Economic Outlook – 27 November 2022


Durable goods orders jumped 1.0% in October, far more than the 0.4% increase expected by consensus. Orders in the transportation category sprang 2.1%, with gains in the defense aircraft (+21.7%), civilian aircraft (+7.4%), and vehicles and parts (+0.6%) segments. Excluding transportation, orders advanced 0.5% after retreating 0.9% in September. The report showed, also, that orders for non-defense capital goods excluding aircraft, a proxy for future capital spending, rebounded 0.7% MoM, essentially erasing the previous month’s pullback. On a three-month annualized basis, “core” orders growth slowed from 7.5% to 5.7%, which nevertheless continues to suggest that business investment in machine and equipment will improve further in Q4 The S&P Global Flash U.S. Composite PMI sank from 48.2 in October to a three-month low of 46.3 in November. This marked the fifth straight monthly contraction in private-sector activity in the United States. Behind this deterioration was the sharpest decline in the new orders sub-index since 2009 excluding the early months of the pandemic. According to polled businesses, the decrease could be explained by the fact that “the impact of inflation and interest rates” was weighing on international demand. Faced with shrinking order books, firms operating in the private sector only slightly increased their workforce in the month, signaling that positions left vacant by job leavers were not necessarily filled. Input cost inflation picked up at the slowest rate in almost two years as the price of many components softened. With demand slowing and input prices inflation moderating, the rise in output prices was the weakest in over two years The manufacturing tracker slid from 50.4 to a 30-month low of 47.6 amid elevated inflation and an uncertain economic outlook. This signaled the first contraction since June of 2020. The deterioration was attributable to sharp declines in both output and new orders. Supply chain constraints continued to ease as evidenced by the first decrease in supplier delivery times since October 2019. As demand faded and supply problems subsided, work backlogs continued to shrink. This resulted in the slowest input price inflation in two years, while output inflation was at its weakest since January 2021. Job creation remained positive, but only just, with many firms stating concerns over weakening demand. The services sub-index, for its part, slipped from 47.8 to 46.1, which is consistent with a solid decline in activity. Incoming new business contracted at the fastest pace since May 2020, a development that survey respondents attributed to higher interest rates and inflation, which were squeezing disposable income. As a result, headcounts grew only marginally Sales of new homes jumped 7.5% from September to October, reaching 632K (seasonally adjusted and annualized). New-home sales nonetheless remained 39.0% short of their pandemic peak. The monthly increase was accompanied by a rise in the number of homes available on the market (a 1.5% increase from 463K to 470K, the highest level since March 2008). Still, as sales increased more than supply did, the inventory-to-sales ratio sank from 9.4 to 8.9, which remained high historically It is worth noting that a large proportion of the houses available on the market were either under construction or awaiting construction. Completed houses represented only 13.4% of the total inventory, one of the lowest proportions ever recorded. This statistic reflects not so much the current health of the market as its past strength. Recall that, faced with severe labor shortages, homebuilders were unable to meet the explosion in housing demand that occurred during the pandemic. As a result, construction backlogs swelled. The current context, which is much less effervescent, should allow homebuilders to quickly make up for lost time. The catch-up process seems to have got underway: Just a few months ago, completed builds accounted for only 7.7% of total unsold inventory On Wednesday, the Federal Reserve released the minutes of its early November meeting. While the decision to hike the target range for the fed funds rate 75 basis points was unanimous, there appeared to be potentially diverging opinions on where to go from there. Importantly, a “substantial majority of participants” judged that it would soon be appropriate to slow the pace of rate hikes. However, it was noted that “various participants” (a relatively lesser used quantifier in FOMC minutes) thought the terminal policy rate would have to be “somewhat higher than they had previously expected”. Clearly, based on the press conference that followed that meeting, Fed Chair Jerome Powell was one of the “various” participants in question, but the language used in the minutes did not suggest that this was the majority view. It is worth highlighting, also, that the meeting took place before the cooler-than-expected October CPI report was released, so some of the hawks may have changed their minds since. Also, several participants remarked that continued rapid policy tightening raised the risk of financial system instability. On balance, the minutes were marginally dovish relative to Powell’s press conference but largely consistent with the tone of FOMC speeches in recent weeks. In sum, the Fed appears to be locked into a 50-bp rate hike next month. However, though the outlook for early 2023 remains cloudy, the odds of the Fed pushing rates to or beyond 5% have fallen  On the consumer front, the University of Michigan consumer sentiment index reading for November dropped 3.1 points to 56.8. The index had previously notched four consecutive months of gains after a precipitous drop in the second quarter of this year, as the robustness of the labor market, combined with a build-up of savings had provided a cushion to consumers. However, with the unemployment rate ticking higher, job growth slowing, and excess savings winding down, the dual shock of higher rates and higher prices present a stronger headwind Initial jobless claims rose to a three-month high last week as some recent major layoff announcements made their way into the data. Recent layoffs in the technology sector are likely more of a matter of rightsizing and look to be concentrated at a few firms for now. Job openings, while lower, are still too elevated to suggest recent layoffs will yet meaningfully disrupt the labor market. Still the mood music is not quite as upbeat as it was in the summer months. Continuing claims rose for a sixth straight week to put the number of people who remain on unemployment benefits at 1.55 million, that is the highest since March Under a final regulation issued by the US Department of Labor on Tuesday, more US retirement savers may soon have the option to invest in funds based on environmental, social and governance principles. The rule clarifies that retirement plan fiduciaries can take the potential financial benefits of investing in companies committed to ESG into account when selecting 401(k) investments and exercising proxy votes. The rule reverses a Trump-era regulation that made it harder for plans to put ESG choices on plan menus The major stock benchmarks produced gains during the holiday-shortened week, with the S&P 500 Index finishing above the 4,000 level for the first time in two months. Favorable earnings reports in the retail and technology sectors as well as indications that the Federal Reserve is open to slowing its pace of rate hikes helped fuel the rally. Markets overcame worries early in the week about the potential impact of a new round of coronavirus-related lockdowns in China on global economies (see China section below). As expected, trading was light heading into the Thanksgiving holiday The personal income & spending reading is out on Wednesday. Inflation-adjusted personal spending growth finished the third quarter on a high note, posting a second consecutive 0.3% monthly increase in September. Retail sales data, which are not as comprehensive as the total personal consumption data but are reported first, showed another solid increase in October. While still early, Q4 personal consumption appears to be heading toward a solid gain to finish the year despite numerous economic headwinds. Consumers have been leaning on their balance sheets to sustain consumption in the face of inflation that has outpaced wage growth. This extra firepower has come from both the asset side (e.g., reducing excess cash holdings built up during the pandemic) and the liability side (e.g., increasing credit card debt) The ISM Manufacturing Index is out on Thursday. Through October, the U.S. manufacturing sector has continued to expand, but the pace of expansion appears to be losing steam. The ISM Manufacturing index registered 50.2 in October, the weakest reading since May 2020 and just above the key 50 level that separates expansion from contraction. Manufacturing output eked out just a 0.1% gain in October and was flattered by the continued normalization in the supply-constrained automobile sector.    


