Economic Outlook – 28 March 2021

• Global supply chains have been strained for over a year due to disruptions and bottlenecks caused by the coronavirus, and this week’s grounding of a massive container ship in the Egypt’s Suez Canal has only added to the problem. As much as 12% of the world’s seaborne trade has been halted by the accident, lengthening delivery times for raw materials and other inputs as well as delaying the transport of finished goods from China to Europe. The most immediate impact has been seen in the price of crude oil, which has again risen to above $61 per barrel


• The third estimate of Q4 GDP growth pegged in at +4.3% in annualized terms, two ticks stronger than what the BEA announced last month. The details of the report showed a slight downgrade to business investment in structures, but this was more than offset by stronger showings for equipment/intellectual property, government spending, and inventories. Trade’s contribution to growth remained roughly unaltered. Q4 growth left U.S. real GDP 2.4% below its level in Q4 2019. The report also showed corporate profits sliding 1.4% q/q following a +27.4% jump in Q3. On a 12-month basis, profits were down 0.7%

• Nominal personal income fell 7.1% in February following a 10.1% surge in January, when American households received the aid cheques included in the $900-billion stimulus package signed at the end of Donald Trump’s presidency. Income derives from government transfers dove 27.6% to $4,146.9 billion (seasonally adjusted at annual rates) on a 66.9% drop in the “other” transfer segment (to $781.1 billion). Payments made via the “economic impact payments” dwindled from $1,660.9 billion to $95.9 billion. Unemployment insurance benefits retraced 3.3% but remained elevated by historical standards at $537.0 billion. Recall that some emergency programs (notably the Pandemic Unemployment Compensation Payments and the Pandemic Unemployment Assistance) were extended following the passage of the most recent fiscal stimulus. The wage/salary component of income, meanwhile, stayed roughly unchanged at $9,658.4 billion. All this translated into an 8.2% contraction of disposable income, the steepest drop recorded in data going back to the late 1950s

• Nominal personal spending, for its part, shrank 1.0% in February and remained 0.6% below its pre-pandemic summit. While goods consumption stood 9.9% above its pre-crisis mark, services consumption was still 5.2% below its peak. The latter segment, which typically holds up better in times of recession, was hit harder during lockdowns and was recovering more laboriously because of rules of physical distancing imposed to limit the spread of the virus

• The Markit flash composite PMI came in at 59.1 in March, down from 59.5 the month before but still the second highest reading of the past six years. Operating conditions continued to improve in the manufacturing sector, as evidenced by a rise from 58.6 to 59.0 in the corresponding PMI gauge. New orders placed at factories piled up at the fastest pace since June 2014, supported by stronger international demand. Despite the sharp increase in new orders, purchasing managers reported a reduction in output growth. This reflected growing capacity pressure stemming from “extensive” supply shortages. With production failing to keep up with demand, work backlogs and supplier delivery times lengthened the most since data collection began in this regard. The rate of input price inflation, meanwhile, was the most acute in a decade

• Firms operating in the manufacturing sector were able to partially pass higher costs along to clients, as prices charged surged the most on record. Factory payrolls expanded once again, but the pace of job creation eased slightly as “many firms highlighted struggles finding suitable candidates to fill vacancies.” For its part, the services sector sub-index edged up from 59.8 to an 80-month high of 60.0 for an eighth consecutive expansion. New business increased at the quickest pace in almost three years “amid stronger client demand and the loosening of COVID-19 restrictions in some states.” Both prices paid and prices charged rose the most since the inception of the series, while payrolls expanded at the fastest clip since December. The degree of optimism towards future output remained very high across the private sector, with the vaccine rollout acting as a virtual shot in the arm for confidence

• Initial jobless claims decreased from an upwardly revised 781K to a post-pandemic low of 684K in the week to March 20. Continued claims, meanwhile, kept trending down, sliding from 4,134K to 3,870K, their lowest level since March last year. We must add to these the roughly 13.3 million people who received benefits in the week ended March 5 under emergency pandemic programs (Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation). Recent confirmation via the Biden’s administration stimulus package that these would be extended until September was no doubt greeted with relief by the millions of people still unemployed because of the pandemic

