Economic Outlook – 18 September 2022


• In August, the Consumer Price Index belied consensus expectations by ticking up instead of down. This came after a flat print the prior month. Prices in the energy segment fell 5.0% on declines for gasoline (-10.6%) and fuel oil (-5.9%), but these were partially offset by an increase for utility gas services (+3.5%). The cost of food, meanwhile, sprang 0.8% as it did in July when it recorded one of the strongest progressions of the past 30 years. The core CPI, which excludes food and energy, rose 0.6%, three ticks more than the median economist forecast of 0.3%. Prices for ex-energy services advanced 0.6% on gains for medical services (+0.8%), shelter (+0.7%), and transportation services (+0.5%). The price of motor vehicle insurance, meanwhile, continued to advance at a brisk clip (+1.3%). The cost of core goods, for its part, progressed 0.5%. Prices were up a further 0.8% for new vehicles, 0.2% for medical care commodities, and 0.2% for apparel, but sagged 0.1% for used vehicles. YoY, headline inflation clocked in at 8.3%, down from the prior month’s reading of 8.5% but above consensus expectations calling for 8.1%. The 12-month core measure climbed to 6.3%, two ticks below the March peak

• After finally showing some signs of moderation the prior month, the CPI for August was hotter than expected. Energy prices declined for a second consecutive month along with other goods such as plane tickets and used cars. However, food prices continued their progression, albeit at the slowest pace since December 2021. Year over year, they increased 11.4%, the most since 1979. On the services side, the report showed more price gains, led by the shelter component (+6.2%, the most since 1982). This remains concerning in that inflation in the services category tends to be stickier

• After falling 0.4% in July, the Producer Price Index for final demand slipped 0.1% in August, marking a second consecutive drop for this indicator. Goods prices sank 1.2% on a sizeable decrease in the energy segment (-6.0%). Food costs, for their part, were unchanged. Prices in the services category edged up 0.4%. The core PPI, which excludes food and energy, grew 0.4% monthly, slightly more than the 0.3% increase registered in July. Year over year, the headline PPI eased from 9.8% to 8.7%, just a tick less than expected by consensus. Excluding food and energy, it slid from 7.7% to 7.3%, which was still above consensus expectations

• The Import Price Index (IPI) retraced 1.0% on a monthly basis, less than the median economist forecast calling for a 1.3% drop. The headline print was negatively affected by a 7.1% retreat in the price of petroleum imports but, even excluding this category, import prices still shed 0.2%, marking a fourth decline in a row for this indicator. On a 12-month basis, the headline IPI eased from 8.8% to a 16-month low of 7.8%. The less volatile ex-petroleum gauge sagged from 4.6% to 4.3%

• Immediately after the data release, markets priced in more aggressive Fed action. They now anticipate at least a 0.75% increase in the fed funds target at next Wednesday’s Federal Open Market Committee meeting and have priced in about a 20% chance of a 1% increase. Investors had earlier expected policymakers to slow the pace of hikes in the next few meetings but now see a greater than 50% chance of a 0.75% hike in November. At this point, futures markets expect the Fed to hike rates to about 4.50% by the first quarter of next year. That’s about a half-percent higher than before the CPI data were released

• Retail sales rose 0.3% in August instead of declining 0.1% as per consensus expectations. The previous month’s print, however, was revised from flat to -0.4%. Sales of motor vehicles and parts contributed positively to the headline print, surging 2.8%. Without autos, retail outlays pulled back a below-consensus -0.3% as declines for gasoline stations (-4.2%), furniture (-1.3%), non-store retailers (-0.7%), and health/personal care (-0.6%) more than offset increases for miscellaneous items (+1.6%), building materials (+1.1%), eating/drinking (+1.1%), and food/beverages (+0.5%), among others. In the end, sales were up in 8 of the 13 categories surveyed. Core sales (i.e., sales excluding food services, auto dealers, building materials, and gasoline stations), which are used to calculate GDP, were unchanged in the month

