Economic Outlook – 30 October 2022


• The Bureau of Economic Analysis put out its first estimate of Q3 GDP growth. The economy reportedly expanded 2.6% annualized in the quarter, a bit more than the median economist forecast calling for a +2.4% print. This gain hoisted economic output 4.2% above its pre-COVID level and narrowed the output gap to only 0.9%. Domestic demand strengthened in the three months to September as gains for personal consumption (+1.4% QoQ annualized), equipment investment (+10.8%), and intellectual property investment (+6.9%) were only partially offset by a steep drop for residential investment (-26.4%). Government spending (+2.4% QoQ annualized) contributed to growth in the quarter. As might be expected in light of receding pandemic fears, households continued to shift consumption from goods (-1.2% QoQ annualized) to services (+2.8%). Spending on the latter thus moved further above its pre-pandemic level. The Personal Consumption Expenditures (PCE) price index excluding food and energy climbed an annualized 4.5% in the quarter, a slight deceleration from the 4.7% recorded in the three months to June. Year on year the index was up 4.9%, down from 5.0% the prior quarter but still one of the highest prints since the 1980s

• Household consumption, on the other hand, showed signs of weakness as it grew at its second-slowest pace since the early days of the pandemic. Rising prices were likely to blame for this slowdown, as evidenced by the fact that the core PCE deflator rose in Q3 at one of its highest annual rates in 40 years. Such an increase means that, despite a very strong labour market, wages were not keeping up with the rise in consumer prices. This has not affected consumption too much so far as households have been able to maintain their level of spending by drawing on the excess savings accumulated during the pandemic. But, however substantial these funds once were, they will not last forever, especially not with the savings rate as low as it is now. Half of the cache has already been used and the rest should be exhausted by the middle of next year. If inflation is not back under control by then, consumption risks hitting a wall

• Despite the slowdown, core inflation is running at an uncomfortably hot pace for the Fed. With that in mind, the FOMC is expected to move forward with another 75 bps hike at the November 1-2 meeting. Prior to the FOMC blackout period, there were market murmurs that FOMC members would begin discussions at the November meeting on the appropriate pace of rate hikes moving forward. At present, Committee members will likely opt for less sizable rate hikes after November

• The employment cost index rose 1.2% in Q3 following a 1.3% gain in Q2. Benefits costs rose 1.0% in the third quarter of the year while wages and salaries jumped 1.3%. Year on year, the employment cost index was up 5.0%, down from a record 5.1%

• The S&P Global Flash Composite PMI sank from 49.5 in September to 47.3 in October, marking a fourth consecutive monthly contraction in private-sector activity in the United States. The retreat was also the second-largest since 2009 outside of the pandemic period. The new orders sub-index fell back into contraction territory (<50) with polled businesses signaling that the “strong dollar and challenging economic conditions in key export markets” were weighing on international demand. Faced with shrinking order books, firms operating in the private sector reduced their workforce for the first time since June 2020, albeit only marginally. Input cost inflation picked up slightly as energy prices bounced back during the month. The rise in output prices, meanwhile, was the softest in nearly two years but remained acute by historical standards. Business confidence for future output fell to a multi-month low. “Although hopeful of a boost to customer demand after inflation peaks, companies remain concerned regarding price pressures and the cost of living, as well as the worsening broader economic outlook amid interest rate hikes and weak customer sentiment,” according to the report

• The manufacturing tracker slid from 52.0 to a 28-month low of 49.9 as a modest expansion in output was more than offset by a sharp contraction in new orders, the latter caused in part by elevated inflation and aggressive stock building earlier in the year. Supply chain constraints continued to ease as evidenced by the weakest lengthening in supplier delivery times since July 2020. As demand faded and supply problems subsided, work backlogs shrank for the first time in over two years. Job creation remained positive, but only just, with many firms stating that they would stop replacing voluntary leavers

• The services sub-index, for its part, slipped from 49.3 to 46.6, which was consistent with a solid decline in activity. Incoming new business contracted for the second time in three months, a development that survey respondents attributed to higher interest rates and inflation, which were squeezing disposable income. Headcounts shrank the most since June 2020

