Economic Outlook – 20 March 2022


• Retail sales edged up 0.3% in February, a result roughly in line with consensus expectations (+0.4%). The previous month’s print, meanwhile, was revised from +3.8% to +4.9%. Sales of motor vehicles and parts advanced 0.8% but remained 4.3% below last April’s all-time high. Without autos, sales crept up 0.2% as gains for gasoline stations (+5.3%), eating/drinking establishments (+2.5%), miscellaneous items (+1.9%) and sporting goods (+1.7%) were partially offset by drops for non-store retailers (-3.7%), health/personal care items (-1.8%), furniture (-1.0%), and electronics (-0.6%). Sales were up in 7 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, fell 1.2% in the month

• Industrial production grew 0.5% MoM as expected by consensus, reaching its highest level since December 2018. After jumping a sharp 10.4% in January owing to colder-than-usual temperatures, output in the utilities segment fell 2.7% with the return of more clement weather. Manufacturing output sprang only 1.2%, held back by a 3.5% drop in the production of motor vehicles and parts. Excluding autos, factory output expanded 1.5% on a 1.8% gain for computers and electronics. Output in the mining segment, meanwhile, remained relatively stable with a gain of 0.1%

• Capacity utilization in the industrial sector rose from 73.3% in January to 77.6% in February, its highest level since 2019. In the manufacturing sector, it improved from 77.1% to 78.0%.

• In February, the Producer Price Index (PPI) for final demand rose 0.8%, roughly in line with the 0.9% expected by consensus, after climbing 1.4% in January. Goods prices jumped 2.2%, a record monthly increase, with gains for both energy (+7.1%) and food (+1.9%). Prices in the services category rose 0.2%. Meanwhile, the core PPI, which excludes food and energy, grew 0.8% on a monthly basis. YoY, the headline PPI remained unchanged at a record high of 10.0%. Excluding food and energy, it ticked down to 8.4% from its January record high of 8.5%. Higher input prices, long shipping delays, and rising labour costs are to blame for the recent surge in producer prices

• In March, the Empire State Manufacturing Index of general business conditions slid into negative territory for first time since the early months of the pandemic, losing 14.9 points to -11.8. Consensus expectations were for a print of +7.8. After progressing in February, both the new orders sub-index (-11.2 vs. 1.4 the prior month) and the shipments sub-index (-7.4 vs. 2.9) declined sharply in March. The number of employees sub-index (6.2 vs. 6.3) remained essentially unchanged, but the average workweek sub-index (8.3 vs. 11.7) declined. Supply chain pressures were still evident in the report. The delivery times sub-index (32.7 vs. 21.6 the prior month) increased while the input prices sub-index (73.3 vs. 76.6) remained well above its historical average. To protect their margins, manufacturers once again raised selling prices (56.1 vs. 54.1), lifting this sub-index to a record high. Business optimism for the next six months (36.6 vs. 28.2) improved to stand roughly at its 20-year average (38.0). Capex (35.5 vs. 37.8) and technology spending intentions (23.4 vs. 29.7) both declined in the month but remained comfortably above their long-term averages.

The Philly Fed Manufacturing Business Outlook Index jumped from 16.0 in February to 27.4 in March, far from the 14.5 expected by consensus. Both the shipments sub-index and the new orders sub-index showed strong increases (from 13.4 to 30.2 and from 14.2 to 25.8, respectively). For its part, the number of employees tracker (up from 32.3 to 38.9) was consistent with one of the strongest rates of hiring recorded in data going back to 1968.

• The Import Price Index (IPI) rose 1.4% MoM in February, short of the 1.6% expected by consensus. This result was also accompanied by a downward revision in January from 2.0% to 1.9%. The headline January print was positively affected by an 8.1% increase in the price of petroleum imports. Excluding this category, import prices still rose 0.7%. On a 12-month basis, the headline IPI went from 10.7% to 10.9%. The less volatile ex-petroleum gauge rose from 7.4% to 7.6%, the second-highest print in data going back to 1989

