Economic Outlook – 27 June 2021


• Nominal personal income declined 2.0% in May, slightly better than consensus expectations calling for a 2.5% decline. The wage/salary component of income rose 0.8%, while disposable income dropped 2.3%. Nominal personal spending, meanwhile, was flat in the month, slightly worse than the median economist forecast calling for a +0.4% print. Adjusted for inflation, disposable income contracted -2.8%, while spending was down 0.4%. As a result, the savings rate dropped from 14.5% to 12.4%. Also in May, the headline PCE deflator came in at 3.9% YoY (in line with expectations) and up from 3.6% in the prior month. The core PCE measure, for its part, clocked in at 3.4% YoY, also in line with consensus and up from 3.1% in the month of April

• Durable goods orders rose 2.3% to US$253.3 billion after sliding 0.8% the month before. The gain was largely due to a steep jump in non-defence aircraft orders (+27.4%), as Boeing reported 73 new orders in the month. Motor vehicle and parts orders contributed as well, rising 2.1%. Excluding transportation, orders were up just 0.3% in May after swelling 1.7% in April. Excluding defence, new orders increased 1.7%. Core orders (non-defence capital goods orders ex aircraft) dipped 0.1%, but the April figure was revised to +2.7%. Relative to their April 2020 low, core orders were up 25.6%, which, incidentally, was 7.3% higher than their prior cycle peak in February 2012

• Existing-home sales dropped 0.9% from a month earlier to a seasonally adjusted annual rate of 5.80 million units. Though this was the fourth consecutive decline this year, sales remained 1.8% above their February 2020 level. As housing resale activity was heavily impacted by measures imposed to curb Covid-19 propagation in the spring of 2020, comparisons with the situation 12 months before are skewed on the upside (44.6%). Housing affordability deteriorated further, as the median existing-home price was up 23.6% to a record-high US$350,300 from 12 months earlier. This said, lack of inventory remained a major factor limiting transactions. According to the National Association of Realtors, properties typically remained on the market for 17 days and 89% of homes sold in the month had been on the market for less than a month. At the current pace of sales, it would take 2.5 months to run through the 1.23 million homes that were for sales at the end of May. Single-family home sales dropped to a seasonally adjusted annual rate of 5.08 million, down 1.0% from 5.13 million in April, while sales of condos and co-ops were stable at 720K. Purchasing patterns are under scrutiny for any change in the condos sector as office employees begin to return to their workplace now that a large portion of the population has been vaccinated. Based on anecdotal evidence, more employers than expected seem keen on having employees on site more days than not per week. After much speculation and high hopes regarding how distance working might become a permanent fixture, many people may be in for a disappointing reality check. On a regional basis, existing-home sales decreased 1.4% in the Northeast, 0.4% in the South and 4.1% in the West, but increased 1.6% in the Midwest

• Seasonally adjusted new-home sales dropped 5.9% MoM after declining a revised 7.8% the previous month. The median forecast among economists was for a gain of 0.2% in the month. The pull-back in new single-family home sales to an annualized pace of 769K units was in part a reflection of deteriorating affordability. The median price of a new home surged 18.1% to $374,400 over the past year. Contributing to the rise in new-home prices were higher input prices and shipping bottlenecks. From April to May, sales of new homes fell 19.6% for those priced under US$400K but rose 17.4% for those priced from US$400K to US$750K. Sales of more expensive homes were unchanged in the month, accounting for 7.3% of total sales. The number of new units available for sale at the end of May stood at 330K, compared with 302K in January. At the current sales rate, the inventory represented 5.1 months of supply, compared with 3.6 months in January and a long-term average of 6 months. Since January, mortgage applications for new purchases have fallen significantly (-19.7%) and a number of home builders have reported a slower flow of prospective buyer more recently. Expectations are that this trend will reverse in the coming months as supply issues are resolved while economic growth remains strong

