Economic Outlook – 30 May 2021


• The Conference Board Consumer Confidence Index dipped 0.3 point to 117.2, its first decline since December 2020. This essentially flat print was characterized by increased confidence in the present situation (+12.4 points to 144.3) but decreased optimism about the future (-8.8 to 99.1). Where the current conditions subindex is concerned, the percentage of respondents who stated that jobs were “hard to get” fell to 12.2%, only three ticks above the pre-pandemic low, indicating that current labour shortages stemmed from the supply side rather than demand side. Also worth noting, the percentage of respondents who deemed that jobs were “plentiful” jumped from 36.3% in April to 46.8% in May, just four ticks shy of this indicator’s pre-pandemic peak (47.2%). For its part, the expectations subindex, which tracks consumer sentiment towards the coming six months, fell sharply from a revised 107.9 in April to 99.1 in May, marked by a 2.7-pp increase in the proportion of respondents who believed that business conditions will worsen over the next six months, a result likely influenced by the fading-out of government support and high inflation expectations. The share of respondents who stated that they intended to buy a home in the next six months shrank 1.7 pp in May, the second sharpest monthly decline on record (tied with November 2019) behind the drop of December 2012

• The second estimate of Q1 GDP growth came in unchanged at 6.4% in annualized terms. The details of this report showed upward revisions in consumption, business investment in equipment and intellectual property products, and residential investment. These were offset by downward revisions to trade, inventories, government spending, and business investment in structures. Q1 growth still left U.S. GDP 0.9% below its pre-pandemic peak (2019Q4)

• Nominal personal income sank 13.1% in April after March’s 20.9% increase, better than consensus expectations calling for a 14.2% drawback. The decline was expected as lump sum assistance checks were sent to households in the prior month. As a result, governments transfers dropped 41.6% from March’s all-time high to $4,751 billion (seasonally adjusted at annual rates). As the labour market continued to recover, the wage/salary component of income progressed 1.0%. This improvement was obviously not enough to offset the decline in government transfers, and as a result disposable income decreased 14.6% in the month

• Nominal personal spending, for its part, improved 0.5% in April and stood 4.6% above its pre-pandemic peak. While goods consumption stood 18.6% above its pre-crisis mark, services consumption was still 1.9% 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

• Durable goods orders fell in April. Total orders decreased 1.3% m/m, a far cry from the +0.8% print expected by consensus. The March result was revised up two ticks to 1.0%. Following the monthly decline for this indicator, total orders stood 6.6% above their February 2020 pre-pandemic level. The deterioration in April was due mainly to a 6.7% decline in the transportation category, where the vehicle/parts segment regressed 6.2%. Excluding transportation, orders rose 1.0% (three ticks above expectations) on gains for primary metals (+3.0%), machinery (+1.4%), fabricated metals (+0.9%), and computers/electronics (+0.4%). These were more than enough to offset the decline for electrical equipment (-0.9%). The report also showed that shipments of non-defence capital goods excluding aircraft, a proxy for business investment spending, rose 0.9% in April after progressing 1.5% the prior month. Core shipments stood a solid 11.6% above their pre-pandemic level. Core orders, which are indicative of future capital spending, sprang 2.3% in the month, topping their pre-pandemic level
• Initial jobless claims dropped 38K to a post-pandemic low of 406K in the week ending May 22nd. Continued claims, meanwhile, fell 96K to 3,642K, practically erasing last week’s growth. Topping these up were the roughly 11.7 million people who received benefits in the week ended May 8 under two emergency programs: Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation

• In March, the S&P CoreLogic Case-Shiller 20-city Index grew at its fastest annual pace (+13.3%) since 2013. Every city but Chicago (9.0%) registered double-digit increases from a year earlier, a first occurrence on record. Seasonally adjusted data showed that the index rose 1.6% m/m in March after climbing 1.3% in February. This was the 108th consecutive monthly gain for this indicator and its steepest jump since April 2013. The increase was generalized across all 20 cities, with Phoenix (+3.1%), Seattle (+2.9%) and San Diego (+2.6%) topping the list. The steep price growth in March was consistent with persistently high demand and low supply on the resale market. In April, the inventory of unsold properties listed for sale stood at only 2.4 months of supply. This was up from 2.1 in March but was still very low by historical terms and continued to reflect tight market conditions

• Seasonally adjusted new-home sales dropped 5.9% MoM (March’s total was subject to a substantial downward revision). The 863K sales in the month fell short of the 950K expected by consensus, a performance influenced by the mounting cost of building materials, which acted as a headwind on demand. Still, new-home sales remained above their pre-pandemic peak of 756K and were up 48.3% from a year earlier when COVID-19 restrictions slowed down the market

• The pending home sales index dropped 4.4% m/m as low inventories acted as a damper on the housing market. The index stood at 106.2, close to its pre-pandemic level of 110.8

• The headline PCE deflator came in at 3.6% YoY (one tick above expectations) and up from 2.4% in the prior month. The core PCE measure, for its part, clocked in at 3.1% YoY, two ticks stronger than consensus and up from 1.9% in the month of March

