Economic Outlook – 26 November 2023

The S&P Global Flash Composite PMI remained unchanged in November at 50.7 and consistent with just a modest expansion in private sector activity. New orders returned to growth in the month after three consecutive contractions, but that did not prevent yet another decline in unfinished business. Reduced work backlogs in turn encouraged firms to cut their workforce for the first time since June 2020, as indicated by a 1.6-point decline in the employment gauge to 49.7. “Businesses commonly mentioned that relatively muted demand conditions and elevated cost pressures had led to lay-offs”, S&P Global’s report mentioned. “Other companies noted that hiring freezes were in place amid pressure on margins.” Input price inflation, meanwhile, continued to rise, albeit at the slowest pace since October 2020, with firms noting that lower energy and raw material costs had dampened cost increases. The services sub-index rose from 50.6 to 50.8, signaling a fractional uptick in the rate of output growth. Incoming new business expanded for the first time in four months, but headcounts nonetheless declined marginally. Perhaps these layoffs were linked to reduced optimism about future output. Indeed, the 12-month outlook of firms operating in the services sector dipped to its lowest level since June in November, with polled firms citing concerns about “tightening customer spending and lingering economic uncertainty.” The manufacturing tracker, for its part, slipped back into contraction territory in November as it fell from 50.0 to 49.4. New orders remained unchanged in the month, while output expanded at a slower pace. Factories also noted a second consecutive decline in staffing levels Durable goods orders sank 5.4% MoM in October, a larger decline than was anticipated by economists surveyed by Bloomberg (-3.2%). Orders in the transportation category fell 14.8% on declines for both motor vehicles/parts (-3.8% amid the UAW strike) and civilian aircraft (-49.6%). Excluding transportation, orders stayed unchanged instead of edging up 0.1% as per consensus. The report showed, also, that orders for non-defense capital goods excluding aircraft, a proxy for future capital spending, dipped 0.1% in October after sagging 0.2% the month before. On a three-month annualized basis, “core” orders were up just 1.6%, showing weak momentum for business equipment spending entering Q4 Existing-home sales declined for the 17th time in 19 months in October, slipping 4.1% MoM to a 13-year low of 3,790K (seasonally adjusted and annualized). Contract closings fell in both the single-family segment (-4.2% to 3,380K) and the condo segment (-2.4% to 410K). On a 12-month basis, sales were down 14.6% but, seeing how the level of transactions in October 2022 was already depressed, this figure does not accurately reflect the sharp slowdown in the resale market since mortgage rates began to rise. For a better idea of the situation, suffice it to say that the sales level in October was about 30% below pre-pandemic levels and 40% below the most recent peak reached in January 2021 (6,560K). Thanks in part to the drop in sales in October, the inventory-to sales ratio climbed two ticks to 3.6. While this figure is roughly back where it was before the pandemic, it remained well below its historical average and at levels consistent with tight supply (<5 indicates a tight market for the National Association of Realtors). This state of affairs was largely due to the fact that the number of homes available on the market remained at a very low level in October. In fact, the 1,150K homes listed during the month represented the smallest inventory ever recorded for this time of year. Homeowners were understandably reluctant to put their properties up for sales at a time where moving could entail having to renegotiate one’s mortgage, which could result in a substantial increase in monthly payments. Consequently, the fact that supply and demand were equally depressed at the same time helped keep prices buoyed: The median price paid in October for a previously owned home was $391,800, up 3.4% on a 12-month basis Initial jobless claims fell from 233K to 209K in the week to November 18. Continued claims eased from 1,862K to 1,840K The Conference Board’s index of leading economic indicators (LEI) slipped 0.8 point in October to a 41-mointh low of 103.9. This was the 19th consecutive decline for this indicator, making it its longest negative streak since the Great Recession Six of the ten underlying economic indicators acted as a drag on the headline index. The biggest negative contributions came from ISM new orders (-0.22 pp), consumer expectations (-0.22 pp), and stock prices (-0.14 pp). 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. Both conditions were met in October: The LEI index dropped 6.4% annualized over six months and the six-month diffusion index stood at 45% The minutes from the FOMC’s last meeting essentially backed up the hawkish signals the Fed has been putting out while they hold the policy rate fixed. Committee members noted how the economy stayed unexpectedly hot through the third quarter of the year, powered by relentless consumer spending. With the supply shocks from the pandemic and the war in Ukraine still gradually resolving themselves, persistently strong aggregate demand helped keep pressure on prices through much of the year. However, committee members judged that this may be starting to shift. This has left the Fed squarely focused on cooling demand to tame inflation pressures. On this front, the Fed maintains that restrictive policy rates are working, and are at an appropriate level. Moreover, with members agreeing that there needs to be clear evidence that inflation is on a solid trajectory back to 2% before easing, and upside risks ever-present, officials will be keenly looking out for any signs that more needs to be done to restore the supply-demand balance Demand for new credit in the United States has declined over the past year and will likely stay soft in the future, according to a survey released on Monday by the Federal Reserve Bank of New York. The regional Fed bank’s quarterly Survey of Consumer Expectations Credit Access shows there has been a notable drop in credit over the past year, with application rates at 41.2%, compared with 44.8% in 2022 and the pre-pandemic 2019 level of 45.8% In terms of data release, personal income & spending is out on Thursday. Consumer spending continues to beat expectations. Over the past four months, personal spending has averaged 0.6% growth. Yet over those same four months, real disposable income growth was negative. Even with wobbling income, households were unfazed and spent at the expense of tomorrow; the personal saving rate slipped to 3.4% in September, or the lowest rate seen this year ISM Manufacturing is out on Friday. While the consumer has been rocking, the industrial sector has felt the heat. One of the most salient comments in the most recent ISM report came from a respondent in the fabricated metals space who said, “We’re clearly in a mild industry recession.” The sentiment aligns with the headline ISM Manufacturing Index that has been in contraction territory for 12 consecutive months.   

