Economic Outlook – 30 January 2022


• The Bureau of Economic Analysis put out its first estimate of Q4 GDP growth. The economy reportedly expanded an annualized 6.9% in the quarter, which was more than the +5.5% print expected by consensus. Following on the heels of a 2.3% expansion in Q3, this gain hoisted economic output 3.1% above its pre-crisis level. In 2021 as a whole, the economy expanded 5.7%, the most since 1984. Domestic demand strengthened in the fourth quarter as personal consumption (+3.3% QoQ annualized) and non-residential investment (+2.0%) posted decent gains. As might be expected given the favorable health context, spending on services (+4.7% QoQ annualized) grew at a faster rate than did consumption on goods (+0.5%), a phenomenon that may have been accentuated by the supply bottlenecks plaguing the global manufacturing sector. This notwithstanding, relative to their pre-crisis levels, services consumption was still down 0.4% while spending on goods was up 15.4%. Residential investment (+0.8% QoQ annualized) held more or less level while government spending (-2.9%) shrank. Trade had virtually no impact on growth as a surge in exports (+24.5% QoQ annualized) was cancelled out by higher imports (+17.7%). It was a different story for inventories, which added no less than 4.9 percentage points to the headline growth figure. The personal consumption expenditures price index excluding food and energy climbed an annualized 4.9% in the fourth quarter. Year on year, the index was up 4.6%, the most since 1989. The saving rate, for its part, fell from 9.5% to 7.4%, roughly in line with its pre-crisis level

• The employment cost index rose 1.0% in Q4 following a record 1.3% increase the prior quarter. Benefits costs rose 0.9% while wages and salaries spiked 1.1%. Year on year, the employment cost index was up 4.0%, the most in two decades

• Nominal personal income grew 0.3% in December. As the labour market continued to recover, the wage/salary component of income progressed 0.7%. Income derived from government transfers, meanwhile, fell 1.9% as transfers made under the Economic Impact Payments program shrank from $11.4 billion to $0. Payments made under the Provider Relief Fund, on the other hand, continued to increase, from $74.4 billion to $81.9 billion. (The U.S. Department of Health and Human Services distributes money from the Provider Relief Fund to hospitals and health care providers on the front lines of the coronavirus response. This funding supports healthcare-related expenses or lost revenue attributable to COVID-19 and ensures uninsured Americans can get treatment for COVID-19. In the national accounts, funds provided to non-profit hospitals are recorded as social benefits.)

• Still in December, the headline PCE deflator came in at 5.8% YoY, up from 5.7% the prior month and reaching its highest point since July 1982. The core PCE measure, meanwhile, climbed from 4.7% to a 38-year high of 4.9%. Markit’s flash composite PMI came in at 50.8 in January, down significantly from 57.0 the month before and its lowest reading since July 2020. The marked growth slowdown in the private sector reflected “softer demand conditions, worsening supply chain disruptions and labor shortages linked to the Omicron wave”.

• The Conference Board Consumer Confidence Index eased from 115.2 in December to 113.8 in January. This was still better than the 111.2 print expected by consensus and suggested that the Omicron wave did not weigh too much on confidence early in the first quarter. By comparison, the index fell as low as 85.7 in the early days of the pandemic. The Delta wave, for its part, had seen the headline index drop to 109.8

• Durable goods orders retraced 0.9% in December, a steeper decline than the one expected by analysts (-0.6%). Orders in the transportation category fell 3.9% on steep decreases for defence (-11.2%) and non-defence (14.4%) aircraft. Orders in the vehicles/parts segment continued to improve, rising 1.4% MoM. Excluding transportation, orders progressed 0.4% to a new all-time high. The report showed, also, that orders of non-defence capital goods excluding aircraft, a proxy for future capital spending, stayed flat in the month but were still up a healthy 8.7% on a three-month annualized basis. This suggests that business investment in machine/equipment has further room to improve in the first quarter of the year

• New-home sales sprang from 725K in November (initially estimated at 744K) to a nine-month high of 811K in December. As this progression was only partially offset by a rise in the number of homes available on the market (from 397K to 403K), the inventory-to-sales ratio fell six tenths to 6.0, indicating a roughly balanced market. The median transaction price, meanwhile, fell 9.2% MoM to $377,700. Twelve-month price appreciation slowed markedly as median prices increased just 3.4% YoY, down from 18.6% in November. After the pandemic’s buying frenzy, the new-home market seems to be stabilizing at a level roughly in line with where it was before the pandemic. While high prices could continue to dampen buyer enthusiasm going forward, rising inventories could help alleviate some of the pressure. There were more new homes available on the market in December than at any time since August 2008. A lot more are on the way judging from the number of single-family homes currently under construction in the United States