• Nominal personal income rose 0.4% in September after increasing 0.3% the month before. As the labour market continued to improve, the wage/salary component of income progressed 0.6%. Income derived from government transfers, for its part, edged down 0.1%. All this translated into a 0.4% gain for disposable income. Nominal personal spending sprang 0.6% on gains for both goods (+0.3%) and services (+0.8%). As spending expanded at a faster pace than disposable income, the savings rate declined from 3.4% to a 3-month low of 3.1%, the second lowest print recorded since April 2008

• Durable goods orders grew 0.4% in September. Although the figure was two-tenths short of consensus expectations, the disappointment was more than offset by an upward revision to the prior month’s result (from -0.2% to +0.2%). Orders in the transportation category jumped 2.1% in September as gains for civilian aircraft (+21.9%) and vehicles/parts (+2.2%) were only partially offset by a 32.2% drop in the defence aircraft segment. Excluding transportation, orders pulled back 0.5%, marking just the second decline for this indicator in the past 29 months. The report showed, also, that orders for non-defence capital goods excluding aircraft, a proxy for future capital spending, decreased 0.7% MoM, the most in 16 months. On a three-month annualized basis, “core” orders decelerated from 9.0% to 7.5%, a figure that continues to suggest that business investment in machine and equipment will continue to improve in Q4

• The Conference Board Consumer Confidence Index dropped from 107.8 in September to a three-month low of 102.5 in October, below the median economist forecast calling for a print of 105.9. The decline reflected a less optimistic assessment of the present situation. Indeed, the corresponding tracker fell from 150.2 to an 18-month low of 138.9 as the share of respondents who deemed jobs plentiful slid from 49.2% to 45.2%, the lowest figure of the post-pandemic period. The percentage of polled individuals with a positive view of current business conditions declined as well, sagging from 20.7% to 17.5%. Longer-term consumer expectations deteriorated, too, albeit to a lesser extent. The sub-index tracking sentiment towards the next six months retreated from 79.5 to 78.1 even though there was a higher proportion of respondents with a positive outlook on business conditions (from 18.6% to 19.2%), employment (from 17.4% to 19.8%), and wages (from 18.3% to 18.9%). More people were also planning to buy a home (from 5.0% to 6.8%), an automobile (from 9.9% to 12.4%), or a major appliance (from 46.8% top 49.5%)

• Sales of new homes were down for the seventh time in nine months, sliding 10.9% in September to 603K (seasonally adjusted and annualized) and bringing the total drawback since the pandemic peak to 41.8%. The monthly retreat, together with a rise in the number of homes available on the market (from 457K to a 14-and-a-half-year high of 462K), pushed the inventory-to-sales ratio up from 8.1 to 9.2, the third-highest print since mid-2009

• The Pending Home Sales Index plunged 10.2% in September, the fifth biggest monthly decline in data going back to 2001. At 79.5, the index currently stands at its lowest level since June 2010, excluding of course the pandemic period. Year on year, pending transactions were down 30.4%, a steeper decline than any seen during the 2008-11 crisis

• According to the S&P CoreLogic Case-Shiller 20-City Index, home prices fell a seasonally adjusted 1.32% in August, marking the second consecutive decline for this indicator and the sharpest since March 2009. All of the 20 markets surveyed registered price drops in the month, led by San Francisco (-3.7%), Seattle (-2.9%), San Diego (-2.5%), and Phoenix (-2.2%). YoY price appreciation slowed from 16.0% to 13.1%, the largest one-month deceleration in data going back to 2000

• Stocks rose but offered widely divergent returns for the week, as investors reacted to a busy calendar of third-quarter earnings reports. Energy and other industrial economy stocks handily outperformed growth shares, with the latter weighed down by steep declines in several mega-cap technology and internet-related stocks, including Microsoft,, Alphabet (parent of Google), and especially Meta Platforms (parent of Facebook), following earnings misses and lowered outlooks

• The US Energy Information Administration reported this week that US exports of crude and refined products reached a record 11.4 million barrels a day last week. The surge in exports comes at a time when the administration of US President Joe Biden is considering curbs on energy exports

• In terms of data, ISM Survey are out on Tuesday and Thursday. The index has headed lower this year but has remained in expansion territory (above the 50-breakeven level). Last month, a 5.5-point decrease in the employment component weighed on the index, and new orders slipped 4.2 points. Supply issues continue to ease, signaled by the falling supplier delivery and prices paid components. Looking ahead, manufacturing activity is expected to be sustained, even as new demand slows, as producers chip away at elevated order backlogs.