• The White House is expected to release US President Joe Biden’s first budget proposal on Friday and the plan would push government spending to its highest level since the Second World War. The measure would appropriate $6 trillion during the fiscal year which begins in October, with outlays expected to reach $8 trillion annually over the coming decade. The spending blueprint forecasts that total debt held by the public will rise to the highest levels in US history by 2024, at 117% of gross domestic product. The outline assumes inflation will rise no faster than 2.3% a year and that the economy will grow just under 2% annually over the coming decade. It also assumes that a retroactive capital gains tax hike have been passed and will have taken effect at the end of April 2021

• While the White House and Republican negotiators remain hundreds of billions of dollars apart on its cost, the two sides moved closer to an agreement that would modernize the nation’s infrastructure this week. GOP lawmakers proposed a package totaling nearly $1 trillion while the White House lowered its offer to $1.7 trillion in new spending from its $2.3 trillion opening bid. Negotiations will continue next week, extending beyond Biden’s self-imposed Memorial Day deadline. If the talks prove unproductive, Democrats may attempt to pass a bill using the budget reconciliation process, which requires only a simple majority to pass in the US Senate but imposes certain legislative constraints

• The major motor vehicle manufacturers are also investing in new equipment to deal with supply bottlenecks and there have been a flurry of announcements from firms planning to increase production of microchips. The increased emphasis on boosting production capacity and bringing supply and demand back into balance was evident in the advanced durable goods report, which showed overall orders falling 1.3% in April. The drop was the first drop in 11 months and was largely due to a drop in orders for aircraft and motor vehicles, while orders for nondefense durable goods, or core capital goods, rose a solid 2.3%. Whether this will be enough to avoid a larger flareup in inflation that lingers for a while remains to be seen

• Concerns over rising inflation have led to some market volatility in recent weeks, but the Fed maintains that large price in-creases will be ‘transitory’. Earlier in the week, a series of speeches from Fed officials drove that point home, with Fed Governor Lael Brainard expressing confidence in the Fed’s ability to “gently guide inflation back to target” should it need to. This helped soothe inflation fears ahead of today’s print. Positive equity market reaction suggests that, for now, investors may be buying into the Fed’s narrative. Transitory simply means “not permanent”, but it could still last for a considerable amount of time. With increased confidence in the economic outlook, there are limits to how long the Fed can stay in wait-and-see mode if it wants to maintain price stability. This suggests an earlier removal of stimulus than its current policy stance implies

• Stocks recorded solid gains for the week, bringing the large-cap S&P 500 Index to within roughly 0.5% of the all-time intraday high it established on May 7 and leaving it with a small gain for the month. Trading volumes were especially light, however, with Monday marking the fifth-lowest turnover in a non-holiday session since the pandemic began. The technology-heavy Nasdaq Composite and small-cap Russell 2000 indexes performed best. Growth shares handily outperformed their value counterparts; Facebook and Google parent Alphabet helped communication services stocks outperform within the S&P 500, and a rebound in Tesla boosted consumer discretionary shares. The light trading volumes came in advance of the long Memorial Day weekend, with U.S. markets scheduled to be closed Monday, May 31

• In terms of data release, the ISM Manufacturing print is out on Tuesday. After notching a high not seen since the 1980s, the ISM manufacturing index slipped four points, or the most since lockdown measures last March, in April. The index likely gave up a bit more ground in May and slid to 60.4, which is still a reading that signals broad and strong expansion in the sector. The main takeaway from the ISM in recent months is that the economy could be running even hotter if it were not for a variety of constraints on supply. This likely remained a theme in May but demand is expected to remain robust and orders continued to roll in last month based on new orders holding up across a number of regional Fed PMI surveys

• In parallel, The ISM Service index read will be released on Thursday. Supply shortages are not limited to the manufacturing sector. The services side of the economy is facing its fair share of problems, as service providers also struggle to get their hands on the materials and help they need. Supply issues, rather than a lack of demand, is likely responsible for slower service sector activity this month. The reopening of the economy amid increased vaccinations and households’ desire to again participate in many previously constrained services is likely to unleash a rapid recovery in the service sector. As such, demand factors that drive service sector activity are only starting to heat up. Strong demand matched with scarce supply is stoking inflation, exhibited by the recent jump in the prices paid component


• British retailers said sales fell back to more normal volumes earlier this month after a flurry of demand in April when a relaxation in lockdown rules allowed non-essential shops to reopen for the first time in months. The Confederation of British Industry said its monthly balance for whether sales were above or below normal for the time of year dropped to -3 in May from +16 in April, indicating roughly normal volumes. “Some retailers have suggested the increase in demand after the initial reopening of non-essential retail in early April was either short-lived or less strong than expected,” CBI economist Ben Jones said. Clothing and specialist food stores reported below-average sales, while demand remained strong at supermarkets, hardware and furniture shops

