Economic Outlook – 19 September 2021


• The Consumer Price Index advanced 0.3% MoM in August after climbing 0.5% the prior month. This result was slightly weaker than the +0.4% print expected by consensus. The energy component rose 2.0% thanks in part to a 2.8% gain in the gasoline segment. The cost of food, for its part, increased 0.4%. The core CPI, which excludes food and energy, also came in below expectations, crawling up just 0.1%. Prices for ex-energy services were flat as gains for shelter (+0.2%) and medical care services (+0.3%) were offset by drops for motor vehicle insurance (-2.8%) and airline fares (-9.1%). The price of core goods, meanwhile, progressed 0.3%, with decent advances for new vehicles (+1.2%) and apparel (+0.4%). The price of used vehicles faded a bit (-1.5%) after increasing roughly 30% from March to July. YoY headline inflation clocked in at 5.3%, down a tick from the prior month. The core index, meanwhile, slid from 4.3% to a still elevated 4.0%.

• The Import Price Index (IPI) fell 0.3% in August after rising an upwardly revised 0.4% in July (initially estimated at +0.3%). The headline print was negatively affected by a 2.4% decline in the price of petroleum imports. Excluding this category, import prices still dipped 0.1%. On a 12-month basis, the headline IPI went from 10.3% in July to 9.0% in August. The less volatile ex-petroleum gauge sank from 6.9% to 5.9%.

• Retail sales rose 0.7% instead of falling 0.7% as per consensus. The positive surprise was offset in part by a big downward revision to July’s result from -1.1% to -1.8%. Sales of motor vehicles/parts shrank 3.6% MoM but were still 15.1% above their pre-pandemic level. Without autos, consumer outlays surged 1.8% on advances for non-store retailers (+5.3%), furniture (+3.7%), general merchandise (+3.5%), and food/beverages (+1.8%). These gains were only partially offset by declines for electronics (-3.1%) and sporting goods (-2.7%). In all, sales increased in 10 of the 13 categories surveyed. Core sales, which are used to calculate GDP and exclude food services, auto dealers, building materials and gasoline stations, sprang 2.5% in the month but were still tracking a 0.0% annualized growth in Q3 as a whole.

• Consumer outlays surprised on the upside in August and the headline print would have been even better but for a sharp drop in the motor vehicles/parts segment. The pullback was not due to lack of demand but reflected instead extremely low inventory levels. Recall that severe chip shortages forced car producers to slow down or stop production lines. This, combined with a surge in sales earlier this year, has left dealer lots virtually empty and spurred prices, further dampening buyer enthusiasm.

• Industrial production rose 0.4% MoM, a tick less than the median economist forecast (+0.5%). July’s print was revised down from +0.9% to +0.8%. August’s gain hoisted industrial production above its pre-pandemic level for the first time. Manufacturing output crept up 0.2% as a gain for computer/electronics was only partially offset by a drop for machinery (-0.8%). Production in the motor vehicles/parts segment was more or less unchanged (+0.1%). Output rose 3.3% for utilities but fell 0.6% for mining. Within the latter category, oil and gas well drilling prolonged its rebound MoM (+2.0%). That said, production in this segment remained 28.4% below its pre-crisis level.

• Capacity utilization in the industrial sector improved from 76.2% in July to 76.4% in August. In the manufacturing sector, it edged up from 76.6% to a 31-month high of 76.7%.

• The NFIB Small Business Optimism Index moved from 99.7 in July to 100.1 in August. The net percentage of polled firms that expected the economic situation to improve sank further into negative territory, slipping from -20% to a 103-month low of -28%, but this did not prevent sales expectations from improving slightly from -4% to -2%. Hiring prospects, meanwhile, were at an all-time high in the month. Rather surprisingly at a time where jobs remain roughly 5.3 million below their pre-crisis level in the United States, 50% of small firms reported not being able to fill one or more vacant positions, the highest proportion ever. Fully 28% of firms also identified poor quality of labour as their most important problem, a share far higher than the historical average for that indicator (12.3%). In an effort to attract qualified candidates, small firms had no choice but to raise salaries. The proportion of firms that reported raising employee compensation in the past 3-6 months climbed to a new all-time high of 41%.