• The service sector signals a more solid pace of activity. The ISM services index declined a slight 0.2 points to 56.7 in September, remaining in expansion territory. The employment component rose 2.8 points to 53.0, yet respondents continued to point to widespread labor shortages. The tight labor market has kept the heat turned up on wages and thus operating costs, but the prices paid component has weakened in recent months. As consumers continue to spend more of their wallet share on services

• Trade Balance print is out on Thursday. The GDP report this week showed that net exports contributed 2.8 percentage points to top-line growth in the third quarter. Real exports expanded 14.4% over the quarter and real imports slipped 6.9%. A detailed look at how trade flows fared in September will be available with next week’s monthly international trade report. Advanced data on merchandise goods trade revealed that goods exports declined 1.5% during September, while goods imports eked out a 0.8% gain. With that in mind


• British businesses think the gloom hanging over their prospects will persist in the coming months, according to an industry. The Confederation of British Industry’s (CBI) gauge of private sector growth in the three months to October rose to -15 from -19 in the three months to September, still in contraction territory. For the next three months, services and distribution companies expect a further downturn, although manufacturers were more optimistic. “Notwithstanding a mixed picture across sectors, the private sector continues to face considerable headwinds,” said Alpesh Paleja, CBI lead economist. “Amid rising costs, labour shortages and demand waning, businesses foresee a continued fall in activity over the next three months.” Paleja said it was vital that new Prime Minister Rishi Sunak restores stability to the economic environment to snap companies out of their malaise. The CBI survey was based on responses from 624 companies, surveyed between Sept. 26 and Oct. 13

• The Bank of England looks set to raise borrowing costs by the most since 1989 next week even as it prepares for a recession that could be deepened by spending cuts under new Prime Minister Rishi Sunak. As well as raising interest rates on Thursday for an eighth meeting in a row to tame inflation above 10% – this time by three-quarters of a percentage point according to most analysts – the BoE is also due to become the world’s first big central bank to start selling bonds from its stimulus stockpile on Tuesday. After a period of turmoil in Britain, caused by the economic plans of former prime minister Liz Truss which sparked a bond market rout, the BoE’s double-barrelled monetary tightening might look at odds with its current forecasts that the economy will be shrinking until 2024. But with inflation still set to be way above the BoE’s 2% target in 2023 and some of Truss’s costly help for households and businesses still in place, the only way is up for borrowing costs. “As things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August,” BoE Governor Andrew Bailey said on Oct. 15

• Business activity in the UK shrank for a third consecutive month in October. An early reading of S&P Global’s composite PMI dropped to a 21-month low of 47.2 from 49.1 in September. Members of Parliament elected former UK finance minister Rishi Sunak as prime minister. Sunak replaces Liz Truss, who stepped down after a proposed change in fiscal policy resulted in financial market turmoil that eroded confidence in her administration.


• The press release from the ECB contained three major policy changes: a) the 75bp policy rate increase, b) a change in the conditions of targeted longer-term refinancing operations (TLTRO III) and c) changes in the remuneration of minimum excess reserves.

“With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation”

Firstly, the Governing Council (GC) raised policy rates by 75bp, thus having raised rates three times in a row, and twice by the magnitude 75bp. The press release also included a new sentence, saying that the ECB has made “substantial progress” in its policy accommodation to date. It nonetheless stated that it “expects to raise interest rates further”. The press release reaffirmed that the GC will continue to base the future policy rate path on the “evolving outlook for inflation and the economy, following its meeting-by-meeting approach”.

