Economic Outlook – 23 October 2022


• Industrial production expanded 0.4% in September and reached a new all-time high. Manufacturing output, too, sprang 0.4% as production of motor vehicles/parts (+1.0%) continued to recover after being hit by semiconductor shortages last year. Excluding autos, factory output still advanced 0.5% on a 1.1% gain for computers/electronics. Utilities output shrank 0.3% as temperatures normalized following a warmer-than-usual month of August, whereas production in the mining sector increased 0.6%. In the latter category, oil and gas well drilling sprang 1.0%, moving further above its pre-crisis level. On a quarterly basis, industrial production progressed an annualized 2.9% in Q3 after gaining 5.2% in Q2. Manufacturing output did not fare quite as well, climbing only 1.9% in Q3

• The Empire State Manufacturing Index of general business conditions signaled a third consecutive contraction in factory activity in New York state and surrounding area, slipping from -1.5 in September to -9.1 in October. Shipments retraced slightly (from 19.6 to -0.3) while new orders continued to accumulate at the same subdued pace (unchanged at 3.7). The number of employees tracker slipped a little (from 9.7 to 7.7) but held above its long-term average (4.7). Supply chain pressures continued to ease as evidenced by another decrease in the index tracking supplier delivery times (from 1.9 to a joint 29-month low of -0.9). However, this did not prevent input price inflation from accelerating (from 39.6 to 48.6), probably on account of the rebound in energy prices before the survey period. Manufacturers once again raised selling prices (this index went from 23.6 to 22.9), albeit at the slowest pace in nearly two years. Business optimism for the next six months cooled (from 8.2 to -1.8), as did technology spending intentions (from 13.2 to 11.0)

• The Philly Fed Manufacturing Business Outlook Index painted a similarly downbeat picture of the situation prevailing in the manufacturing sector in October, as it remained in contraction territory for the second month in a row (from -9.9 to -8.7). New orders (from -17.6 to -15.9) continued to shrink while production (from 8.8 to 8.6) and employment (from 12.0 to 28.5) expanded. Input price inflation (from 29.8 to 36.3) and output price inflation (from 29.6 to 30.8) strengthened on an increase in energy prices. Supplier delivery times, meanwhile, shortened for the third time in four months. The index tracking future business activity dropped from -3.9 to -14.9, one of the lowest levels observed in the past 40 years

• Housing starts retraced from 1,566K in August (initially estimated at 1,575K) to 1,439K in September, which is considerably lower than the median economist forecast calling for a 1,461K print. The drop reflected decreases in the single-family and the multi-family segments alike (respectively, -4.7% to a 28-month low of 892K and -13.2% to 547K). Building permits, for their part, edged up 1.4% to 1,564K as a 3.1% decline in the single-family segment (to 872K) was more than offset by a 7.8% gain in the multi-family category (to 692K). The number of authorized residential projects for which construction had not yet begun (291K) remained close to the 50-year high reached back in July (300K). Normally, such a high number of unexercised permits pile up when business is booming in the residential sector as it reflects builder inability to meet demand. Under current market conditions, however, this figure could be indicative instead of a loss of confidence among builders, who might prefer to leave a few projects on ice while waiting to see how the situation evolves. After all, a record number of housing units are currently under construction (1,734K) and this already risks boosting supply greatly at a time when demand is fading. In this context and given that the residential sector faces challenges ranging from rising interest rates to labour shortages, putting off the construction of housing units for which permits have already been issued does not seem like a bad idea

• Homebuilder sentiment, meanwhile, is sliding fast. In October, the National Association of Home Builders Market Index fell 8 points to 38. This was the lowest print since August 2012 outside of the pandemic period. NAHB data also showed a significant drop in prospective buyer traffic. All told, these data suggest that there could be more pain in store for residential construction

• After seven consecutive declines from January to August, existing home sales slipped another 1.5% in September to 4,710K (seasonally adjusted and annualized), bringing the total drawback since the beginning of the year to 27.4%. Excluding the first months of the pandemic, this was also the lowest level of sales observed in more than 10 years. Contract closings sagged for both single-family dwellings (-0.9%) and condos (-5.8%). The inventory-to-sales ratio, for its part, remained unchanged at 3.2. Despite the recent increase, this ratio remained low on a historical basis (<5 indicates a tight market for the National Association of Realtors), as supply continued to lag: The inventory of properties available for sale totaled just 1.25 million (not seasonally adjusted), the lowest level ever recorded in a month of September