• According to the S&P CoreLogic Case-Shiller 20-City Index, home prices rose for the 115th consecutive month in November, springing a seasonally adjusted 1.18% after climbing 0.96% the prior month. This sharper increase in prices coincided with stronger activity in the resale housing market. Existing-home sales rose to a 10-month high of 6,480K in November before retreating in the final month of the year. All the cities in the index saw higher prices in November, led by Seattle (+2.09%), Miami (+2.02%) and Tampa Bay (+2.00%). Year on year, the index was up 18.3%. This was down from 18.5% the prior month but it was still one of the sharpest 12-month jumps ever recorded

• The Federal Reserve is staying the course and policy rate lift-off in March is all but decided. The more explicit monetary policy communication on the FOMC’s tightening plans gives little respite for the volatile markets of late. Note that the FOMC also kept its view that “overall financial conditions remain accommodative”, suggesting limited worries from the falling stock markets, and Powell stated that market outcomes are only relevant when they affect the Fed’s dual mandate achievement. This brushing aside of market volatility was to be expected after the unambiguous hawkish pivot at the FOMC’s December meeting. With the Fed in risk management mode to beat any risk of high inflation becoming entrenched, new data showing even higher inflation and broadening wage pressure was never going to be taken lightly by the FOMC. Remember that the Fed is monitoring not least the risk of a wage-price-spiral, and now wage rises are picking up among ‘incumbents’ also – a category that Powell has referred to previously. The initial impact was for stock market relief, but during Powell’s press conference bond yields pickup, and the US stock market declined

• Turning to the QE programme, the Fed reaffirmed its previous modus operandi that a reduction in asset holdings will be initiated after lift-off in the policy rate. The separate press release on the “principles for reducing the size of the Federal Reserve’s balance sheet” gave no concrete signal on the start of quantitative tightening, QT, and Powell said that discussion will happen in the upcoming meetings. Again, Powell confirmed that QT will likely happen sooner and possibly faster than last time, hinting at a potential start this year

• Late gains helped the large-cap benchmarks move higher for the week, but not before most major indexes moved temporarily into correction territory or down more than 10% from recent highs. The small-cap Russell 2000 Index lagged and ended the week down nearly 20% from its November peak, leaving it just outside of a bear market. Volatility as measured by the Cboe Volatility Index (VIX) reached its highest level since the early months of the pandemic. Energy stocks rallied as international oil prices pushed above USD 90 per barrel, driven in part by the continued massing of Russian troops along the border with Ukraine

• In terms of data release, construction activity is out on Tuesday. It continues to improve, despite shortages of building materials and labor. Overall construction spending rose 0.4% during November. Total spending is now up 9.3% on a year-over-year basis. Residential spending increased 0.9% during the month. Home building appears to be strengthening against a backdrop of strong buyer demand and a shortfall of existing homes for sale. Total nonresidential spending was flat (0.0%) in November. Private nonresidential spending edged up 0.1%, while public nonresidential expenditures fell 0.1%

• ISM manufacturing and Services Indexes are out on Tuesday and Thursday. Signs that nation’s supply chain woes were starting to resolve were apparent in December’s readings of the manufacturing and services ISM indexes. The ISM Manufacturing index fell to 58.7 during the month. Sharp declines in delivery times and prices paid brought the monthly reading of manufacturing activity lower. Similarly, the overall ISM services index fell 7.1 points to 62.0 in December. The largest overall decline in the services index occurred in supplier deliveries, which fell 11.8 points. Meanwhile, declines in prices paid and delivery times were the primary drivers of the drop in the ISM manufacturing index. Overall, the declines in both the manufacturing and services indexes are encouraging signs that firms are having a slightly better time procuring inputs


• British stocks weakened on Friday as investors locked in gains in bank shares, while the prospect of more policy tightening saw the domestically-exposed midcap index mark its weakest month in nearly two years. The blue-chip FTSE 100 (.FTSE) fell 1.2% with financials weighing the most after a run of strong gains. The banking sub-index (.FTNMX301010) rose more than 12% this month on support from higher yields, as investors expect lenders to benefit from rising interest rates this year. Looking at the way the FTSE 100 and the big banking names have performed year-to-date, this drop is potential profit taking ahead of the weekend and the Bank of England meeting due next week where expectations are for a 25 bps rate hike,” said Michael Hewson, an analyst at CMC Markets UK. But heavyweight mining stocks sank as the prospect of rising interest rates weighed on metal prices, while energy companies (.FTNMX601010) also retreated after recent gains

• Energy stocks were up 16.5% this month, their best since November 2020 as crude prices hit a seven-year high. “As long as oil and gas prices remain at such levels, the FTSE 100 will hit the 7,800 mark mid-year,” Hewson added. The domestically focused mid-cap index (.FTMC) fell 1.0%, and has lost 7.8% over the month, marking its worst month since March 2020. Concerns that rate increases by the Bank of England could slow down a British economic recovery have walloped locally-exposed stocks in recent weeks. Meanwhile, data showed that the number of shuttered shops in Britain edged lower for the first time in four years in the final quarter of 2021, which supported retail stocks. Among other stocks, British outsourcer Capita (CPI.L) dropped 1.8% after it said it would sell its IT services business Trustmarque to private equity firm One Equity Partners for 111 million pounds ($148.64 million)