“In view of the unexpected and extraordinary rise in inflation… the GC decided to adjust the interest rates applicable to TLTRO III.”

Secondly, as for the targeted longer-term refinancing operations (TLTRO III), the Governing Council decided to change the terms and conditions of the third series of these operations, adding that “in view of the unexpected and extraordinary rise in inflation, it needs to be recalibrated to ensure that it is consistent with the broader monetary policy normalisation process and to reinforce the transmission of policy rate increases to bank lending conditions. Therefore, the GC decided to adjust the interest rates applicable to TLTRO III”.

“from 23 November 2022… the interest rate on TLTRO III operations will be indexed to the average applicable key ECB interest rates over this period.”

This means that from 23 November 2022 until the maturity date or early repayment date of each respective outstanding TLTRO III operation, the interest rate on TLTRO III operations will be indexed to the average applicable key ECB interest rates over this period. This statement could be taken to mean that the ECB is prepared to raise rates even after the December meeting. The Governing Council also decided to offer banks additional voluntary early repayment dates. The intention appears to be that banks start repaying their TLTRO loans early, thus shrinking the ECB’s balance sheet and improving policy transmission, by releasing collateral back to banks.

Thirdly, to align the remuneration of minimum reserves held by credit institutions with the Eurosystem “more closely with money market conditions, the Governing Council decided to set the remuneration of minimum reserves at the ECB’s deposit facility rate”. In a separate note, the ECB said the change “better aligns minimum reserves remuneration with money market rates”. Meanwhile, statements related to APP and PEPP programmes were unchanged, indicating no formal changes on future quantitative tightening (QT)

• The Eurozone flash Composite PMI fell faster than expected to 47.1 in October, compared with 48.1 the previous month. The Manufacturing PMI was also below expectations at 46.6, compared with 48.4 earlier, and the Services PMI was in line with expectations at 48.2, compared with 48.8 the month before.

• France’s economy stagnated in October as economic activity was mainly held back by demand conditions, such as lower new order inflows due to high prices and rising uncertainty. Inflationary pressures remained historically elevated and business expectations slumped to their lowest level in almost two years. Meanwhile, in Germany economic activity fell for the fourth consecutive month and at an accelerated rate, consistent with reported adverse impact of high energy prices on both business costs and demand. Firms’ expectations of future activity remained deeply negative

• Preliminary October inflation data in the eurozone show that price pressures have continued to build this month. YoY on a European Union harmonized basis, CPI rose to 11.6% in Germany, 12.8% in Italy and 7.1% in France, all significantly higher than expected

• Shares in Europe rose strongly on hopes that central banks might slow the pace of interest rate increases. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 3.65% higher. The main stock indexes also surged. Germany’s DAX Index advanced 4.03%, France’s CAC 40 Index added 3.94%, and Italy’s FTSE MIB Index climbed 4.46%


• The 20th National Party Congress of the Chinese Communist Party concluded last weekend with Xi Jinping securing an unprecedented third term as the party’s general secretary. Additionally, Xi was able to staff the party’s Politburo and Politburo Standing Committee with allies and loyalists, cementing his hold on power. Those officials are generally seen as less market-oriented than their predecessors and less experienced overall. Markets fear the consolidation of power by Xi could stifle the economy and private enterprise

• Data also showed that profits at China’s industrial firms declined at a faster pace in September. The broad, capitalization-weighted Shanghai Composite Index fell 4.05%. Growth worries rattled investors despite better-than-expected GDP data reported for the third quarter during. China’s economy expanded 3.9% in July-September from a year earlier, faster than the 0.4% growth in the second quarter.

• Retail sales grew 2.5%, missing forecasts for a 3.3% increase and easing from August’s 5.4% pace. Exports grew 5.7% from a year earlier in September, beating expectations but coming in at the slowest pace since April. Imports rose a feeble 0.3%, undershooting estimates for 1.0% growth

• China’s stock markets pulled back, as investor sentiment was dampened by new COVID-related lockdowns in several parts of China. Several Chinese cities doubled down on COVID-19 curbs after the country reported three straight days of more than 1,000 new cases nationwide

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