• The US Federal Reserve indicated this week that it expects to hike rates at least 0.25% at each of the six meetings remaining in 2022, according to its latest Summary of Economic Projections. The FOMC statement accompanying Wednesday’s hike, the first since late 2018, indicated that inflationary pressures had broadened beyond the supply and demand imbalances resulting from the pandemic. The Fed said the implications for the US economy on the heels of Russia’s invasion of Ukraine are highly uncertain, but noted the invasion’s likely inflationary impacts, along with its potential to weigh on growth. Fed Chair Jerome Powell said the central bank could hike rates more quickly if the committee feels it appropriate while acknowledging that the invasion will likely postpone the untangling of global supply chains, making inflation more persistent. He further warned that labor market tightness may have reached an unhealthy level. He said he expects price levels to moderate in the second half of the year and to come down more sharply in 2023. Regarding the Fed’s balance sheet, Powell indicated that the FOMC discussed quantitative tightening in depth at this week’s meeting and that it could start shrinking its bond holdings as early as May. Despite the growth challenges posed by the conflict in Ukraine, the Fed chair said he sees the odds of a near-term recession as low and the economy as well-positioned to withstand tighter monetary policy

• In February, existing-home sales dropped 7.2% to a 6-month low of 6,020K (seasonally adjusted and annualized). Contract closings decreased for both single-family dwellings (-7.0%) and condos (-9.5%). The decrease in the number of transactions during the month resulted in a one-tick increase of the inventory- to-sales ratio but it remains near its all-time low. (According to the National Association of Realtors, a ratio <5 indicates a tight market.) Listed properties remained on the market for 18 days on average, a one-day increase from the record low set last year

• Stocks moved higher for the week, ending a two-week losing streak and reclaiming much of the ground lost over the past month. Markets were supported by multiple factors, including falling oil prices, news that Russia had avoided defaulting on its sovereign debt, and the outcome of the Federal Reserve’s monetary policy meeting. While fighting continued in Ukraine, investor sentiment was also buoyed during the week by continued negotiations to end the conflict. Gains were widespread across the major indexes, with the tech-heavy Nasdaq Composite staging the biggest rally

• President Biden’s nominee for Fed vice chair for supervision, Sarah Bloom Raskin, withdrew her nomination from consideration this week after the nomination failed to garner majority support in the US Senate. The nominations of Biden’s four other Fed appointees, including Chair Jerome Powell, were all approved by the Banking Committee and await a final vote by the full chamber

• In terms of data release, new home sales is out on Thursday. New home sales rose a comfortable 2.5% to a 821K-unit pace in February after slipping slightly in January due to supply chain struggles. Much of the recent moderation can be traced back to slim inventories and a consistent uphill battle against material and labor shortages. Besides delays, these obstacles have also pushed new home prices up, making getting one’s hands on a home even more of an ordeal. The median price of a new home rose 13.4% year-over-year in January to $423,000, and fewer than 10% of homes sold over the month were $300,000 or below. In the past few months, there has been an uptick in homes where construction has not yet started, which reached a new record high at 106K after jumping over 10% in January

• Durable goods are out on Wednesday. While the consensus is calling for a slight, 0.5% decline in durable goods orders in February, orders are expected to slip a more stark 1.4% last month. Such a decline would be the first since September and the largest since April 2020. Most of the reason for the decline comes from the transportation sector, as Boeing reported there were only 37 new gross orders in February, which is around 10 orders less than typical for the month. Disregarding transportation, durable goods orders are expected to rise 0.5% last month. This is a turnaround from January, where a 15.6% rise in nondefense aircraft helped propel the monthly gain to 1.6%, which was more than double the ex-transportation increase of 0.7%. Supply chain issues continue to present challenges for manufacturing, and while not likely visible in February’s report, Russia’s invasion of Ukraine is likely to present further complications to getting needed materials. Demand remains strong, and a 1.2% rise in shipments in January indicated that manufacturers are working hard to deliver on the orders they have received


• Unemployment has dropped by 0.2 percentage points QoQ to 3.9%, while the employment rate rose by 0.1 percentage points over the same period to 75.6%. Vacancy numbers continue to break records: between December 2021 and February 2022 job vacancies breached the 1.3 million mark, increasing by over 100,000 since the last quarter – although the rate of growth is slowing down. Despite the bullish job numbers, total employment in the UK remains considerably below its pandemic peak, down by around 580,000. This is primarily due to a rise in economic inactivity of the 50+ demographic group. There could be modest rises in unemployment in the short to medium term due to the major squeeze on consumer spending arising from tax and inflationary pressures over the course of 2022

• Growth in average total pay inc. bonuses was 4.8% (consensus 4.6%) and regular pay excluding bonuses now sits at 3.8% for the period November 2021 to January 2022. Strong bonus payments over the past six months have managed to keep real total pay growth positive: real pay including bonuses was up +0.1%. There are, however, strong differences in pay settlements across different sectors in the economy. For example, average pay growth in the finance and business services sector grew at 8.6% while the manufacturing sector saw more modest average increases of just 2.8%