The British consumer is facing increasingly strong headwinds. Calculations show that increasing mortgage costs will take some GBP 14 billion away from consumer expenditure in 2022 and almost as much in 2023. The impact of this is obviously limited to the 7% of households who have to re-mortgage each year, or those that expect to do so soon. The impact of steep increases to mortgages will begin to subside from 2024 onwards as the number of two-year mortgages struck at low rates fades. The Chancellor may not have made much of it, but fiscal drag, the non-adjustment of income tax thresholds in light of inflation, gives the government an extra GBP 900 million per 1% of inflation, resulting in the exchequer taking between GBP 6.5 and 7.5 billion in 2022 and 2023. Again, this directly impacts consumer expenditure. Rising energy costs are also having a major impact on consumers’ disposable income, the energy price cap which runs at its present rate through next March helps, but even with this in place, consumer spending on energy is set to double over the coming years when compared to 2021. In cash terms, this means consumers will lose some GBP 30 billion this year and, as the energy price cap is rising from GBP 2500 to GBP 3000 for a typical household in April, over GBP 45 billion next year. All this is with the proviso that energy prices have to be watched carefully as given the geo-political situation, prices remain highly volatile. Add to this consumers’ savings behavior, where the Bank of England data seems to be pointing to rising deposits and the record-low levels of Consumer Confidence are naturally leading to a significant degree of caution. The result of all of this is that consumer expenditure is set to fall by 4.4% in 2023 and 2.2% in 2024 Business activity in the UK declined for a fourth month running in November, reinforcing evidence that the economy is contracting, a PMI survey showed. The composite PMI edged up to 48.3 in November from 48.2 in October, near the lows seen during the coronavirus lockdown in early 2021. Despite the economic slowdown, Bank of England Deputy Governor Dave Ramsden and Chief Economist Huw Pill both indicated that interest rates might have to rise further to quell persistently high inflation.


