Economic Outlook – 29 August 2021


• Durable goods orders fell 0.1% to US$257.2 billion after swelling 0.8% and 3.2% in June and May, respectively. Orders for vehicles and parts rose US$2.96 billion or 5.8% to US$53.8 billion, a gain that was more than offset by a 48.9% decline (US$7.04 billion) in non-defence aircraft and parts orders to US$7.4 billion from US$14.4 billion in June. Excluding transportation, new orders rose 0.7% in the month. New orders for non-defence capital goods excluding aircraft (i.e., core capital goods), a closely watched proxy for business investment, were unchanged from the previous month. Shipments of manufactured durable goods increased 2.2%. Shipments of core capital goods were up 1.0% for a fifth consecutive monthly increase

• Existing-home sales rose 2% to a 5.99-million-unit pace. Sales were stronger than expected. The median analyst projection called for a 0.5% MoM decline for the month. Single-family homes accounted for all of the increase, with sales climbing 2.7% to a 5.28-million-unit pace. Still, compared with July 2020, sales of single-family homes were down 0.8%. Condo and co-op sales were a drag in the month. They fell 2.7% MoM to a 710K-unit pace in July but were nonetheless up 22.4% from 12 months earlier. Compared with July 2020, completed transactions for single-family homes, townhouses, condominiums and co-ops edged up 1.5%. The median price for an existing single-family home was US$367K in July, up 18.6% from July 2020. Meanwhile, the median price for condos rose 14.1% to US$307.1K. The number of homes available for sale grew for the fifth straight month in July to 1.32 million units, up 7.3% from June but down 12.0% rom a year earlier (1.50 million). At the current pace of sales, it would take 2.6 months to sell all the homes on the market. Anything less than five months of supply is considered a tight market by realtors. It is fair to say that this was still a seller’s market, as 89% of homes sold in July 2021 were on the market for less than a month. According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage was 2.87% in July, 11 basis points lower than in June (2.98%)

• New-home sales rose 1.0% to a seasonally adjusted annual rate of 708K after declining three consecutive months. Gains in the number of new homes sold in the South and West more than offset declines registered in the Northeast and Midwest. The seasonally adjusted estimate of new houses for sale at the end of the month rose 5.5% to 367K, its highest mark since November 2008. Although the report showed a large increase in new-housing inventory, the jump was spurred by a record rise in homes yet to be built. These accounted for a record 28.6% of that inventory, compared with a median reading of 15.7% since January 1999. Completed houses made up only 9.8% of the new supply at the end of July (vs. a 24.6% historical median). Expensive building materials, scarce land and hard-to-find workers have certainly contributed to delay home starts and to stretch lead times to completion. In July, the median price for a new home sprang more than US$60K (18.4%) from the year before to a record US$390,500. At the current sales pace, it would take 6.2 months to clear the supply of houses on the market, up from 6.0 months a month earlier

• Markit’s flash composite PMI fell 5.4 points to 55.4 from 59.9 in July. Since striking a series high of 68.7 in May, the index has been on a soft downslope. Although the pace of business expansion was the slowest year to date, survey participants generally remained optimistic about their business outlook for the coming year. The Manufacturing PMI printed above the 60-point threshold for a fifth month in a row. However, at 61.2, it was down 2.2 points from the month before and at its lowest in four months. Once more, material shortages and difficulties retaining employees and filling job openings contributed to slow down output growth

• Initial jobless claims rose 4K to 353K in the week ending August 21. The previous week’s level was revised up 1K to 349K. Still, the four-week moving average, which smooths out volatility in the weekly figures, fell to a new pandemic low of 367K. The advance number for seasonally adjusted insured unemployment (i.e., continued claims) fell 3K to 2,862K in the week ending August 14. The jobless claims report shows that, in the week ending August 7, the total number of people receiving benefits under all programs, including those introduced since the start of the health crisis

• Nominal personal income rose 1.1% in July, or US$225.9 billion. As the labour market continued to recover, the wage/salary component of income progressed 1% (US$98.5 billion). Income derived from government transfers, meanwhile, rose 3.4% (US$135.6 billion). However the “other” transfer segment fell US$15.3 billion (17.2%). Extending their down trend, unemployment insurance benefits, for their part, retreated 12.1% to US$380.5 billion. This is well below the US$574.2 billion in benefits that were distributed in January. Excluding price changes and taxes, real personal disposable income increased by 0.7% MoM

• Nominal personal spending, for its part, rose by 0.3% MoM, following an upwardly revised June reading of 1.1% (from 1.0% originally). According to the Bureau of Economic Analysis, the US$42.2 billion increase in spending reflected a jump of US$102.6 billion in spending for services and a decrease of US$60.4 billion in spending for goods

• The headline PCE deflator rose by 0.4% MoM and 4.2% YoY. Excluding food and energy, the core PCE deflator rose 0.3% MoM and held steady at 3.6% YoY. Excluding price effects, spending in real term edged lower by 0.1% MoM, with real services gaining 0.6%, but goods falling 1.6% MoM

• The Bureau of Economic Analysis released its second estimate of Q2 GDP growth. Growth was revised up 0.1 percentage point to 6.6%. Upward revisions to non-residential fixed investment, exports, and PCE were partly offset by downward revisions to private inventory investment, residential fixed investment, state and local government spending, and federal government spending. Imports were revised down. The price index for gross domestic purchases was also revised. On a quarter-over-quarter basis, it rose 5.8% in Q2, an uptick of 0.1 %. The PCE price index quarterly increase was adjusted up 0.1 percentage point as well to reach 6.5%. Finally, the core PCE inflation second estimate was left unchanged at 6.1%

• Powell’s opening remarks at the Jackson Hole Symposium confirmed what most members of the FOMC have been signaling over recent weeks. That is, a tapering of the Fed’s massive bond-buying should be expected later this year. However, his remarks stopped short of signalling that a taper was locked in or imminent (i.e. September). This is the key quote from Powell’s prepared remarks that encapsulates his policy stance: “At the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year. The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant. We will be carefully assessing incoming data and the evolving risks. Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions.”