• London’s FTSE 100 was unchanged on Friday, as weakness in miners and energy stocks countered gains in bank shares, while the prospect of further stimulus in the United States made investors optimistic of speedy economic recovery. The blue-chip FTSE 100 index (.FTSE) was flat with banks (.FTNMX301010) and life insurers (.FTNMX303010) adding 0.6% and 0.1%, respectively. HSBC Holdings (HSBA.L) and Prudential (PRU.L) provided the biggest boost. Homebuilders (.FTNMX402020) jumped with Vistry Group (VTYV.L) and Taylor Wimpey (TW.L) gaining 4.2% and 2.6%, respectively. Miners, including BHP Group (BHPB.L), Antofagasta (ANTO.L) and oil majors BP (BP.L) and Royal Dutch Shell (RDSa.L) were the biggest drags of the index

• British finance minister Rishi Sunak said there was a deal to be done with the United States on tax but big tech firms would have to pay their fair share in return for British backing for Washington’s corporation tax proposals. The United States has proposed a global minimum corporation tax rate of 15%, well below G7 levels, but above those in some countries such as Ireland. But Britain remains concerned the plans do not go far enough on taxation of tech giants such as Amazon, Google and Facebook. “We need them to understand why fair taxation of tech companies is important to us. There’s a deal to be had, so I’m urging the U.S. – and all of the G7 – to come to the table next week and get it done,” Sunak told the Mail on Sunday newspaper ahead of a meeting of G7 finance ministers on June 4-5

• The reopening of the economy and comments from Bank of England (BoE) policymaker Gertjan Vlieghe, who said the central bank could raise interest rates as soon as the first half of next year, helped the currency rise for a fifth consecutive week


• The Ifo Business Climate Index for Germany rose to 99.2 in May—its highest level since May 2019—from 96.6 in April, as optimism about the economic outlook strengthened. The French economy slipped into recession in the first quarter, with a preliminary estimate of 0.4% growth revised to a contraction of 0.1% due to weaker-than-expected construction data

• The European Commission’s Economic Sentiment Index rose 4 points to 114.5 in May following a steep improvement in April, reaching its highest level since January 2018. This increase was due to improved confidence in all sectors surveyed, markedly services (+8.8 to 11.7). On a country level, Italy (+11.0 to 115.8), Poland (+5.1 to 106.7) and France (+5.0 to 110.8) registered the largest gains. The progressive re-opening of the economy and ramping up of the vaccination campaign should help maintain optimism in the coming months

• Anticipation of a slowdown in the pace of bond purchases by the European Central Bank eased this week after a series of top officials emphasized that while the eurozone’s economic outlook is improving, it is still too early to discuss dialing back policy accommodation. ECB Executive Board member Fabio Panetta said that he sees no signs of sustained inflation pressures. He also said the region’s recovery is incomplete and its economy remains reliant on monetary and fiscal support

• Switzerland abandoned talks on a framework trade deal with the European Union (EU) that would codify access to the single market because of differences over wages and immigration. The end of the seven-year talks means that existing treaties with the bloc’s fourth-largest trading partner might eventually lapse

• Shares in Europe advanced on continued affirmations of ultra-easy monetary policy and reports of a massive U.S. fiscal spending plan. In local currency terms, the pan-European STOXX Europe 600 Index ended the week up 1.02%. France’s CAC 40 gained 1.53%, Germany’s Xetra DAX Index added 0.53%, and Italy’s FTSE MIB Index advanced 0.78%.


• Primary home sales in China remained very strong, according to the China Reality Research May survey. Primary home sales surged 50% from January to April over the prior-year period, according to data from 23 developers. Despite the strong demand, caps imposed by local governments restrained property prices. More than half of the sales managers surveyed reported that sales this year have beat expectations due to surprisingly strong sentiment and the post-pandemic recovery

• On June 1, a long-awaited revamp of the Hang Seng Index (HSI) will see the Hong Kong stock benchmark expand from 55 to 58 names with the addition of auto and battery maker BYD, solar panel glass maker Xinyi Solar Holdings, and real estate services company Country Garden Services. The HSI will add five new stocks each quarter, expanding to 80 in total by mid-2022, when it will cover around 71% of the Hong Kong stock market (versus 57% today). The overhaul of the HSI, first announced in March, reflects the growing influence of China’s tech giants and a bid to increase the index’s relevance since its creation in 1969

• Northbound equity inflows from Hong Kong into China hit USD 3.4 billion on Wednesday, among the largest-ever daily net inflows. The week saw a return of southbound Stock Connect buying of Hong Kong-listed China shares. Mainland funds were active in buying large-cap favorites like Hong Kong Exchanges and Clearing and e-commerce giant Tencent

• Chinese stocks rose strongly, with both the CSI 300 Index and Shanghai Composite Index posting the best weekly gain in more than three months, according to Reuters. Tourism-related names and other stocks leveraged to an economic reopening rose after China passed a milestone of over 500 million COVID-19 vaccinations.

• In an effort to reduce financial risks, policymakers promised zero tolerance for commodity speculation and further cracked down on cryptocurrency mining. Separately, Chinese regulators turned down applications to issue RMB 154 billion of asset-backed securities from various companies including fintech company Ant Group, according to domestic news portal The amount was twice the amount rejected in 2020 and reflects the government’s renewed focus on curbing financial risks

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