Economic Outlook – 26 September 2021


• New-home starts rose 3.9% to an annual pace of 1.615 million units following a revised decline of 6.2% the previous month. Reflecting stronger demand for apartments, multifamily starts accounted for the overall gain in August. They rose 20.6% or 92K to an annual rate of 539K units. This more than offset the 2.8% decline (-31K) in single-family starts to an annual pace of 1.076 million units. Though lumber prices have fallen substantially from their recent peak, builders are facing a long list of other material shortages, not to mention a shortage of skilled construction workers. Under these circumstances, it is not surprising to see the number of single family houses under construction but yet to be completed rise to levels not seen since 2007

• Building permits, meanwhile, increased 6% in August to an annual pace of 1.728 million units. Again, reflecting a sizable jump in the multi-family segment, permits for units in buildings with five units or more rose 19.7% to 632K, while permits for single-family units edge up 0.6% to 1.054 million

• Purchases of new single-family homes increased 1.5% to a 740K annualized pace following an upwardly revised 729K in July. The median sales price of new houses sold in August 2021 was US$390,900 according the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. There were 378K new homes for sale as of the end of August, the most since October 2008. This represents a supply of 6.1 months at the current sales rate

• According to the National Association of Home Builders/Wells Fargo survey, homebuilder sentiment was practically unchanged in September, ticking up to 76 from 75 the month before. Regarding the HMI gauges derived from the survey, builder perceptions of current single-family home sales rose one point to 82, the component measuring traffic of prospective buyers posted a two-point gain to 61, and the gauge tracking sales expectations in the next six months held steady at 81

• Existing-home sales slipped 2%, after rising 2.2% the previous month. According to the National Association of Realtors, at a seasonally adjusted annual pace of 5.88 million units, August sales were down 1.5% from a year earlier. In the wake of the pandemic, demand for larger homes in the suburbs soared as people working out of small dwellings sought more space. It now appears that the tailwind for that demand has abated somewhat. Indeed, single-family home sales fell 13.6% from their peak of October 2020, while those for condos/co-ops declined 4.2% over the same period. Still, total existing-home sales remain higher than before the pandemic started, supported by low mortgage rates and rising wages from a tightening labour market

• As fully expected, the FOMC, in a unanimous vote, left the target range for the federal funds rate unchanged at 0% to 0.25% at the conclusion of its two-day meeting. Also, as expected following a disappointing August nonfarm payroll report, there was no formal announcement in the press release of an imminent tapering of asset purchases. The statement did note, however, that “if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted”. During the post-FOMC meeting press conference, the Fed Chair Jerome Powell said: “The purpose of that language is to put notice out that could come as soon as the next meeting.” He added that he would only need to see a “decent” or “reasonably good” September jobs report for him to be convinced that the time to taper had arrived. He also noted that “many” on the committee felt that the substantial further progress test that they had been looking for in order to taper asset purchases had already been met. Powell also lifted the veil a little on the pace/timeline of the taper. Powell said that the committee agreed that “so long as the recovery remain[ed] on track, a gradual tapering process that concludes around the middle of next year [was] likely to be appropriate.” Should that kick off in November, it would imply a roughly 8-month process. On rate hikes, Powell stressed that the liftoff test for rates was still far from being met. Moreover, he all but ruled out rate hikes during the tapering process. Instead, should conditions warrant it, they would simply accelerate the taper. When asked about the post-taper balance sheet outlook, Powell offered no guidance, noting that it was not yet time to discuss the issue

• According to the Conference Board, the trend in the Leading Economic Index was consistent with robust economic growth for the remainder of the year. In August, the LEI increased 0.9%, with 8 of the 10 components contributing positively. This came on the heels of a 0.8% increase in July and a 0.6% increase in June.

• The IHS Markit flash composite index of purchasing managers continued to signal solid output growth in September. However, the pace has slowed noticeably since May. The Composite PMI printed at 54.5, compared with 55.4 in August and 68.7 four months before. Both the Services and the Manufacturing indices ground lower in September. Services edged down 0.7 point to 54.4 while Manufacturing slipped 0.6 point to 60.5.