• Durable goods orders fell for the first time in ten months in February, slipping 1.1% instead of rising 0.5% as per consensus. Despite the monthly decline, headline orders remained 3.2% above their level a year earlier. Bookings for transportation equipment sagged 1.6% in February on an 8.7% drop for vehicles and parts. Excluding transportation, orders retraced 0.9% (+0.5% expected) on declines for fabricated metals (-0.9%), machinery (-0.6%), and computers/electronics (-0.5%). The report showed, also, that shipments of non-defence capital goods excluding aircraft, a proxy for business investment spending, shrank 1.0% but remained on track to expand an annualized 9.5% in Q1 as a whole Core orders, which are indicative of future capital spending, cooled 0.8% in 4Economics and Strategy Weekly Economic Watch February. With weather returning to normal in the Midwest and the effects of the Biden administration’s stimulus beginning to be felt, business investment are expected to remain strong in coming months. That said, there are some challenges arising in the segment, namely, a semi-conductor shortage that could further impact production of motor vehicles. Limited supply of various commodities is another concern.

• Sales of existing homes fell for only the second time in nine months in February, dropping 6.6% to 6,220K (seasonally adjusted and annualized). This decline, also the steepest in nine months, should not be interpreted as the sign of an imminent slowdown in the housing market. The moderation was due instead to inclement weather. Indeed, the central United States suffered through an unprecedented cold snap in the second month of the year, at which time sales in the Midwest and the South dropped 14.4% and 6.1%, respectively. Still, resale transactions remained 9.1% above their pre-crisis level despite declining month over month

• Contract closings in February retraced for both single-family homes (-6.6% to 5,520K) and condos (-6.7% to 700K). The inventory-to-sales ratio ticked up to 2.0 but continued to indicate extremely scarce supply. (According to the National Association of Realtors, a ratio of <5 indicates a tight market.)Aside from resilient sales, the persistent tightness of the market can be explained also by an extreme shortage of listings. Indeed, the inventory of properties available for sale totaled just 1.03 million (not seasonally adjusted) in the second month of the year. Not only was this down 29.5% from 12 months earlier but it also represented the lowest February level ever recorded. Lack of supply has been largely responsible for supporting prices since the beginning of the COVID-19 crisis. In February, the median price for a previously owned home progressed 15.8% YoY to $313,000. Advanced indicators give reason to be optimistic about the future. The extra stimulus announced by the Biden administration and the progressive re-opening of the economy later this year should continue to stimulate demand. True, the recent rise of mortgage rates could act as a brake, but borrowing costs remain so low by historical standards that they are unlikely to present a major obstacle anytime soon

• New-home sales, too, were hit by the “deep freeze” in February, sinking 18.2% m/m to 775K (seasonally adjusted and annualized). This was significantly weaker than the 870K expected by consensus but still roughly in line with this indicator’s pre-pandemic peak (774K). The increase in sales, combined with a rise in the number of homes available on the market, boosted the inventory-to-sales ratio from 3.8 to a nine-month high of 4.8. Also worth noting, the number of properties sold but not yet built remained elevated at 245K, a factor that should continue to support residential construction going forward

• The US Federal Reserve announced that it will end restrictions on dividends and share repurchases for most banks from 30 June. Fed Chair Jerome Powell said that the recent increase in bond yields has been an orderly process and is coming from very low levels. Any Fed policy changes will be made gradually and only after substantial progress toward inflation and full employment goals, he said

• Secretary of the Treasury Janet Yellen said a temporary surge in US government spending is needed in response to the pandemic but that the US must raise revenues longer term. Next week President Biden is expected to outline the next phase of his economic plan, which is expected to include tax hikes on corporations and upper-income Americans

• The major indexes were mixed, as investors seemed to continue weighing optimism about reopening against inflation and interest rate concerns. Small-cap stocks lagged for the second consecutive week, signaling a potential pause or reversal in their recent market leadership. Similarly, communication services stocks fared worst within the S&P 500 Index, dragged down by sharp declines in shares of several traditional media companies following a stretch of strong performance. The closure of the Suez Canal because of a disabled cargo ship raised worries about already stressed global supply lines but boosted oil prices and energy stocks. Consumer staples, utilities, materials, and real estate shares were also strong

