support for the prominent state-owned enterprise. Nevertheless, the week’s sell-off in Chinese offshore dollar-denominated bonds was the biggest since March 2020. Sentiment in both the domestic (RMB) and offshore (USD) bond markets was hurt by new regulations on Tuesday that local government financing vehicles should choose bankruptcy if they were unable to repay their debt. The timing of this announcement shook investors, coinciding as it did with Huarong’s troubles

• The Shanghai Composite broad market index of A-shares fell 0.7% over the week to Friday. The CSI 300 large-cap index, with its higher weight in technology stocks, fell 1.4%. Asian and Chinese markets were broadly higher Friday following key Chinese economic data. Mainland investors appeared unsure whether strong GDP data would bring forward liquidity tightening or if disappointing March industrial production data would give the authorities cause to pause. Consumer stocks rallied after a working paper from the government proposed fully lifting restrictions on family size

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