• Initial jobless claims rose 16K to a seasonally adjusted 351K in the week ended September 18. The four-week moving average, which smooths WoW volatility, fell 0.8K to just 335.8K. The advance number for seasonally adjusted insured unemployment (i.e., continued claims) rose 131K to 2,845K in the week ending September 11. The jobless claims report shows that, in the week ended September 4, the total number of people receiving benefits under all programs, including those introduced since the start of the health crisis (i.e., Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation), fell to 11.25 million, a decline of 856.4K

• The US House of Representatives passed a bill to a avoid a government shutdown and suspend the debt limit, but it faces Senate roadblocks with the 30 September deadline fast approaching. Republicans are threatening to block the measure if it includes a debt limit suspension, which could leave Democrats scrambling to find another way to avoid a federal funding lapse or even a first-ever default on US debt. The White House began to advise federal agencies that, barring a new appropriations bill, they expected to execute a shutdown next week

• The major benchmarks overcame an early sell-off to end the week flat to modestly higher. On Monday, the S&P 500 Index recorded it biggest daily drop since May 12 and briefly dipped below its 100-day moving average, a closely watched technical level. Longer-term bond yields rose sharply over the week, helping financials shares by holding the promise of improving banks’ lending margins. Energy stocks also outperformed within the S&P 500, while utilities shares lagged

• In terms of data release, durable goods orders are out on Monday. Such orders advanced 0.6% last month after slipping modestly in July. The ISM manufacturing new orders index for August indicated that the demand backdrop remained quite strong during the month. While it would not be surprising to see orders grow broadly, the usually-volatile transportation sector looks to have been a fairly neutral force in August. Orders for autos may give back a bit after the large 5.8% gain in July, while aircraft orders should pick up based on the 53 gross new orders reported by Boeing for August

• Personal Income & Spending is out on Friday. The expectation for personal income is for an increase of 0.1% in August, a gain that could have been even larger if not for dwindling stimulus. There will be a lot to unpack under the headline estimate of personal income next week, as August’s data should reflect some states having discontinued the enhanced unemployment benefits, PPP funding for sole proprietors continuing to expire and the Child Tax Credit being sent to households. Excluding transfer payments, personal income growth was likely stronger, as another solid pickup in wages & salaries income is likely


• As expected, the Bank of England Monetary Policy Committee voted unanimously to leave interest rates at 0.1% and it will be continuing with its GBP 895bn quantitative easing (QE) programme through to year-end. In August’s last meeting, and in the absence of the now retired Chief Economist, Andy Haldane, Michael Sunders took up the hawkish mantle and voted to reduce the pace of the QE programme. At this meeting, he was joined by Dave Ramsden, while the new Chief Economist, Huw Pill, who is seen as potentially hawkish, agreed with the majority that the QE programme should continue until year-end. Undoubtedly, both dissenters knew that they would be outvoted on this occasion, but they are keen to put down markers that monetary policy should be rebalanced over the course of 2022.

• Looking at the economy overall, there are growing indications that the UK is near capacity, even if the economy is still around -2.5% short of the level of GDP seen at the end of 2019. Supply constraints are clearly a major factor and this morning’s flash composite PMI was down to average levels (54), while the ONS business conduct survey released this morning shows that employment levels continue to improve, although the survey also noted the UK continues to loose exporting market share (the benefit of trade deals has been hampered by the difficulty in having business people travel to potential new customers). For the Bank, the key remains inflation, and while it remains of the view that much of the 3.2% inflation reported last week is transitory (in particular the restaurant meals impacted by the base effect of Eat Out to Help Out), compounded by issues such as transportation bottle necks (which are fading more slowly than initially expected), there is naturally a concern that wage rises of 8%-plus seen over the last two months will prove to be stickier than anticipated

• The PMI report for the UK painted a picture of slower economic activity and rising input prices. The flash composite index hit 54.1 in August—down from 54.8 in the preceding month—mainly due to a marked loss of momentum in the manufacturing sector, which offset an increase in services sector growth


