Economic Outlook – 22 August 2021


• Retail sales fell 1.1% in July, more than the 0.3% drop expected by consensus. The negative surprise was only partially compensated by an upward revision to the prior month’s result from +0.6% to +0.7%

• The employment report for July and healthy revisions to prior months marked a strong step toward the Fed’s desire for “substantial further progress,” before it starts tapering its asset purchases. That said, the report is somewhat backward looking. Cases have risen rapidly since the survey week in mid-July. The level of reported new cases now stands above the spring and summer waves of 2020 and is roughly on par with November 2020 before the pandemic’s winter peak in the United States. Thus far, visits to retail and recreation locations and seated diners at restaurants have rolled over only modestly, reflecting a further delay in the return to normal rather than a drop in activity. While Fed officials will certainly be pleased with this strong report and the lack of a clear reversal in activity measures, they are expected to wait and see if progress can be sustained and if constraints boil down to short-term frictions or longer-lasting damage before kicking off tapering

• Auto sales fell by 4.2% to 14.8 million (seasonally adjusted at annual rate) in July, marking the third consecutive monthly decline. Instead of demand, however, it is lean inventories – the result of supply chain disruptions – that are the primary culprit behind the down-ward trend. Constrained production from supply chain is-sues is acting as a drag on the rest of the economy. Sales of motor vehicles/parts contracted 3.9% m/m but still stood 20.1% above their pre-pandemic level. Without autos, consumer outlays fell 0.4% on drops for non-store retailers (-3.1%), clothing (-2.6%), sporting goods (-1.9%), and building materials (-1.2%). These contractions were only partially offset by gains for miscellaneous items (+3.5%), gasoline stations (+2.4%), and eating/drinking establishments (+1.7%). In all, sales decreased in 8 of the 13 categories surveyed. Core sales, which are used to calculate GDP and exclude food services, auto dealers, building materials and gasoline stations, slipped 1.0% in the month.

• Consumer outlays surprised on the downside in July. Auto sales fell amid high prices and limited inventories while non-store retailers suffered from the return of consumers to brick-and-mortar stores. Alternatively, gasoline station receipts benefited from rising pump prices. Spending at restaurants and bars, meanwhile, continued to recover as COVID-19 caseloads remained relatively low in the month. The gradual reopening of the economy has encouraged American consumers to shift some of their spending towards services, a process that partly explains the leveling off of retail sales in recent months. Moderation is particularly evident in the categories that benefited the most from social distancing measures, such as sporting goods and non-store retailers. The segments most closely linked to the housing sector, namely, furniture and building materials, have experienced a slowdown as well, the meteoric rise in house prices having dampened the enthusiasm of potential buyers

• Industrial production advanced 0.9%, nearly double the median economist forecast (+0.5%). The prior month’s print, on the other hand, was revised down from +0.4% to +0.2%. July’s gain left industrial production just 0.2% short of its pre-crisis level. Manufacturing output sprang 1.4% in the month, moving past its pre-crisis level for the first time. Production in the motor vehicles/parts segment rebounded sharply (+11.2%) after being hit by semiconductor shortages the prior month. Excluding autos, manufacturing output still expanded 0.7%, its 14th increase in 15 months. Production in the utilities segment, meanwhile, sank 2.7% after a severe heat wave on the west coast caused demand for electricity to spike the prior month. Mining output, for its part, progressed 1.2% as oil and gas well drilling prolonged its rebound MoM (+6.1%). That said, production in this segment remained 29.8% below its pre-crisis level

• The Empire State Manufacturing Index fell from an all-time high of 43.0 in July to 18.3 in August. This was below consensus expectations (28.5) but still consistent with a decent pace of growth at factories operating in New York State and surrounding areas. The new orders and the shipment sub-indexes retreated July’s multi-year highs (33.2 to 14.8 and 43.8 to 4.4, respectively), with the latter even slipping to a six-month low. The employment gauge eased from 20.6 to 12.8 but still indicated that payrolls were expanding at a healthy clip. Supply chain pressures were still evident in the report. Delivery times lengthened further (from 20.2 to 28.3) and input prices continued to soar even though the sub-index slid from 76.8 to 76.1. In an attempt to protect their margins, manufacturers raised selling prices (from 39.4 to 46.0) at the fastest clip ever. Business optimism for the next six months continued to improve: The corresponding index sprang from 39.5 to 46.5. Capex (from 26.3 to 23.0) and technology spending intentions (from 14.1 to 15.0) remained roughly in line with their long-term average