• In terms of data release, Construction Spending is out on Wednesday. During June, total construction spending edged up 0.1%. Again, nearly all of the gain occurred in the residential sector, which rose 1.1% during the month. More time spent at home throughout the pandemic has induced a need for more space, which has bolstered single family and home improvement spending. By contrast, nonresidential outlays declined 0.9% during June, which reflects the seismic impact COVID continues to have on office, hotel and education construction projects

• Wednesday also brings ISM Manufacturing. Pervasive supply chain bottlenecks continue to hamper otherwise strong activity in the factory sector. The ISM manufacturing index came in below expectations and slipped to 59.5 during July, the first reading below 60 since the start of the year. Most sub-components of the headline index deteriorated during the month, notably new orders, production and inventories. There were a few signs that procuring parts and labor was becoming less of an issue. The employment index crossed back into expansion territory, while the prices paid index fell back from the highly elevated levels seen recently. The supplier delivery index also fell to a five-month low of 72.5. These improvements no doubt come as welcome news to the manufacturing industry, which has been the epicenter of the supply chain dislocations affecting the entire economy.


• The flash reading for IHS Markit’s UK composite PMI tumbled to 55.3 in August compared with 59.2 in July. Whereas the reading for the manufacturing sector slipped 30 basis points to 60.1, the PMI for the services sector contracted to 55.5 from the 59.6 record during the previous month. The news release noted that survey participants cited staffing shortages as one constraint on the recovery. The Financial Times reported that the UK government would roll out a program to deliver booster shots of the coronavirus vaccine to the most vulnerable populations, beginning in early September, and later expand eligibility to those 70 years and older.


• Operating conditions in the Eurozone’s private sector continued to show strong momentum. Despite facing supply chain constraints, manufacturing output kept growing at a solid pace (59.2) and the Markit Manufacturing PMI flash estimate (61.5) printed above the 60-mark threshold for a sixth month running. The service sector was marginally softer than the prior month’s 15-year high of 59.8, edging down 0.1 percentage point to 59.7. Consequently, the headline IHS Markit Eurozone Composite PMI fell less than a point to 59.5 from a 15-year high of 60.2.

• Within the Eurozone, Germany continued to lead the expansion. At 60.6, the Flash Germany PMI Composite Output Index remained above 60 for a third straight month. Though the index was down 1.8 points in the month, it was still one of the highest readings in the history of the series going back to 1998

• The Germany Service PMI fell 0.3 point to 61.5 from 61.8 in July. This was a lot less than the Manufacturing PMI’s 3.2-point decline from 65.9 to 62.7. In France, growth moderated further from its peak in June. The index came in at 55.9 in August, compared with 57.4 two months earlier. The slowdown reflected weaker rates of expansion in both manufacturing (57.3) and services (56.4)

• Philip Lane, chief economist of the European Central Bank (ECB), told the Reuters news agency that he regards recent inflationary pressures as temporary, citing muted wage growth. Bloomberg reported that fellow ECB governing council member François Villeroy de Galhau expressed similar sentiments at a conference, saying, “We continue to think and hope that these supply difficulties are temporary given our experience of past recoveries”

• European stock benchmarks pulled back amid global concerns about the spread of the delta variant of the coronavirus, the situation in Afghanistan, and slowing growth in China. After reaching a series of record highs in the first two weeks of August, the pan-European STOXX Europe 600 Index ended the week 1.48% lower in local currency terms. Country specific indexes also declined. France’s CAC 40 Index fell 3.95%, Germany’s Xetra DAX Index was off 1.14%, Italy’s FTSE MIB Index dropped 2.78%


• The People’s Bank of China (PBOC) met with leading financial institutions to urge them to strengthen credit support to the economy. The meeting is significant because credit growth accelerated after the central bank held similar meetings in 2018 and 2019, according to CLSA, and suggests that policy is shifting toward further easing amid an uneven economic recovery. Possible easing measures for the PBOC include accelerated government bond issuance, an expansion in the loan quota for some banks, or a cut in banks’ required reserve levels

• The China Securities Regulatory Commission pledged to cooperate with their U.S. counterparts regarding the auditing of Chinese companies that trade in the U.S. The years-long dispute with the U.S. stems from China’s refusal to provide full access to the financial data of Chinese companies that trade in the U.S. on national security grounds. Separately, China sought to clarify misconceptions over the term “common prosperity,” a slogan recently emphasized by President Xi Jinping amid a crackdown on the technology sector. The term refers to a long-term goal that involves economic growth, wages, taxation, and income distribution and is not aimed at privately owned internet platform companies, according to a senior Communist Party official

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