Economic Outlook – 3 October 2021


• Durable goods orders increased in August. Total orders were up 1.8% MoM, far above the +0.7% print expected by consensus. July orders growth was revised from -0.1% to +0.5%. Following the monthly increase for this indicator, total orders were 14.1% above their February 2020 (prepandemic) level. The improvement in August was due mainly to a 5.5% increase in the transportation category, where the non-defence aircraft segment jumped 77.9%. Excluding transportation, orders rose 0.2% (three ticks below expectations) on gains for fabricated metals (+2.0%), computers/electronics (+1.4%), and electrical equipment (+0.9%). These gains were more than enough to offset declines for primary metals (-1.5%) and machinery (-1.2%). The report also showed that shipments of non-defence capital goods excluding aircraft, a proxy for business investment spending, rose 0.7% in August after improving 0.9% the prior month. Core shipments stood a solid 15.3% above their pre-pandemic level

• Durable goods orders for August were above consensus expectations. Orders increased mainly on the back of transportation, more specifically the non-defence aircraft segment (+77.9%). The motor vehicles/parts segment pulled back 3.1%, which was not surprising in light of supply chain issues and trouble procuring critical production parts such as semiconductors. This trend is still having an outsized impact on the industry and is expected to persist for some time. All told, core shipments were up 0.7% in August for a sixth consecutive monthly increase

• Nominal personal income crept up 0.2% in August, in line with expectations. Private wages and salaries increased 0.5% month over month while Government compensation rose 0.2%. According to the Bureau of Economic Analysis, advance payments of the Child Tax Credit authorized by the American Rescue Plan, was partly offset by a decrease in unemployment insurance, reflecting decreases in payments from the Pandemic Unemployment Compensation program. Unemployment insurances benefits fell 3.7% in the month. Personal current taxes edged up 0.6% in August. All this translated into a 0.1% increase in disposable income to US$18,123.9 billion

• Nominal personal spending, for its part, increased 0.8% or US$130.5 billion to US$15,922.2 billion with spending on goods up 1.2%. Within goods, increases in spending for food and beverages as well as “other” nondurable goods were partly offset by a decrease in spending for motor vehicles and parts. Meanwhile spending on services rose 0.6% in the month. July spending was revised from a 0.3% gain to a 0.1 decline

• The PCE price index rose 0.4% month over month in August, resulting in a year over year increase of 4.3%, one tick higher than in the prior month. Excluding food and energy, the PCE price index advanced 0.3% month over month and 3.6% year over year, unchanged from July. From 12 month ago, energy prices were 24.9% higher in August

• The U.S. Census Bureau released its monthly advance economic indicators report for the month of August. The report shows that wholesale inventories adjusted for seasonal variations and trading day differences, but not for price changes, grew 1.2% to US$731 billion. In July, they had increased 0.6%. Retail inventories were little changed in the month (+0.1%) at US$603.3 billion. The prior month’s gain was left unchanged at 0.4%. The advance estimate of the international trade deficit shows a deterioration of US$0.8 billion from US$86.8 billion in July to US$87.6 billion in August

• In September, the ISM Manufacturing PMI rose to 61.1 from 59.9 in August. Among the 5 sub-components used to calculate the headline index, the largest increase was the 3.9 points jump in the supplier delivery index. Although, at 73.4, the index is 5.4 points lower than in May, it is nonetheless indicating that supply chain bottlenecks remain significant. New orders printed at 66.7, unchanged from the prior month and the production index slipped 0.6 point to 59.4. The employment index rose 1.2 points to 50.2, but remain slightly below its 6-month average (51.3). The production component slipped 0.6 point in September to 59.4. The inventories sub-index rose 1.4 points to 55.6 in the month, the highest print since October 2010. With the index averaging 51.2 over the last 6 months, it is indicating that a majority of firms have been restocking in recent months. Finally, price pressures remain elevated with the prices paid component printing at 81.2 in the September

• The Conference Board Consumer Confidence Index slid 5.9 points to 109.3 in September. The August reading was revised up 1.4 points to 115.2. After registering three consecutive monthly declines since this year’s high of 128.9 in June, the index sat at a seven-month low in September. According to the Conference Board, the Present Situation Index, which gauges consumer perception of current business and labour market conditions, fell 5.5 points to 143.4 in the month. Meanwhile, the Expectations Index, which measures the consumer short-term outlook for income, business, and labour market conditions, fell from 92.8 in July to 86.6 in September. Nonetheless, the share of consumers who considered jobs plentiful rose 0.3 point to 55.9, its highest level on record. Those who considered jobs hard to get rose 2.2 points to 13.4%. As a result, the difference between these indices fell to 42.5 from 44.4 a month earlier