• The index of leading economic indicators (LEI) declined 0.5 index point in September to a 15-month low of 115.9. Five of the ten underlying economic indicators acted as a drag on the headline index, with the biggest negative contributions coming from stock prices (-0.32 pp), consumer expectations (-0.21 pp), and ISM new orders (-0.19 pp). The decline in jobless claims, meanwhile, contributed 0.19 pp to the headline figure. Historical analysis shows that an annualized drop of 3.5% in the LEI index over six months, coupled with a six-month diffusion index below 50%, is generally symptomatic of a pending recession. These conditions were met in September: The index dropped 5.6% annualized over six months and the six-month diffusion index stood at 30%

• Initial jobless claims dipped from 226K to 214K. Continued claims meanwhile, rose from 1,364K to 1,385K. This number remains very low by historical standards, which suggests that unemployed workers were finding new jobs quickly

• US Secretary of State Anthony Blinken said Monday that China is planning to annex Taiwan on a much faster timeline than previously thought. The comments came in the wake of a speech from President Xi Jinping to the National Congress of the Chinese Communist Party in Beijing, in which Xi pledged reunification with Taiwan: “We will continue to strive for peaceful reunification with the greatest sincerity and the utmost effort, but we will never promise to renounce the use of force, and we reserve the option of taking all measures necessary.” On Wednesday, Admiral Mike Gilday, the chief of US naval operations, warned that a move by China against Taiwan could come before the end of 2023

• More tough talk from Fed officials appeared to cause a pullback at midweek. On Tuesday afternoon, Minneapolis Fed Bank President Neel Kashkari said in a speech that “if we don’t see progress in underlying inflation or core inflation, I don’t see why I would advocate stopping [rate hikes] at 4.5%, or 4.75% or something like that.” Futures markets reacted by pricing in the federal funds rate nearing 5% by the Fed’s March 2023 meeting and remaining at that level into the second half of next year. Friday morning, however, stocks bounced after The Wall Street Journal reported that “some officials have begun signaling their desire both to slow down the pace of increases soon and to stop raising rates early next year to see how their moves this year are slowing the economy.” In particular, the paper cited recent warnings from Kansas City Fed President Esther George that “a series of very super-sized rate increases might cause you to oversteer and not be able to see those turning points.” The journalist behind the story, Nick Timiraos, has earned the reputation of “Fed whisperer” for accurate advance reporting of previous changes in Fed policy

• Stocks recorded strong gains, as investors appeared to react to some prominent earnings reports and hints that the Federal Reserve might moderate its pace of interest rate hikes. The S&P 500 Index enjoyed its best weekly gain in nearly four months, while the Dow Jones Industrial Average marked its third consecutive week of gains. Energy shares outperformed within the S&P 500, as oil prices proved resilient despite the announcement of a release from the U.S. Strategic Petroleum Reserve

• In terms of data release, New Home Sales is out on Wednesday. Housing activity is buckling under the weight of higher mortgage rates. Existing home sales declined for the eighth straight month in September, and a similar outturn for new home sales when data print on Wednesday is expected. Specifically, new home sales is expected to decline to a 616K-unit annual pace from 685K previously. If realized, this decline in sales would reverse much of the previous month’s gain. The nearly 30% jump in new home sales in August was likely nothing more than a brief respite from the market correction. The new home sales figures have been a bit volatile month-to-month, but there is a clear down-trend occurring in the market. Higher rates have ushered in a rapid move up in financing costs, which have greatly reduced affordability for buyers and locked in many owners

• Q3 real GDP is out on Thursday. The first estimate of third quarter GDP growth will be released for the United States. After two consecutive quarters of negative growth, the U.S. economy is expected to expand at an annualized rate of 2.8% in the third quarter. Underlying demand measures remained solid. Higher consumption suggests modestly more import growth as well, though net exports still look to provide a considerable boost of over three percentage points to the headline GDP figure as import growth still broadly reversed during the quarter. Some of this boost will be offset by less of an inventory build than what took place in the second quarter. Equipment spending also looks to have been solid in the third quarter based on nondefense capital goods shipments data through August. The biggest downside is set to come from residential investment, where activity continues to buckle under the weight of higher mortgage rates