• August’s increase was largely due to growth in auto sales and was limited by lower spending at gasoline stations. The former may have been due to a larger supply of available vehicles while the latter certainly reflected lower gasoline prices. Without these two categories, retail sales were up 0.3% on decently broad gains. Still, this report is not indicative of renewed consumer vigour in August. Once adjusted for inflation, spending on goods will most likely be only slightly up or flat. Looking at core sales (which exclude some of the more volatile components and which are used to calculate GDP), retail spending was flat in the month, the lowest print in several months. Overall, perspectives for the quarter are not too bad and household spending may have increased in the third quarter, spurring GDP back to growth at the same time

• Industrial production fell 0.2% from the all-time high reached in July. Manufacturing output expanded 0.1%, limited by a decline in the production of motor vehicles/parts (-1.4%), which dipped below its pre-pandemic level. Excluding autos, factory output increased 0.2% on a 1.0% gain for machinery. Utilities output shrank 2.3% while production remained unchanged in the mining sector even though oil and gas well drilling sprang 2.7% to move further above its pre-crisis level

• Capacity utilization in the industrial sector slid from 80.2% in July to 80.0% in August, which was still above the indicator’s historical average. In the manufacturing sector, it remained unchanged at 79.6%

• The University of Michigan Consumer Sentiment Index rose from 58.2 in August to a still depressed 59.5 in September. The increase was due to an improvement in both current and longer-term perspectives. The former improved from 58.6 to 58.9, while the latter climbed from 58.0 to 59.9. Buying conditions for houses and homes remained close to multi-year lows, as did the share of survey respondents who felt their financial situation had improved over the past 12 months. Twelve-month inflation expectations eased once more (from 4.8% to 4.6%), as did the 5/10-year expectations (from 2.9% to 2.8%)

• The NFIB Small Business Optimism Index recorded its second consecutive monthly increase in August, edging up 1.9 points to 91.8. This, however, was still well below the index’s historical average. The net percentage of firms that expected the economic situation to get better improved significantly from -52% to -42% but remained indicative of a gloomy outlook. The net percentage of firms that expected sales to go up improved from a 27-month low of -29% to a still low -19%. Flagging prospects did not seem to affect hiring plans too much: 21% of firms said they expected to expand payrolls in the coming months, up from 20% in July and comfortably above the long-term average for this indicator. Finding good candidates remained extremely difficult as a near-record 49% of businesses reported not being able to fill one or more vacant positions, unchanged from last month

• The Empire State Manufacturing Index of general business conditions rebounded 29.8 points in September. This was the largest monthly improvement registered by this indicator since April 2022 and left the index at -1.5, above consensus expectations calling for a -12.9 print. After declining in August, both the new orders sub-index (3.7 vs. -29.6 prior month) and the shipments sub-index (19.6 vs. -24.1) improved in September. The number of employees tracker improved as well (9.7 vs. 7.4), while the average workweek gauge climbed from -13.1 to -0.1, indicating practically no change in hours worked. Despite delivery times (1.9 vs. -0.9) increasing, input price trackers continued to ease (39.6 vs. 55.5), falling to a 22-month low. Manufacturers once again raised selling prices (23.6 vs. 32.7), albeit at a slower pace than in the early months of the year. Business optimism for the next six months improved (8.2 vs. 2.1) but remained below its long-term average. Finally, capex (17.9 vs. 12.7) and technology spending intentions (13.2 vs. 10.0) both showed a progression

• The Philly Fed Manufacturing Business Outlook Index did not paint a more optimistic picture of the situation prevailing in the manufacturing sector, as it dropped from 6.2 to -9.9, a result below the 2.3 print expected by consensus. The indices tracking new orders (-17.6 vs. -5.1 prior month), shipments (8.8 vs. 24.8) and number of employees (12.0 vs. 24.1) weakened. Meanwhile, the indicator tracking average workweek turned negative (-3.8 vs. 6.1), a first since June 2020. Input (29.8 vs. 43.6) inflation continued to ease, while output prices (29.6 vs. 23.3) showed an increase. The index tracking future business activity crept up from -10.6 to -3.9, the fourth consecutive negative print for this indicator

• The Business Roundtable’s CEO survey showed that chief executives plan to decrease hiring and capital investment amid persistently high inflation and higher interest rates. The index fell 12 points to 84 but remains well above the neutral level of 50