The Eurozone flash Composite PMI increased to 47.8 in November, compared with 47.3 the previous month. The Manufacturing PMI also increased, rising to 47.3, compared with 46.4 earlier, and the Services PMI was unchanged at 48.6 compared to the previous month. All three series were above expectations. In France, economic activity was adversely affected by falling new business intakes, as data suggested weakening demand conditions once more. Backlogs of work subsequently fell, although a twenty-third successive month of job creation was recorded. In Germany, the private sector economy remained firmly in contraction. Still, the rate of decline in activity eased somewhat and firms were a little less pessimistic about the future. Demand continued to be adversely affected by inflation pressures, albeit to a lesser extent. Despite overall falling economic activity, labor market conditions remained relatively strong Although activity remained in contraction territory, the intensity receded on several fronts. Manufacturing input prices fell back in November, and output prices also to a smaller extent, yet price pressures remain high historically. Increases in manufacturing new orders and export orders meant small upward shifts away from historical lows. Future expectations improved marginally but remain very low overall and employment growth decreased slightly The release points further towards the eurozone having fallen into a recession this quarter. That said, a warmer-than- expected winter, ample inventories and a decent supply of liquid natural gas, suggest that the risk of broader energy shortages has declined. Yet ongoing price pressures point to real household incomes also weakening more than expected. It is possible that institutional forecasters such as the ECB, the European Commission as well as the OECD are underestimating the depth of the downturn, especially with regards to activity next year Most European Central Bank (ECB) policymakers voted in favor of a three-quarter-point hike in interest rates in October amid growing concerns that inflation might become entrenched and that a wage-price spiral might emerge, minutes of the meeting showed. Some policymakers were also quoted as saying that “monetary tightening would probably need to continue after the monetary policy stance had been normalized and moved into broadly neutral territory.” European shares rose for a sixth consecutive week on hopes that central banks might slow the pace of interest rate increases. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.66% higher, while Germany’s DAX Index advanced 0.62%, France’s CAC 40 added 0.88%, and Italy’s FTSE MIB was flat.


Chinese authorities increased hopes of further monetary stimulus as they attempt to amplify support for the Chinese economy, which is under strain from surging coronavirus cases and newly imposed lockdowns. On Friday, the People’s Bank of China announced a 25-basis-point cut to the reserve requirement ratio (RRR) for banks after it pledged that monetary tools will be used “in a timely and appropriate manner” to maintain reasonably ample liquidity, according to Bloomberg. Meanwhile, many of China’s large state banks agreed to boost lending to real estate developers following the government’s announcement of a property sector support package. The Financial Times reported that the Bank of Communications was the first bank that agreed to provide financial aid, after it announced a CNY 100 billion credit line for Chinese developer Vanke and CNY 20 billion for Midea Real Estate. The Bank of China and the Agricultural Bank of China were also among those who agreed to offer support Shares in China were modestly positive for the week as investors balanced new coronavirus restrictions against signs that authorities will provide more supportive measures to stimulate the economy. News of additional funding for property developers also provided a boost to sentiment. The Shanghai Composite Index gained 0.76%, and Hong Kong’s Hang Seng Index rose 0.59%.   

Sources: T. Rowe Price, Handelsbanken Capital Markets, MFS Investments, Wells Fargo, National Bank of Canada, TD Economics, M. Cassar Derjavets