• Britain’s rich and poor alike are experiencing surges in inflation, official data showed on Friday, although soaring food and energy prices mean low-income households stand less chance of avoiding the hit from rising prices. Consumer prices rose in annual terms by 5.4% last month, the highest rate in almost 30 years – making inflation a hot political topic. Some campaigners say the latest figure understates the true cost increases faced by the poorest families. New figures published by the Office for National Statistics suggest both low- and high-income households face similar inflation to the headline rate – although the analysis was unable to take account of changed spending patterns during the pandemic or differences in the quality of food bought. The ONS said low-income households experienced annual consumer price inflation of 5.3% in December, while high-income households faced inflation of 5.5%. The data showed there has been little to separate the two groups since 2014. However, analysts said inflation for poorer Britons could overtake that of their richer peers this year. “While the new ONS figures confirm that the average inflation rates experienced by different income groups are currently similar, they also highlight again how low income families experience inflation in a different way,” said Jack Leslie, an economist at the Resolution Foundation think tank. He said rising food prices and the prospect of a hike in Britain’s household energy price cap in April would hurt the lowest-income families most, given they spend twice as much on food and domestic bills as a proportion of their income. “These families should be the priority for the government’s cost of living crisis response,” Leslie said. Easing the impact of April’s higher energy bills for poorer households would cost at least 2.5 billion pounds ($3.4 billion), the think tank has calculated.


• The eurozone flash Composite PMI sank below expectations to 52.4 in January, the lowest value since February last year, compared with 53.3 in the previous month. Manufacturing PMI was 59, significantly above expectations, compared with 58 the month before, and Services PMI was 51.2 compared with 53.1, and below expectations. Germany experienced a significant increase in the pace of business activity, boosted by a manufacturing sector where supply disruptions showed further signs of easing. Furthermore, the services sector climbed into expansion territory having contracted in the previous month. In France, economic activity rose at a slower rate than last month, with the composite PMI at the lowest level since April last year. For manufacturing, there was a marginal improvement in sector expansion, whereas a relatively larger drop in services growth weighed on the overall performance of the French private sector

• Pandemic restrictions affected in particular the services sector with continued slowing of private sector growth. Indicators of future expectations as well as incoming new business suggests this may persist for a while longer. That said, the more immediate effects of omicron appear so far relatively mild. Meanwhile, manufacturing activity improved at a faster pace, and while output prices continued to increase, input prices as well as supplier’s delivery times indicated easing in supply chains. A measure of price pressures combining the latter two shows levels have come off highs seen earlier last year

• Shares in Europe fell for a fourth consecutive week, extending declines on rising concerns about interest rate increases and escalating tensions between Russia and the West. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.87% lower. The major indexes in Germany and Italy suffered similar pullbacks, while France’s CAC 40 Index slid 1.45%


• The debt crisis in China’s property sector has drawn attention to the role of local government financing vehicles (LGFVs), a tool used by local governments to borrow money without it appearing on their balance sheets. According to several reports, LGFVs have eclipsed private developers as the leading buyers of land parcels in China. The increase in off-balance sheet debt amid the pandemic is a key concern for policymakers as they try to manage growing risks to the economy. China’s LGFV debt totals roughly CNY 53 trillion, or roughly one-half of gross domestic product, Goldman Sachs estimates. Last year, China’s fiscal revenue rose 10.7% from 2020, driven by the economic recovery. The revenue surge has raised the prospect that the central government would boost transfer payments to local governments to help ease their fiscal strains

• In property sector news, debt-laden developer China Evergrande Group said it would come up with a preliminary restructuring proposal in the next six months. Creditors, however, were disappointed by a lack of detail at a bondholders’ call. Moody’s Investors Service said that the covenant packages in Evergrande’s offshore issuance had become increasingly lax, placing recovery prospects for offshore creditors in peril. Evergrande’s restructuring process was dealt a setback last week after Oaktree Capital, a Los Angeles-based alternative investments manager that issued secured loans to two major projects, seized one of the developer’s prime residential developments near Shanghai, the Financial Times reported

• Chinese stocks slumped ahead of a weeklong Lunar New Year holiday as Jerome Powell’s hawkish tone following the U.S. Fed’s policy meeting raised expectations for faster monetary tightening. For the week, the Shanghai Composite Index lost 4.6% and the CSI 300 Index slid 4.5% as traders factored in as many as five rate hikes in the U.S. this year, a development that would impact the offshore borrowing plans for many Chinese companies. The CSI 300, which struck a 16-month low during the week, is now in a bear market, having fallen more than 20% from its February 2021 peak

Sources: T. Rowe Price, National Bank of Canada, MFS Investment Management, Handelsbank Capital Markets, M. Cassar Derjavets