• Stocks fell sharply as inflation fears intensified and short-term bond yields reached levels last seen in 2007. The S&P 500 Index recorded its largest weekly drop since mid-June and hit its lowest point on an intraday basis since mid-July. Growth stocks fared worst, with the technology-heavy Nasdaq Composite falling nearly 5.5%. Communication services and information technology shares led the declines within the S&P 500 as Google parent Alphabet and Facebook parent Meta Platforms hit new 52-week lows. Industrials and materials shares were also especially weak

• Despite the evidence of a resilient U.S. consumer, a gloomy outlook on the global economy from shipping giant FedEx sent stocks sharply lower at the end of the week. After the market closed on Thursday, FedEx announced that it was pulling its earnings guidance for fiscal year 2023 due to “expectations for a continued volatile operating environment,” and its new CEO told a CNBC interviewer that he expected a global recession. FedEx stock fell by about 21% in trading on Friday

• After intervention by the White House, a potentially crippling strike of US freight railroad workers was averted at the eleventh hour. About 30% of US freight is moved by rail, so a strike would have severely disrupted supply chains at a time when logistics operations are finally recovering from the effects of the pandemic and would have exacerbated already high inflation. A tentative agreement was reach on Thursday but still needs to be ratified by union members

• In terms of data release, the FOMC is set to increase the fed funds target by 0.75%-pts for the third consecutive meeting on Wednesday. Markets had been fluctuating between 50 and 75 basis points for most of the inter-meeting period but, following August’s red-hot CPI print on Tuesday, there was a decisive move towards 75 bps (and a non-trivial chance of a full percentage point hike). With inflation still hot and the labour market remaining tight, the Fed is likely to signal that further rate increases will be necessary. On that note, a new Summary of Economic Projections and ‘dot plot’ will be soon released which will give us fresh insight into the FOMC’s expected policy rate trajectory. Likely, the median 2022 ‘dot’ will be pushed higher, towards 4%. Consistent with recent Fed rhetoric, it’s unlikely they’ll be signalling rate cuts until at least 2024. Just as interesting will be the FOMC’s economic projections. June’s SEPs (Summary of Economic Projections) were consistent with a very soft landing but Powell’s Jackson Hole comments conceded that ‘pain’ may be coming for households and businesses, so there should be a material downgrade coming. As usual, there will be a Jerome Powell press conference after the meeting which should provide marginal guidance on the path of interest rates going forward

• There will also be some important information about the state of the housing market with the publication of August’s existing home sales and housing starts. After plunging in July, housing starts may have posted a slight uptick based on the most recent building permits data


• UK Retail Sales for August have come out at -1.6% MoM, -5.4% YoY, these results are worse than expected, a combination of rising inflation and falling consumer confidence having an impact. Non-food stores sales volumes fell by 1.9% over the month and were 2.0% below their pre-pandemic February 2020 levels. Other non-food stores, such as sports equipment and toy stores, reported a monthly fall in sales volumes of 2.8% in August 2022, while department stores fell by 2.7%. These figures are in some ways unsurprising as UK Consumer Confidence has continued to plumb new depths over the summer (GfK’s confidence figure for Aug was -44, an all-time low). The interesting data will be next month, when the impact of the latest Government intervention in the energy market can be assessed and how it might improve wider confidence and wiliness to spend. For the moment, discretionary spending is clearly on a downwards trajectory

• While overall online sales fell, it was a less notable fall than sales overall and suggests consumers do, at times, find it easier to shop for bargains online. Online retail sales continue to be of interest, moving from approximately 20% of retail before the pandemic, they peaked at over 50% above pre-pandemic levels, but have now fallen from 26.3% of overall sales in July to 25.7% in August. This could be the new equilibrium, with consumers having adopted new patterns of shopping (notably food shopping has doubled to 10% of food sales and there is little volatility in spending patterns, suggesting there will be no reversion to mean). This shift in spending patterns is having an ongoing impact on retail property values, particularly more indifferent non destination High Streets (lacking green space, lacking ancillary amenities such as good cafes, lacking parking or transport) where competition with people’s sitting rooms is proving acute