At the Autumn Statement, Chancellor Jeremy Hunt has benefitted from an improved fiscal outlook since the March Budget due to higher than expected tax receipts arising from the impact of inflation and fiscal drag. While debt interest spending is projected to be higher than previously expected as a result of increased interest rate expectations, this has been more than offset by the growth in tax receipts. Chancellor Hunt has announced a series of measures that spend almost all of the improvement in forecasted public finances with total policy decisions at the Autumn Statement costing around GBP 21bn in 2027-28, according to the Treasury. In the run up to an election that must take place at some point next year, a range of measures have been announced that effectively loosen fiscal policy. This includes a cut of 2pp in employee National Insurance contributions, the implementation of permanent full expensing for businesses and a commitment to uprating working age and pensioner benefits by previously agreed amounts. A series of supply side measures were also announced in areas including skills, planning and pension reforms in an attempt to boost UK growth prospects UK provisional PMIs for November have been published this morning, and they bring relatively good news with respect to the UK economy’s performance. The UK’s composite PMI has edged up from 48.7 in October to 50.1, indicating that there is marginal growth in private sector activity. UK manufacturing PMI remains in contractionary territory at 46.7, although this is considerably higher than market expectations of 45, and the services PMI has accelerated to 50.5, up 1pp from October. The UK’s manufacturing sector continues to see reductions in production volumes and manufacturers note that customer destocking continues to act as a headwind to the sector. Service providers, on the other hand, have experienced marginal business activity growth in November The UK government announced tax cuts for workers, incentives for business investment, and measures to support the housing market in its fall budget. The Office for Budget Responsibility (OBR) forecast that the economy would expand 0.6% this year but slashed its growth forecasts for 2024 and 2025 by about half to 0.7% and 1.4%, respectively.  

The PMI flash composite output index was 47.1 in November, up from 46.5 in October and slightly above a market expectation of 46.8. The increase in the composite indicator reflects increases in manufacturing as well as services. Nevertheless, all sub-components related to output and employment are still below or much below historical averages, although export orders in the service sector indicate a positive trend. Overall, the PMI continues to signal falling euro area GDP in the fourth quarter, and the outlook remains weaker for manufacturing than for services. The employment index has deteriorated in recent months but the labour market still appears resilient compared to the outlook for production ECB policymakers reiterated that the fight to curb inflation was not over and sought to disabuse financial markets of expectations that the central bank would soon cut interest rates. ECB President Christine Lagarde said rates could be steady over “the next couple of quarters,” while France’s François Villeroy de Galhau said rates have reached a plateau where they will probably remain for the next “few quarters.” Belgium’s Pierre Wunsch said the ECB is likely to stand pat both in December and January. Separately, the minutes of the ECB’s October meeting revealed that policymakers insisted that another rate hike should be kept on the table, even if further policy tightening was not part of the main scenario In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.91% higher amid hopes that central banks would start cutting interest rates in the first half of next year. Major stock indexes closed mixed. France’s CAC 40 Index rose 0.81%, Germany’s DAX gained 0.69%, but Italy’s FTSE MIB fell 0.22%.  

Chinese regulators formulated a funding plan for property developers in its latest efforts to consolidate growth as the country grapples with an ongoing property crisis. The list, which reportedly includes 50 private and state-owned developers, will act as a guide for financial institutions to deliver a range of financing measures to strengthen balance sheets, according to Bloomberg. Separately, the National People’s Congress, China’s parliament, encouraged banks to accelerate support measures for real estate developers to reduce the risk of further defaults and ensure the completion of outstanding housing projects. The reports follow recent property data that underscored an ongoing downturn in a key sector for China’s economy. Property investment, sales, and new home prices slumped in October Chinese banks left their one- and five-year loan prime rates unchanged, as expected, after the People’s Bank of China (PBOC) kept its medium-term lending rate on hold the prior week. China remains an outlier among global central banks as it has maintained a looser monetary policy to shore up a slowing economy. More recently, expectations that the PBOC may cut its reserve ratio requirement rose as the latest economic data provided a mixed outlook for China Many economists anticipate that Chinese government advisers may propose an economic growth target of around 5% in 2024 at the annual Central Economic Work Conference in December. The gauge will be aimed at promoting job growth and to ensure long-term development goals remain on track Changpeng Zhao, the chief executive of Binance, the largest global cryptocurrency exchange, agreed on Tuesday to step down from his post and plead guilty to money laundering charges brought by the US Department of Justice. The firm agreed to pay fines totaling $4.3 billion but will be allowed to remain in operation. Binance remains under investigation by the Securities and Exchange Commission and may face additional charges Stocks in China retreated as news that Beijing may introduce fresh stimulus measures for the property sector was not enough to offset broader economic woes. The Shanghai Composite Index gave up 0.44% while the blue-chip CSI 300 lost 0.84%. In Hong Kong, the benchmark Hang Seng Index gained 0.6%, according to FactSet.
Sources: T. Rowe Price, MFS Investments, Wells Fargo, National Bank of Canada, Handelsbanken Capital Markets, TD Economics, M. Cassar Derjavets.