• Initial jobless claims fell 7K to 411K in the week ending June 19. The previous week’s level was revised up 6K from 412K to 418K. The advance number for seasonally adjusted insured unemployment (i.e., continued claims) fell 144K to 3,390K in the week ending June 12. The jobless claims report shows that, in the week ending June 5, 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) rose to 14.8 million, an increase of 3.8K

• Although the IHS Markit flash composite index slid from 68.7 in May to 63.9 in June, the index printed above 60 for a third month running is consistent with strong growth again in June. Significant supplier delays, especially in the goods producing sector, and difficulties finding staff once more hampered growth, according to the report. Activity in the services sector moderated in the month, with the Flash Services Business Activity Index losing 5.6 points to 64.8. The manufacturing sector fared better, edging up from 62.1 in May to 62.6, as goods producers sounded more confident about the future than service providers did. Once more, price pressures remained elevated. According to the report, higher costs were commonly passed on to clients

• The third estimate of Q1 GDP released by the Bureau of Economic Analysis confirmed that growth in the quarter stood at an annualized 6.4%. Still, contributions to growth, reflecting a more complete source of data, showed upward revisions to non-residential fixed investment, private inventory investment, and exports, which were offset by an upward revision to imports

• Fed Chair Jerome Powell testified on Capitol Hill this week that the central bank sees no risk of runaway inflation. While inflation has increased notably in recent months, it is expected to drop back toward the Fed’s longer run goal, Powell said. The Fed will support the economy for as long as it takes to complete its recovery, the chairman said, adding that the central bank will not raise rates preemptively because it fears the possible onset of inflation but will instead wait for actual inflation or other imbalances before tightening policy. Federal Reserve Bank of New York President John Williams said this week that while the economy is improving at a rapid clip, conditions have not progressed enough for the Fed to shift its monetary stance. “Lift off” is still way off in the future, he said. The comments helped soothe fears sparked a week ago when Fed forecasts showed that members of the rate-setting Federal Open Market Committee expected to hike rates twice in 2023, some months earlier than they had previously predicted

• A bipartisan group of US Senators and the White House reached agreement on Thursday on an infrastructure package totaling nearly $1 trillion of spending over five years on roads, bridges, mass transit and the like. However, US President Joe Biden said he would veto the legislation if it were not accompanied by a broader social spending plan that concentrates on what his administration calls human infrastructure. The second measure is opposed by Republicans and early indications are that it may have trouble gaining the support of all 50 Democratic Senators to pass under the Senate’s arcane budget reconciliation rules, which require only a simple majority to gain passage rather than the usual 60 votes

• Stocks rebounded from the previous week’s declines, bringing the S&P 500 Index and the technology-heavy Nasdaq Composite index to new highs and helping both record their best weekly gains since early April. Stocks moved steadily higher through much of the week, if on generally lackluster summer volumes. Energy shares fared best within the S&P 500 as oil prices reached their highest levels since October 2018 on falling global inventories. Utilities and real estate stocks lagged

• In terms of data release, total construction spending is out on Thursday. It edged up 0.2% in April. Residential spending once again accounted for most of the modest monthly gain as builders rushed to build homes to meet the surge in demand. Meanwhile, the nonresidential sector continues to absorb the aftershocks of the pandemic. Nonresidential outlays slipped during the month, marking the fifth straight decline

• The ISM manufacturing index is out on Thursday as well. It beat expectations and rose to a reading of 61.2 during May. The supplier deliveries index reached the highest level since 1974 during the month, reflecting the ongoing supply-side constraints many producers are currently experiencing. Not surprisingly, longer wait times are weighing heavily on the production index, which declined to 58.5 from 62.5 the month prior. The prices paid index fell in May, although the index remains elevated


• The Bank of England said Thursday that it now expects inflation to peak near 3%, a half-percentage point higher than it forecast just six-weeks ago. However, it also warned against premature tightening of monetary policy as it expects the inflation surge to be temporary. On the growth front, the Bank sees economic growth accelerating to a 5.5% pace in Q2, faster than its previous 4.25% forecast. Markets are pricing in several BOE hikes in 2022, well before any move from the Fed

• Energy and mining stocks led the FTSE 100 higher on Friday on the back of higher commodity prices with the blue-chip index ending its best week in over a month following a boost from a dovish central bank policy in the previous session.