• The Empire State Manufacturing Index of general business conditions bounced back strongly in September, surging 16.0 points to 34.3. This was miles ahead of consensus expectations (17.9) and indicative of a very healthy pace of growth at factories operating in New York State and surrounding areas. Both the new orders sub-index (33.7 vs. 14.8 the prior month) and the shipments sub-index (26.9 vs. 4.4) mustered strong advances, while the employment gauge (20.5 vs. 12.8) showed payrolls expanding at a healthy clip. Supply chain pressures were still evident in the report. Delivery times (36.5 vs. 28.3 the prior month) lengthened the most in the survey’s history and input prices continued to soar though the corresponding sub-index edged down 0.4 point to 75.7. In an attempt to protect their margins, manufacturers raised selling prices (47.8 vs. 46.0) at the fastest rate ever.

• Initial jobless claims rose from 312K to 332K in the week to September 11. The increase reflected steeply higher claims in Louisiana, the state most directly impacted by the passage of hurricane Ida. Continued claims, meanwhile, fell from 2,852K to a post-pandemic low of 2,665K. Another 9.3 million or so people received benefits in the week ended August 27 under two emergency programs: Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation. As these extraordinary programs expired on September 4, millions of Americans could suffer an income shock unless they find work. Though the outlook for hiring is encouraging, total employment demand (jobs + job openings) in sectors such as resource extraction, arts/entertainment/recreation, and accommodation/food services remains far short of prepandemic levels. People who used to work in these sectors might have a harder time rejoining the labour force.

• The University of Michigan Consumer Sentiment Index edged up 0.7 point in September to a still-depressed 71.0. The current condition tracker fell from 78.5 to a 17-month low of 77.1, near the trough reached in the first wave of the pandemic (74.3 in April 2020). The expectations sub-index, on the other hand, gained 2.0 points at 67.1. Buying conditions for houses and homes fell to their lowest level in decades.

• The key focus of next week will be the Federal Reserve’s meeting, though it may prove unextraordinary. After what was a disappointing August jobs report, it’s unlikely the Fed will formally announce the tapering of its outsized asset purchases. Powell’s press conference has to be closely followed for clues on exact timing. While an official announcement isn’t expected to be in the cards, look for the Fed chair to continue to pre-emptively break down any perceived links between the timing of the taper and rate hikes. On inflation, the transitory narrative is expected to be prevalent once again, both in the statement and press conference. Finally, the statement will also be released alongside a fresh Summary of Economic Projections. While June’s SEP saw growth projections upgraded and rate hikes moved into 2022, the same momentum this month is not likely.

• The Ways and Means Committee of the US House of Representatives detailed its plan this week to raise revenues to fund some of the Democrat-proposed social and climate spending plans working their way through Congress. If approved, the overall package would raise the corporate income tax to 26.5% from 21%, create a 3% surtax on those earning above $5 million a year, raise the capital gains tax to at least 25% from 20% and to as high as 31.8% on certain high earners, among other measures. A study by the Joint Tax Committee shows that the Democratic proposal would increase taxes on households earning more than $1 million by 10.6%. Analysts expect the tax provisions emanating from the House to face tough sledding in the Senate, as two high-profile Democratic moderates, Kyrsten Sinema (D-AZ) and Joe Manchin (D-WV), have expressed opposition to large tax hikes. President Joe Biden met with the pair, but media reports indicate the senators remain unpersuaded on the need for a package as large as the one proposed, which would cost $3.5 trillion.

• The small-cap Russell 2000 Index managed a small gain, but most of the major equity indexes ended the week modestly lower, as investors weighed some encouraging economic data against worries about supply chain challenges, elevated valuations, and concerns over how stocks would respond to an eventual tightening in monetary policy. Energy shares within the S&P 500 Index recorded solid gains on the back of rising oil prices, while strength in auto-related shares boosted consumer discretionary stocks. The small materials and utilities sectors lagged. Trading volumes were subdued for much of the week but were expected to pick up on Friday with the expiration of options and futures contracts.


• UK inflation (CPI) for August has come through at 3.0% YoY 0.7% MoM, this is the largest ever monthly jump in the 12 month inflation rate. Thus, inflation remains well above the Bank of England’s target rate of 2%, although their forecasts have been expecting as much. The bank’s end of year central inflation forecast of 4% (before it contracts over the course of 2022) looks reasonable, even conservative. The main driver was the prices of restaurant meals, but today’s prices are being compared to those of a year ago when the temporary “eat out to help out” programme was in full swing. PPI input prices have come through at 11.0% YoY, 0.4% MoM (consensus 10.3% YoY, 0.2% MoM). The impact of the blockages to the global supply chain are clearly apparent, and evidence from the United States, at least, is that these port blockages have some way to go before they are cleared. Retail prices have come out at 4.8% YoY, 0.6% MoM (consensus 4.7% YoY, 0.5% MoM), indicating that prices are being passed through the supply chain to consumers. In Friday’s retail sales data there will be the evidence if these price rises are having any impact on consumer demand.