• The eurozone Flash Composite PMI was 56.1 in September compared with 59 in the previous month. Meanwhile, the Manufacturing PMI was 58.7 compared with 61.4 the month before, and the Services PMI was 56.3 compared with 59 previously. All indices were below expectations. Robust but slowing growth in the euro during September reflected not only reversion from the high point last quarter, but also ongoing concerns over the pandemic and supply-side disruptions. These factors weighed further on new orders in both sectors and for business expectations in the services sector. Employment also showed signs of weakening. Meanwhile, both input- and output prices kept rising. The manner in which supply-side constraints boost headline manufacturing PMIs hides the more intense deceleration in manufacturing output

• The German Flash Composite PMI slowed to 55.3 in September compared with 60 the previous month, the Manufacturing PMI was 58.5 compared with 62.6, and the Services PMI was 56 compared with 60.8. All indices except manufacturing were below expectations.

• The French Flash Composite PMI decelerated slightly in September, with the index falling to 55.1 compared with 55.9 the previous month. The Manufacturing PMI was 55.2 compared with 57.5, and the Services PMI was 56 compared with 56.3 a month earlier. All PMIs were below expectations.

• For both countries, the Markit press releases noted concerns about supply-side constraints weighing on demand. Lastly, employment decreased in Germany but kept increasing in France

• Shares in Europe advanced as optimism about a continuing economic expansion offset concerns about a gradual withdrawal of central bank support. However, lingering worries about Chinese property developer Evergrande curbed gains. In local currency terms, the pan-European STOXX Europe 600 Index ended 0.31% higher. Major indexes also rose. Germany’s Xetra DAX Index added 0.27%, France’s CAC 40 Index rose 1.04%, and Italy’s FTSE MIB Index gained 1.01%


• Chinese authorities have told local officials to prepare for the potential demise of property developer Evergrande, the world’s most indebted developer, with liabilities of $300 billion, the Wall Street Journal reported. Local officials described the signals from Chinese authorities as preparations for a potential storm and said the government told them they should step in only at the last minute to prevent spillover effects from Evergrande’s demise. Evergrande was due to pay $83 million of interest on Thursday for a $2 billion dollar-denominated bond that is set to mature in March 2022. Dollar bonds are typically held by foreign investors. Even if no payment is made, the company will not technically default unless it fails to make that payment within 30 days. As of Friday morning in Hong Kong, the company had not made any announcement, or any filing to the Hong Kong exchange, leaving investors in limbo

• Many analysts believe that China’s government will step in to contain the financial fallout ensuing from an Evergrande bankruptcy or default. Moreover, many believe systemic risk is unlikely as Evergrande’s outstanding debt amounts to a negligible amount of the country’s total banking assets. Beijing is reportedly aiming for a “marketized default” for Evergrande, a term that some believe means an orderly market exit and well-managed restructuring. The company has many assets it can sell to reduce its debt, ranging from core property assets to an electric vehicle business and a property services unit. However, some analysts are concerned that the longer the government refrains from a public intervention, the more risk it poses to China’s economy

• Mainland Chinese stocks ended a holiday-shortened week broadly flat from the prior Friday’s close after being closed Monday and Tuesday for the Mid-Autumn Festival. The market’s subdued performance was noteworthy after Hong Kong’s Hang Seng Index fell more than 3.0% on Monday amid the mounting debt crisis surrounding China’s Evergrande Group

• The semiconductor chip shortage is now expected to cost the global automotive industry $210 billion in revenue in 2021, according to AlixPartners. The forecast is almost double the previous projection of $110 billion in May. The consulting firm released an initial forecast of $60.6 billion in late January, when the parts problem started causing automakers to cut production at plants. The firm is forecasting that 7.7 million units of production will be lost in 2021, up from 3.9 million indicated in its May forecast. The parts problem is expected to last at least until the second quarter of next year as supply issues involving labor, transportation and other materials will slow the noticeable improvement of inventory levels

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