• GfK’s consumer confidence indicator for the UK rose two points to -47 in October, its first improvement in nearly a year, although it remains only just above its record low of -49 in September. All core measures within the index remain depressed, driven by consumers’ top concern of rampant inflation that accelerated to 10.1% in September. Political and economic instability are also reported to be weighing on consumer sentiment. Poor readings for consumer confidence continue to be reflected in consumer purchasing habits. Retail sales in September were negatively affected by the bank holiday for the State Funeral of Queen Elizabeth II, but, nonetheless, registered at levels that were significantly worse than expected. Retail sales MoM were -1.4% and -6.9% YoY leaving sales volumes 1.3% below pre-pandemic February 2020 levels. The proportion of online sales came in at 26.4%. Note that the proportion of retail sales online has remained broadly consistent at around 26% since May 2022, suggesting that this is the “new normal”

• UK CPI inflation YoY has nudged back into double digits, registering at 10.1%. The largest contributor to increasing annual inflation was food prices, which rose by 14.6% in the 12 months to September from 13.1% in August. A drop in the annual rate of motor fuel inflation to 26.5%, down from 32.1% in August, helped somewhat offset upward pressure on CPI – although motor fuel inflation in September 2022 remains higher than in the same month in the previous year. YoY core inflation crept up, too, rising from 6.3% to 6.5% in September with both YoY goods and services inflation increasing. Annual goods inflation stands at 13.2%, up from 13% in August, and services inflation jumped to 5.3% from 5.1%. Although goods inflation did not exceed the high of 13.6% in July 2022, both CPIH services and core CPIH inflation are now at their highest rates since March 1993 and March 1992, respectively. Note that in “more normal times”, it is often common for services inflation to be higher than goods inflation, but problems relating to blocked supply chains and high commodity prices flipped this trend during the pandemic


• German producer prices in September climbed 2.3% sequentially and 45.8% year over year, as energy prices continued to soar. Metals, intermediate goods, capital goods, durable, and non-durable goods also recorded significant price increases. Meanwhile, investor sentiment in Germany ticked up in October from near record lows, a survey by the ZEW economic research institute showed. Pessimism about current conditions increased markedly, however, as the economic outlook deteriorated further

• Shares in Europe rose on the resignation of UK Prime Minister Liz Truss and the scrapping of her fiscal policies. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.27% higher. The main stock indexes rose as well. France’s CAC 40 Index gained 1.74%, Germany’s DAX Index advanced 2.36%, and Italy’s FTSE MIB Index climbed 3.04%


• China’s statistics bureau announced last Monday that it would postpone releasing third-quarter gross domestic product (GDP) and other key indicators, including monthly readings of industrial production, fixed asset investment, and retail sales. The data were originally scheduled for release the next day. The bureau did not say when it would publish the data. The delay raised speculation that the third-quarter GDP report would show that China’s economy was on track to miss the official growth target of around 5.5% this year and that officials sought to avoid any fallout from its release during the weeklong Communist Party congress, which began October 16. The twice-a-decade gathering of the country’s top leadership was expected to wrap up on October 23 and hand President Xi Jinping a third five-year term as party chief

• The onshore yuan fell to its weakest closing level against the U.S. dollar since the 2008 global financial crisis despite the efforts of state banks to support the currency. The onshore yuan closed Friday at 7.2494 per dollar, its lowest close since January 14, 2008, Reuters reported. The yuan and most other developed and emerging markets currencies have been pressured by the surging greenback as the Fed has aggressively hiked interest rates to fight inflation, while China’s central bank has been easing policy to support a slowing economy. Last week, the People’s Bank of China left its benchmark one-year and five-year loan prime rates steady

• Chinese technology shares retreated, pressured by reports that officials from the Ministry of Industry and Information Technology held emergency meetings with domestic chipmakers regarding the Biden administration’s recently announced restrictions on tech exports to China. The U.S. export curbs will likely have a chilling effect on U.S.-China relations over the long term and push both countries further down the path of decoupling

• China’s stock markets recorded a weekly loss after Beijing delayed releasing key economic data without explanation. The broad, capitalization-weighted Shanghai Composite Index eased 1.1%, and the blue chip CSI 300 Index (which tracks the largest listed companies in Shanghai and Shenzhen) slipped 2.6%, Reuters reported

Sources: T. Rowe Price, Handelsbanken Capital Markets, MFS Investments, Wells Fargo, M. Cassar Derjavets