• UK CPI inflation for August YoY came in slightly below expectations at 9.9%, falling from 10.1% the previous month. August’s monthly increase came in at 0.5%. CPI core inflation YoY registered at 6.3%, slightly up from July’s figure of 6.2%. The headline rate of 9.9% brings the rate of CPI inflation back in line with projections set out in the Bank of England’s August report. A fall in motor fuel prices resulted in a large downward contribution to CPI inflation, with the annual rate of inflation easing from 43.7% to 32.1% between July and August. However, food prices – which have risen throughout 2022 – saw a further unwelcome monthly price increase of 1.5% between July and August. In August, the core rate of CPI was driven marginally upwards by a growth in services inflation, which was partially offset by a slight easing in goods inflation

• Vacancy levels registered at 1.266m for June to August 2022 – down 34,000 from the previous quarter. While this shows vacancy levels have peaked, the absolute level remains high and pretty much all other indicators suggest the labour market in the UK remains tight and, if anything, is tightening further. The UK’s unemployment rate from May to July reached 3.6%, down from 3.8% and below economists’ predictions of 3.8%. The employment change for the three months to July was just 40k, well below consensus of 125k. Economic inactivity rates have risen to 21.7%, 0.4pp higher than the previous three-month period. There are now nearly 650,000 additional inactive people in the UK compared to pre-pandemic levels, with recent increases driven by the 50-64 demographic and those declared as long-term sick

• The British pound depreciated against the U.S. dollar, sinking to levels last hit in 1985. Fears of a looming recession contributed to this downward pressure, along with concerns that the Bank of England might deliver an interest rate hike of 0.5 percentage point at its next meeting, a smaller increase than the U.S. Federal Reserve is expected to announce


• The ZEW survey of expectations, which tracks the opinion of experts on the direction of the Eurozone’s economy over the next six months, declined for the third consecutive month in September, from -54.9 to -60.7, just 3.0 points shy of its lowest level on record. It is worth noting that the index has never fallen this low without the Eurozone economy entering a recession

• The European Union is considering a windfall tax on the profits of energy companies that do not burn natural gas, which it estimates will generate about €140 billion in revenue. Those funds would be used to cushion the burden on consumers as those profits are redistributed. Final details, which could include a price cap, are expected to be worked out in advance of an EU summit at the end of the month. Illustrating the gravity of the energy situation in Europe, the German government is negotiating to nationalize three utility companies to avoid a possible collapse in the domestic energy market

• Shares in Europe pulled back amid signs of a deepening economic slowdown. In local currency terms, the pan-European STOXX Europe 600 Index ended 2.89% lower. Germany’s DAX Index slid 2.65%, France’s CAC 40 Index lost 2.17% and Italy’s FTSE MIB Index finished roughly flat


• China reported better-than-expected growth in factory output and retail sales last month. Industrial production rose 4.2% year on year in August, up from 3.8% in July, while retail sales jumped 5.4% year on year from July’s 2.7% growth. Fixed asset investment, another closely watched metric, rose a surprisingly strong 6.4% in August from a year earlier, up from July’s 3.6% increase. Unemployment rates for cities and young people both declined

• However, the property sector extended its slump. New home prices in 70 cities, excluding state-subsidized housing, fell in August for the 12th straight month, according to official data. New housing starts slumped 46% in August from a year ago compared with July’s 45% drop, reflecting a collapse in land sales and poor sentiment among property developers. The property sector’s travails are one of several mounting headwinds facing China’s economy that have left many economists skeptical that it will reach Beijing’s growth target of about 5.5% this year. Economists in a recent Bloomberg survey forecast that China’s economy will expand 3.5% in 2022, which would mark the second-lowest annual growth in more than four decades

• The People’s Bank of China drained liquidity from the banking system for the second straight month but held interest rates steady as it sought to ease selling pressure on the yuan resulting from a widening policy divergence with the Federal Reserve. China’s central bank has recently set a string of stronger-than-expected yuan fixings against the U.S. dollar and reduced banks’ foreign reserves requirement to stabilize the currency

• China’s stock markets fell as currency weakness and downbeat property data overshadowed surprisingly strong factory output and retail sales indicators. The broad, capitalization-weighted Shanghai Composite Index tumbled 4.2%, and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, sank 3.9% in its biggest weekly drop in two months, Reuters reported

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