• The Bank of England has followed the US Federal Reserve in raising interest rates, in the UK’s case from 0.50% to 0.75%, in line with market expectations. After the Bank of England’s Monetary Policy Committee’s vote in February only failed by a single vote to rise rates by 0.50 percentage points (with the Governor’s casting vote, they opted for a 0.25pp rise), it was clear that inflation had become the primary concern. This remains the case and markets are now anticipating as many as six 25bp hikes, taking interest rates to around 2.20% by the end of the year. However, monetary policy now needs to accommodate a far more complex set of concerns and, with the vote moving 8-1 in favour of 25bp tightening, the Monetary Policy Committee is considering a very different macro-economic backdrop. The latest employment data helpfully suggests that earnings inflation is not yet a chronic problem, with data for February seeing wages rise by an average of 4.8% which is somewhat below the latest CPI of 5.5% inflation. Where there has been more wage inflation pressure is between people switching jobs, but flagging consumer confidence and the rising cost of employment (the 1.25% NI tax increase) suggests that job moves will fall back from last year’s very high rate. Real wage rises are likely to remain manageable and with the overall economy struggling to digest April’s tax rises and energy price hikes, along with the wider impacts of the Ukrainian crisis, the Bank of England is expected to move cautiously. Expectation for monetary policy is, therefore, for a further 0.25pp rise to 1.0% in the summer, followed by a further rise to 1.25% early next year. If the UK were to follow the path the Fed has now set out, it is likely to trigger a wider correction of asset prices, in particular housing prices


• In a speech to the annual “The ECB and Its Watchers” conference, European Central Bank President Christine Lagarde appeared to strike a more bearish tone since last week’s policy meeting. She warned that the Ukraine conflict could trigger “new inflationary trends,” as inflation expectations become embedded, companies onshore supply chains, and countries switch to different sources for energy supplies. She also said that the invasion “posed significant risks to growth,” which could depress medium-term inflation “if it means the economy returns to full capacity more slowly.”

• Separately, Germany’s ZEW research institute said its economic sentiment index plunged to a record low of -39.3 in March from 54.3 in February. The institute’s president, Achim Wambach, said: “A recession is becoming more and more likely. The war in Ukraine and the sanctions against Russia are significantly dampening the economic outlook for Germany.”

• Shares in Europe gained ground for a second consecutive week amid cautious optimism that negotiations between Russia and Ukraine could yield a peace plan. China’s announcement that it would take measures to support the economy and financial markets also appeared to boost sentiment. In local-currency terms, the pan-European STOXX Europe 600 Index advanced 5.43%. Germany’s Xetra DAX Index added 5.76%, France’s CAC 40 Index tacked on 5.75%, and Italy’s FTSE MIB Index climbed 5.13%.


• China reported better-than-expected activity in the January-February period with help from policy easing measures and the easing of power and chip shortages. The year-on-year growth of industrial production, fixed asset investment, and retail sales were all significantly above December 2021 levels and well above market expectations.

• Industrial output rose 7.5% in January-February from a year earlier, the fastest pace since June 2021 and up from a 4.3% increase seen in December. Fixed-asset investment rose 12.2% in January-February from a year earlier, the highest since July last year, and retail sales, a gauge of consumption that has been lagging since COVID-19 hit, expanded 6.7% year-on-year amid rising demand during the Lunar New Year holidays and Winter Olympic Games. It also marked the quickest clip since June last year and beat expectations of a 3.0% increase in the poll.

• China’s new home prices stalled in February after eking out a small gain a month earlier. A surge in domestic omicron cases in recent weeks has also cooled somewhat, helping demand in big cities

• Chinese officials said they would introduce market-friendly policies and keep the capital market running smoothly at a meeting attended by President Xi Jinping’s economic czar, Vice Premier Liu He. In a statement carried by state media, China’s top financial policy body vowed to ensure stability in capital markets, support overseas stock listings, resolve risks around property developers and complete the crackdown on Big Tech “as soon as possible.”

• Yi Gang, governor of the People’s Bank of China (PBOC), said in a statement the central bank would help implement the policies after the PBOC unexpectedly held its key interest rate for one-year policy loans unchanged earlier in the week, confounding the expectations of the majority of economists who had predicted a cut in the medium-term lending facility rate

• Chinese markets weakened during the week with the broad, capitalization-weighted Shanghai Composite index retreating 1.8% and the blue chip CSI 300 index down 0.8%, but the tone at the end of the week was positive after policymakers pledged economic support

Sources: T. Rowe Price, MFS Investment Management, Handelsbank Capital Markets, Wells Fargo, Reuters, M. Cassar Derjavets