• In terms of data release, next week brings the ISM manufacturing survey. In February, the index rose to its highest level in two years. The rebound in the factory sector is limited mostly by supply chain constraints, which suggest an uptick in supplier deliveries could lift the headline ISM even higher. Another signal that ISM could come in even hotter in March is the fact that last week there was the strongest print for Philly Fed business outlook survey since the early 1970s. Other regional PMIs, like the surveys conducted by regional Fed offices in Richmond & Kansas City, were also higher. Inventories might be a drag and offset some of the potential boost of supplier deliveries

• On Tuesday, the Consumer Confidence index will be released. In recent weeks and months, forward-looking expectations for economic growth have brightened substantially. This is due in part to progress in the ongoing struggle against the pandemic with case counts falling on trend and as millions of Americans now receive vaccination shots on a daily basis. It also has to do with generous fiscal policy measures, which can underpin spending once some semblance of normality returns to the service sector

• Non Farms Payroll will be out on Friday. While many parts of the economy have rebounded swiftly, the labor market has been slower to get back on its feet. During his testimony before the Senate this week, Fed Chairman Jay Powell responded to a question about the fact that the Fed’s own forecast showed only an incremental decline in the unemployment rate. He explained how a wave of hiring later this year would likely result in a rise in the participation rate as discouraged workers were drawn back into the labor force


• The eurozone Flash Composite PMI was 52.5 in March compared with 48.8 from the previous month. Meanwhile, the Manufacturing PMI was 62.4 compared with 57.9 the month before, and the Services PMI was 48.8 (below expectations) compared with 45.7. All indices were significantly above expectations. Business activity turned expansionary for the first time in half a year, predominantly driven by global demand for eurozone manufacturing. Employment increased, particularly in the manufacturing sector. The services sector remained contractionary, but the decline has softened. Despite the current booming manufacturing output, the future outlook took a moderate hit, as survey respondents voiced concerns about the duration of the pandemic
• The German Flash Composite PMI was 56.8 in March compared with 51.1 the previous month, the Manufacturing PMI was 66.6 compared with 60.7, and the Services PMI was 50.8 (below expectations) compared with 45.7. All indices were above expectations. The flash results, which were recorded before the latest tightening of Easter restrictions were announced, could indicate better-than-expected performance in the first quarter. Manufacturing continued to lead the way, with a fair amount of easing in the service sector, which entered positive territory for the first time since September last year

• The French Flash Composite PMI was 49.5 in March compared with 47 the previous month, the Manufacturing PMI was 58.8 compared with 56.1, and the Services PMI was 47.8 compared with 45.6 a month earlier. All indices were above expectations. Even as the manufacturing sector saw expansion while the service sector was still in contraction, activity in both sectors accelerated and seemed to indicate an increase in demand, to a large extent driven by new orders. Expectations of the boost in activity – after the pandemic ends – accelerated even as concerns were raised that revenue continued to be adversely affected by the restrictions

• Shares in Europe rose on hopes of an economic recovery, reversing earlier losses stemming from concerns about additional restrictions to curb the spread of the coronavirus and the European Commission’s (EC) threat to halt vaccine exports. In local currency terms, the pan-European STOXX Europe 600 Index added 0.85%. Major stock indexes were mixed: France’s CAC 40 ended the week down modestly, while Germany’s Xetra DAX Index and Italy’s FTSE MIB posted gains


• UK retail sales for February have come in at or near the forecast of +2.1% MoM, -3.7% YoY. Taking fuel out of the picture, sales showed slightly better growth of +2.4% m-o-m, -1.1% YoY. Sales in January were well down as a result of the renewed lockdown, and with the lockdown extended through February, sales were never expected to be anything particularly exciting. Non-food stores provided the largest positive contribution to the monthly growth in February 2021 sales volumes, aided by strong increases of 16.2% and 16.1% in department stores and household goods stores, respectively. Total retail sales for both the amount spent and quantity bought had been higher than pre-pandemic levels between July and December 2020. However, February 2021 marked the second consecutive month where sales were lower than before the pandemic began (in March 2020). This suggests that people may be looking forward to the end of the lockdown (full lifting of all restrictions is set for midsummer’s day) and there may well be some delay in expenditure as a result