• The eurozone Flash Composite PMI was 59.2 in June compared with 57.1 in the previous month. Meanwhile, the Manufacturing PMI was flat compared with 63.1 the month before, and the Services PMI was 58 compared with 55.2 previously. The Composite and Manufacturing PMIs are above, whereas the Services PMI is in line with, expectations. The eurozone private sector grew at its fastest rate in 15 years as restrictions continued to be lifted and confidence grew in the vaccination rollout. Significant increases in demand continue to outpace supply, as price pressures have also become visible in the services sector, in addition to more extreme pressures in manufacturing. Overall, the June release points to a potential significant boost in Q2 GDP, and the potential for a further strong reading in Q3

• The German Flash Composite PMI was 60.4 in June compared with 56.2 the previous month, the Manufacturing PMI was 64.9 compared with 64.4, and the Services PMI was 58.1 compared with 52.8. All indices were above expectations. IHS Markit reported that “further easing of COVID-19 restrictions and release of pent-up demand leading to a sharp and accelerated rise in business activity”. Meanwhile, “further increase in price pressures, with rates of inflation in both input costs and output prices accelerating to new record highs.”

• The French Flash Composite PMI rose significantly to 57.1 in June compared with 57 the previous month, the Manufacturing PMI was 58.6 compared with 59.4, and the Services PMI was 57.4 compared with 56.6 a month earlier. All PMIs were below expectations. Continued growth in business activity suggests increased confidence in the recovery on behalf of the French private sector. This month’s release also shows further jobs growth as well as signs of additional price pressures amid supply chain bottlenecks

• European Central Bank President Christine Lagarde told a European Parliament committee it was important “not to withdraw support too early.” She said the outlook for the eurozone economy was “brightening” and economic activity “should improve strongly” in the second half of the year. She also said rising inflation would start declining at the start of 2022 as temporary factors fade out

• European shares rose in volatile trading, buoyed by a reaffirmation of ultra-loose monetary policy and a bipartisan agreement on a huge U.S. infrastructure spending plan. The pan-European STOXX Europe 600 Index ended the week 1.23% higher. The main stock indexes also posted gains. Germany’s Xetra DAX Index rose 1.04%, France’s CAC 40 0.82%, and Italy’s FTSE MIB 1.16%


• China’s railway investment from January to May dropped 8% to RMB 203.6 billion from a year earlier, according to the country’s National Railway Administration. The decline was surprising given that Beijing has favored infrastructure investment to spur growth in the post-pandemic recovery.

• Property sales fell in May from a year ago, when the property sector rebounded strongly from the pandemic, but surged 22% from 2019, according to China Realty Research. Despite a raft of central and local government measures to cool the property sector, demand is underpinned by strong fundamentals. Analysts do not expect a sharp slowdown in the second half, and some see scope for an upside surprise

• E-commerce giant reported robust sales growth at its annual “618” shopping event. The promotion, which lasts from June 1 to June 18, is the summertime equivalent of the so-called Singles Day event hosted by competitor Alibaba each November. Analysts see little chance that the PBoC will increase official interest rates in the near term. Most banks cut their long-term deposit rate ceilings by 30 to 50 basis points following a long-anticipated technical change in the rate-setting mechanism

• China’s large-cap CSI-300 Index added 2.7% and the Shanghai Composite Index rose 2.3%, ending a three-week losing streak. Financial stocks led the rally after the People’s Bank of China (PBoC) injected liquidity into the financial system for the first time since February. Renewable energy names did well after China’s National Energy Administration announced that over 50% of rooftop spaces on government buildings would be reserved for solar panels, with lower targets for schools, hospitals, and other types of buildings. Domestic leisure and travel stocks also advanced amid reports that China may not open its international borders this year

Sources: T. Rowe Price, Wells Fargo, MFS Investment Management, Handelsbanken Capital Market, Reuters, National Bank of Canada, M. Cassar Derjavets