• The Philly Fed Manufacturing Business Outlook Index painted a similar picture, with the headline index edging down from 21.9 in July to an eight-month low of 19.4 in August. The new orders sub-index progressed from 17.0 to 22.8 while the shipment gauge cooled from 24.6 to 18.9. The number of employee tracker (from 29.2 to 32.6) settled at a new record high, hinting at an acceleration in hiring. Prices paid (from 69.7 to 71.2) continued to rise at a steep clip and the record rise in prices received (from 46.8 to 53.9) suggests that some of the increase was passed onto clients

• Housing starts softened from 1,650K in June to 1,534K in July (seasonally adjusted and annualized), undershooting by far the 1,600K print expected by analysts. The monthly drop reflected decreases in both the single-family category (-4.5% to 1,111K) and the multi-family category (-13.1% to 423K).

• Building permits, for their part, crept up 2.6% in July to 1,635K. Permits issued for single-family units slid 1.7% to 1,048K, while applications for multi-family dwellings advanced 11.2% to 587K. uly’s disappointing starts report provides further evidence of the slowdown in activity in the housing sector. Surging prices for building materials could very well be dampening enthusiasm among builders at present, though demand seems to be fading as well. In August, a record proportion of respondents to a University of Michigan poll deemed buying conditions for houses to be bad because prices were too high. In this regard, the Case-Shiller 20-City Home Price Index showed that prices rose 17.0% in May, the steepest increase since August 2004

• Initial jobless claims decreased from 377K to a post-pandemic low of 348K in the week to August 14. Continued claims, meanwhile, dropped from 2,899K to 2,820K, their lowest level since March 2020. Another 8.7 million or so people received benefits in the week ended July 30 under two emergency programs: Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation. Total continuing claims across all programs have dropped roughly 3.0 million over the past seven weeks. 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 played a large role in this decline

• The Federal Reserve published the minutes of its two-day policy meeting on July 27-28. The key theme shining through was the vastly varying viewpoints on the appropriate trajectory of monetary policy and the short- to medium-term economic outlook. While participants agreed that the overall “substantial further progress” threshold for tapering had not been met by July, some thought that might come soon while others did not see a taper beginning for “some time”. Meanwhile, there seemed to be some dissention also regarding the inflation outlook. While some participants held steadfast to the “transitory” narrative, others expressed concern that inflation pressures might be longer lasting and that inflation expectations could become unanchored. It will likely to be a while still before either side is able to declare victory on this debate

• Stocks pulled back for the week but not before the S&P 500 Index reached a new record high of 4,480 on Monday afternoon, more than double its intraday low of 2,192 on March 23, 2020. Small-cap stocks lagged for the week, with the Russell 2000 Index briefly falling into correction territory, down more than 10% from its March 2021 peak. Energy shares performed worst within the S&P 500, while gains in a wide range of health care stocks boosted the sector

• In terms of data release, Home Sales are out on Tuesday. Slowing sales growth over the past few months has helped inventories build and cooled price growth. More homes for sale at marginally better prices should help home sales stop their slide. While sales should improve in July, some stops and starts are likely in the new home market, as builders try to work through a backlog of projects in the face of persistent material shortages

• Durable goods orders are out on Wednesday. The likely pulled back in July, due to a slowing in transport orders. Orders for durable goods most likely fell last month but rose excluding transportation. Autos have been the poster child of supply chain disruptions over the past year. Shortages of parts, most notably semiconductors, have hampered production and constrained orders. Orders for nondefense aircraft have bounced back mightily over the past three months, as airliners continued to restock their fleets and make up for cancelations last year. But based on data from Boeing, aircraft orders are set to be a drag in July. Excluding the volatile aircraft and defense components, core capital goods orders have made a remarkable come back over the past year and have shown little signs of slowing, rising at roughly an 18% annualized rate over the past three months


• UK retail sales for July have come out at -2.5% MoM, 2.4% YoY (consensus 0.4% MoM, 6.0% YoY), but excluding petrol they were -2.4% MoM, 1.8% YoY (consensus 0.3% m-p-m, 5.7% YoY). These numbers are slightly disappointing and undoubtedly the rise of the Delta variant was a factor. Although, looking on a quarterly basis they were up by 5.2% in the three months to July compared with the previous three months and are 5.8% higher than their pre-pandemic February 2020 levels. Food store sales volumes fell by 1.5% in July 2021, following an increase in the previous month when sales were positively boosted by the start of the Euro 2020 football championship. Non-food stores reported a fall of 4.4% in sales volumes in July 2021 when compared with June 2021, driven by falls in other stores (negative 10.1%), such as second-hand goods stores and computer and telecoms equipment stores. Petrol sales volumes fell by 2.9% over July, its first monthly fall since February 2021; with heavy rainfall in the early part of the month impacting driving, staycation or no staycation. As always it is interesting to note the progress of online sales. Before the onset of the pandemic, online sales were 20% of all sales, at their January 2021 peak they hit 35% and they have since fallen to 27.9%, although that is a slight pickup from last month. Online will eventually constitute 28-30% of all retail sales, with two consequences: 1) there are some uncomfortable implications for some High Streets, particularly ones which are not pleasant shopping destinations (more investment will be one consequence of this); and 2) online could well prove to have a helpful disinflationary element as comparison shopping is so easy in such circumstances