• The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 0.7% YoY in February, down from 0.9% in January; CPI came in at 0.4% YoY, 0.1% MoM. These numbers are clearly not going to raise any inflationary concerns at the Bank of England, if anything the concern will be that inflation will remain somewhat below its long-term 2% target. The Bank of England’s latest report that accompanied the MPC decision earlier in the month showed that it expected inflation to rise to its target rate over the course of 2021. This data suggests that this is less likely than hoped, and the Governor of the Bank of England will be writing to the Chancellor explaining why inflation remains below target. So long as the economy does well in the coming weeks and months, the bank will not see the need for further stimulus, but if this were deemed necessary, subdued inflation gives scope for action

• Bank of England rate-setters Michael Saunders and Silvana Tenreyro on Friday played down risks of a sustained surge in inflation when Britain’s economy recovers from its pandemic crash, and Tenreyro said more stimulus might yet be needed. After weeks of rising government bond yields driven by worries about inflation on both sides of the Atlantic, Saunders said the economy may have more room than the BoE predicted last month to recovery without generating excess price pressure. Tenreyro acknowledged an improving outlook, but she pointed to scenarios that might require more monetary stimulus later this year.
Their comments underscored how most members of the Monetary Policy Committee think that a sustained and hard-to-tame surge in inflation is not top of the list of risks as Britain recovers from its biggest economic slump in three centuries

• Britain and the European Union agreed a new post-Brexit financial services pact that will allow them to co-operate on regulation but does little to improve the City of London’s access to the bloc. Britain’s finance ministry said the two sides have agreed terms on a “Memorandum of Understanding” that will set the conditions for how regulators from the EU and Britain share information. However, Brussels has said the MoU will not automatically lead to Britain’s large financial industry being able to sell a wide range of products and services to EU clients again. Industry experts said while the framework was useful, it was unlikely to rekindle anything like the kind of access banks and brokers had to the EU before Britain left the bloc


• Moody’s Investors Service said that China’s conservative economic growth target and gradual policy normalization, two goals that the government revealed at its recently concluded National People’s Congress, were positive for the country’s outlook. Both measures may enable Beijing to focus on the quality, rather than the quantity, of output and address some of the structural issues facing China without a further buildup of leverage, according to the credit ratings agency

• The yield on the sovereign 10-year bond closed at 3.22%, off four basis points from the previous week, amid expectations that monetary policy would remain supportive in the near term. After a meeting with major lenders to discuss expectations for credit growth in 2021, the People’s Bank of China (PBOC) said that monetary policy should remain “neutral” since “the recovery of the real economy is not yet solid and weak links still need to be adjusted,” according to state-run media. The PBOC kept the loan prime rate (LPR)—which serves as a reference rate for new renminbi bank loans—unchanged for the 11th straight month, as expected. In foreign exchange trading, the renminbi weakened slightly against the U.S. dollar to close at 6.540

• Chinese stocks recorded a weekly gain, thanks to a rally on Friday after the country’s central bank signaled that it was not about to tighten monetary policy. The Shanghai Stock Exchange Composite (SSEC) Index rose 0.4% to 3418.3, while the large-cap CSI 300 Index ended up 0.6% at 5038.0, its first weekly gain after five straight weeks of losses. Since reaching a record high on February 18, the CSI 300 has fallen 15%, while the SSEC is 8% below a 5½-year high also touched on February 18. In the A share market, consumer staples and health care stocks led gainers as strong northbound Stock Connect inflows from Hong Kong boosted sentiment. Hong Kong-listed China stocks also performed strongly, particularly property services and real estate management companies. Similar to other major markets, China is experiencing a rotation from growth stocks to value stocks as the economic recovery broadens

• China’s CSI 300 Index has fallen more than 13% from its February highs, fueled in part by warnings from regulators of asset bubbles and the reining in of pandemic-fueled credit growth. If policymakers are to be believed, it will likely be a considerable period of time before most developed economies begin to dial back stimulus, but China’s recent experience could be an omen that markets will face difficulties adjusting to life without a steady stream of stimulus

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