• UK earnings and employment for July have been released. Average earnings including bonus were up 8.3% (consensus 8.2%), while earnings without bonus were up 6.8% (consensus 6.8%). Unemployment for July was 4.6% (consensus 4.6%), and despite that the more up-to-date August claimant count -58.6K (previous -7.8K) can be seen as dramatic, the July figure was the anomaly as the more recent August figure is more in line with the trend, which is for falling overall unemployment. The concern regarding earnings is the inflationary impact of these rises. The statisticians continue to attribute at least some of the 8.3% boost to earnings to base effects, which skews the average earnings figures upwards. While this latter reason may well be having a marginal impact, with unemployment at 4.6%, it is unlikely this effect is particularly significant. Looking forward, these wage increases are, in many cases, going to be absorbed by the impending tax rises, so do not look for them to boost consumption. Moreover, with UK productivity growth still some way behind pay awards, the longer-term competitive position of many businesses will come under some pressure.


• ECB Chief Economist Philip Lane told German economists at a private meeting that the central bank expects to hit its 2% inflation target by 2025, the Financial Times reported. This view and the ECB’s new policy framework suggest that conditions for raising interest rates could be met by 2023, the newspaper said. An ECB spokesperson said that the report was inaccurate. Separately, at an online event, Lane said that he was confident of reaching the inflation target. “If you are persistent with a high level of monetary stimulus, you can get there,” he said. “We think the current set of [monetary policy] instruments is working.”

• Shares in Europe weakened as concerns about the impact of the coronavirus’s delta variant on the global economy outweighed expectations of continuing central bank support. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.97% lower. Major indexes were mixed. Italy’s FTSE MIB Index ended modestly higher, but Germany’s Xetra DAX Index slipped 0.77%, and France’s CAC 40 Index lost 1.40%.


• China’s August indicators were surprisingly weak, underscoring the impact from continued coronavirus outbreaks across the mainland. Industrial output, retail sales, and fixed asset investment all missed expectations, particularly retail sales, which recorded its slowest growth pace since August 2020, according to Reuters. Economists had forecast a rebound in economic activity in September after an outbreak in August was quickly brought under control, but a recent coronavirus flare-up in Fujian could cause consumers to retrench once more. China’s zero-tolerance coronavirus policy has proven successful to date, though the short-term economic costs are high given the difficulty for consumer services and retail sales to recover under the threat of more restrictions.

• Yields on China’s government bonds were broadly flat for the week. In currency trading, the renminbi (RMB) weakened by 0.2% against the U.S. dollar. The RMB has largely moved with the dollar in recent weeks, with the trade-weighted currency index close to a five-year high. Foreign investor inflows into Chinese bonds have slowed in recent months, but analysts expect demand will increase after Chinese government bonds are included in the FTSE World Government Bond Index starting in October.

• Worsening debt problems at Evergrande, China’s third-largest developer, dominated headlines as concerns grew about a potential debt restructuring of the company, whose debt load exceeds USD 300 billion. During the week, China’s Ministry of Housing and Urban Rural Development told banks that Evergrande wouldn’t be able to make its interest payments due on September 20, Bloomberg reported, citing unnamed sources. The inability to repay bank interest is the latest sign of a liquidity crisis at Evergrande, which is emerging as a key test of the Chinese government’s willingness to bail out systemically important, highly indebted companies. China’s government will likely focus on the social fallout of Evergrande’s unfinished housing units, followed by supply chain companies that are owed money by Evergrande.

• Stocks fell sharply for the week. Weak August economic data, a fresh coronavirus outbreak in Fujian province, the growing debt crisis at embattled property developer China Evergrande Group, and the threat of tighter gaming regulations in Macau dampened investor sentiment. The CSI 300 index of large-cap stocks fell 3.1%, and the Shanghai Composite Index retreated 2.4%, according to Reuters. Next week, China’s stock markets are closed Monday and Tuesday for the Mid-Autumn Festival and will reopen on Wednesday, September 22.

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