• UK CPI inflation for July is 0.0% MoM 2.0% YoY, these numbers come as a relief to the Bank of England and act as an effective counter to calls for action heard yesterday on the back of strong earnings and jobs growth. Looking into the data, prices last year had spiked, which seems to be the reason today’s figures are more muted than many will have expected. The base effect, measuring today’s prices against those of a year ago when the first lockdown was just ending and prices were often depressed, is thought to have added some 0.2% to today’s figures. The ONS also reports that they are now able to collect data on all but one item used to form the index


• Inflation in the eurozone increased 2.2% for the July annual period, up from 1.9% in June and slightly higher than the European Central Bank’s 2% target. Higher inflation in the euro area was driven primarily by rising energy costs. For the European Union overall, prices rose 2.5% for the latest 12-month period, up from 2.2% in June

• European stock benchmarks pulled back amid global concerns about the spread of the delta variant of the coronavirus, the situation in Afghanistan, and slowing growth in China. After reaching a series of record highs in the first two weeks of August, the pan-European STOXX Europe 600 Index ended the week 1.48% lower in local currency terms. Country specific indexes also declined. France’s CAC 40 Index fell 3.95%, Germany’s Xetra DAX Index was off 1.14%, Italy’s FTSE MIB Index dropped 2.78%


• China’s factory output and retail sales growth slowed sharply and missed expectations in July as new COVID-19 outbreaks and floods disrupted business operations. Industrial production in the world’s second-largest economy increased 6.4% year on year in July, data from the National Bureau of Statistics showed. Analysts expected output to rise 7.8% after growing 8.3% in June. Retail sales increased 8.5% in July from a year ago, far lower than the forecast 11.5% rise and June’s 12.1% uptick. China’s economy rebounded to prepandemic growth levels, but it lost steam as businesses grappled with higher costs and supply bottlenecks. New COVID-19 infections in July also led to fresh restrictions, disrupting the country’s factory output, already hit by severe weather this summer

• Higher material costs and supply chain issues continue to dampen profit margins for many Chinese small and medium-sized companies, crimping manufacturing output. Disappointing construction and industrial production data reflected regulatory tightening and slowing global export growth, according to analysts. Given the temporary nature of the shocks hitting activity, Beijing is expected to adopt a “wait and see” strategy before deciding whether further policy easing is needed

• The renminbi currency hit a three-week low of 6.5059 against the U.S. dollar on Friday, weakening past its 200-day moving average and the psychologically key level of 6.50 renminbi per dollar. In the bond market, the yield on the 10-year government bond declined three basis points to close at 2.87%. In credit markets news, government-backed investors said they would recapitalize Huarong Asset Management after the cash-strapped bad debt manager posted a record $15.9 billion loss. The rescue package suggests that Xi Jinping’s government is reluctant to allow one of the country’s most systemically important state-owned enterprises to default despite making clear that it does not intend to prop up every indebted company

• Chinese stocks slumped as Beijing’s regulatory clampdown on the technology sector stoked uncertainty about what other sectors the government might target next. Liquor stocks slumped after state media reported that the State Administration for Market Regulation was considering new regulations for liquor companies. Health care companies fell on concerns that industry profits would also be curbed by new regulations

• The Shanghai Composite Index fell 2.5% while the CSI 300 Index of large-cap stocks shed 3.6% to its lowest close since July 28, according to Bloomberg. In Hong Kong, the benchmark Hang Seng Index fell into a bear market, having lost more than 20% from its peak earlier this year. As of Friday, stock markets of China and Hong Kong lost more than USD 560 billion in market value, according to Reuters. China’s state-run media said that the country’s technology companies should innovate more, assume greater social responsibilities, and promote social values in line with the principles set forth by President Xi Jinping. In remarks publicized Wednesday, Xi stressed the importance of “common prosperity,” calling for fairer wealth distribution in the next phase of China’s economic development.

Sources: T. Rowe Price, TD Economics, MFS Investment Management, Handelsbanken Capital Market, Wells Fargo, M. Cassar Derjavets