• In July, the S&P CoreLogic Case-Shiller home price index for the country’s 20 largest metropolitan areas rose 1.55% month over month (seasonally adjusted). Year to date, the largest monthly gain was recorded in May (1.83%). Phoenix (3.20%) was the market with the strongest MoM price increase in July, and Cleveland (0.68%) was the market with the weakest. The average price increase was 2.31% for the top 10 cities and 1.14% for the bottom ten. The index is calculated using the price change between two arms-length sales of the same single-family home. Sales pairs are designed to yield the price change for the same house, while holding the quality and size of each house constant

• The Pending Home Sales Index of the National Association of Realtors increased 8.1% to 119.5 in August after declining 2.0% each in June and July. In August 2020, the PHSI reached a 20- year high of 130.3. At the time, in the wake of the pandemic, resale activity was boosted by demand for larger homes in the suburbs as people working out of small dwellings sought more space

• Initial jobless claims rose 11K to 362K (seasonally adjusted) in the week ending September 25 for a third straight weekly increase. Temporary factors accounted for the rise. California recorded the largest increase in the week (+17,218 not seasonally adjusted). According to CNBC and the WSJ, in September, California implemented a program where those cut off from enhanced aid could file for an additional week of benefits. Those who shifted programs were counted as new applicants. The four-week moving average increased 4.25K to 340K, matching the level recorded for the week ending September 4. The advance number for seasonally adjusted insured unemployment (i.e., continued claims) edged up 18K to 2,802K in the week ending September 18

• The US Congress passed a stopgap funding measure on Thursday to fund government operations through early December but has thus far failed to raise the country’s debt ceiling, which Secretary of the Treasury Janet Yellen thinks will be reached around 18 October. Given that a proposed additional $4.6 trillion in government spending is being debated on Capitol Hill, Republican lawmakers have put the onus on Democrats to raise or suspend the debt limit, which they can do without Republican support through the budget reconciliation process. President Joe Biden’s spending plans remain bogged down, with progressive and moderate Democratic legislators unable to reach agreement on the contours of his “social infrastructure” spending bill, though the likelihood of a package approaching the proposed $3.5 trillion figure is dwindling, with numbers in the $1.5 to $2.1 trillion range being floated

• Progressive Massachusetts Senator Elizabeth Warren used a hearing of the US Senate Banking Committee at which US Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen testified to announce that she would oppose Powell’s renomination to Fed chair for a second term, calling him a dangerous man to run the Fed given his past support for banking deregulation. Most expected Powell, whose term expires in February, to be renominated by President Biden given the Fed’s aggressive response to the pandemic, but Warren’s opposition, if shared by enough of her progressive Senate colleagues, may prompt Biden to look elsewhere. In other Fed news, two regional Federal Reserve Bank presidents, Eric Rosengren of Boston and Dallas’ Robert Kaplan resigned their posts after their personal stock trading was revealed in recent weeks, raising questions regarding the propriety of policymakers actively trading in financial markets. The disclosure has prompted the Fed to undertake a review of its ethics rules

• A Friday rally moderated the losses, but the large-cap benchmarks and Nasdaq Composite index recorded their biggest weekly drops since February and rounded out the worst monthly declines since the onset of the pandemic, seemingly weighed down by inflation and interest rate fears. The S&P MidCap 400 and small-cap Russell 2000 indexes ended with only modest losses. Declines within the S&P 500 were broad-based, with only energy shares notching a gain. Growth stocks fared worse than value shares, which was mirrored in the underperformance of the technology-heavy Nasdaq Composite Index

• In terms of data release, Tuesday brings the trade balance print. During July, the U.S. trade deficit narrowed to $70.1 billion. Exports surged 1.3%, with every major category advancing during the month. On the other side of the ledger, overall imports declined 0.2% alongside a 1.2% dip in goods imports. Aside from auto imports, every other major category of goods imports fell during the month. On the services side, exports of services rose 0.1%, while imports climbed 5.5%. Consumers are again spending on experiences, as evidenced by a jump in both travel services and recreational imports

• On Tuesday the ISM Services is also out. The ISM services index fell to 61.7 in August from 64.1 in July. The drop was likely owed to the acceleration in Delta case counts, which led to a pullback in consumer confidence during the month. The move lower also suggests that service providers are still constrained by labor shortages and rising input costs due to supply chain dislocations. The level of the headline index is still solidly above 50, which indicates a solid pace of expansion in the service sector, but the monthly downshift means these headwinds are holding back growth


• Bank of England (BoE) Governor Andrew Bailey said that UK gross domestic product probably won’t recover to pre-pandemic levels until early next year—a few months later than previously predicted. He said the BoE will keep a “close watch” on inflation expectations and the labor market for signs that temporary price pressures are becoming more persistent


• Eurozone inflation increased in September to 3.4 % YoY, compared to 3% in the previous month, and was marginally above expectations. Energy had the highest annual rate (17.4 % , compared with 15.4 % in August), followed by non-energy industrial goods (2.1 % , compared with 2.6 % in August), food, alcohol & tobacco (2.1 % , compared with 2 % in August) and services (1.7 % , compared with 1.1 % in August). Meanwhile, core inflation rose to 1.9 % this month, compared to 1.6 % in the previous one, which was in line with expectations. The releases for France, Germany, Italy, and Spain were 2.1 % (1.9), 4.1 % (3.9), 2.6 % (2) and 4 % (3.3) respectively in September (August)

• Even though annual inflation increased compared to the previous month, and now remains well above the 2 % inflation target, the factors driving this increase are to a large extent either driven by base effects from last year’s downturn or otherwise transitory in nature such as the tax effects that have pushed up German inflation this year. This year’s rise in energy prices, which this month contributed to nearly half the annual percentage increase, is a combination of both price accelerations this year as well as unusually low prices last year. Core inflation has accelerated somewhat in line with historical seasonal patterns, as the eurozone shows increasing signs of recovery, and base effects are likely to drive the annual rate higher in the coming months

• The center-left Social Democratic Party (SPD) earned a slight plurality in German federal elections last Sunday, giving Olaf Scholz the first opportunity to form a government. The coalition-building process is expected to take months as at least three parties will need to band together to reach a majority in the Reichstag. It was the worst-ever result for Angela Merkel’s Christian Democrats, though the party lost out on the top spot by just 1.6% in a highly fragmented vote. Merkel will remain as caretaker while the process of trying to form a governing coalition plays out. Populist parties lost ground compared with their 2017 showings


• Positive news concerning indebted property developer China Evergrande Group supported investor sentiment. On Wednesday, Evergrande said that one of its units would sell roughly 20% of its stake in Shengjing Bank Co. to a state-owned enterprise for USD 1.5 billion to help reduce its debt load. News of the asset sale came as Beijing is prodding government-owned companies and state-backed property developers to buy some of Evergrande’s assets, Reuters reported

• Despite the magnitude of Evergrande’s debt problems, some analysts do not think that a default by the company will cause systemic risk in China’s credit markets. A more likely outcome is that there will be a well managed deflation of the company’s debt balloon. Though Evergrande ranks among China’s major developers, it accounts for a small amount of total revenue in a fragmented industry, and any impact to the country’s banking system will be manageable. Ultimately, Beijing will likely focus on managing the social fallout of Evergrande’s unfinished housing units, followed by property supply chain suppliers owed money by the company

• Separately, the People’s Bank of China (PBOC) pledged to ensure a “healthy property market” and to protect homebuyers’ rights in a statement following the central bank’s quarterly monetary policy committee meeting. The PBOC has injd stresses in the short term. Some analysts also think that a cut in China’s reserve requirement ratio appears more likely if the economy continues to slow toward year-end

• Goldman Sachs this week cut its 2021 growth forecast for China to 7.8% from 8.2% due to cuts in industrial output amid energy shortages. Forty-four % of China’s industrial activity has been impacted by the scarcity of power, the bank estimated.

• China’s manufacturing purchasing managers’ index fell to 49.6 in September amid electricity shortages, breaking an 18-month string of 50-plus readings.

• After China banned cryptocurrency trading last week, some exchanges this week began closing the accounts of Chinese residents

• Chinese stocks ended a holiday-shortened week on a mixed note. The CSI 300 Index of large-cap stocks edged slightly higher, while the Shanghai Composite Index declined from the previous Friday’s close. China’s markets were closed Friday for the weeklong National Day holiday starting on October 1. In the bond market, yields on Chinese government bonds were broadly unchanged from the prior week. China’s currency, the renminbi (RMB), strengthened against the U.S. dollar 0.3% to 6.447 per dollar

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