Economic Outlook – 31 October 2021


• The Bureau of Economic Analysis put out its first estimate of Q3 GDP growth. The economy reportedly expanded an annualized 2.0% in the quarter, which was less than the +2.6% print expected by consensus. Following in the footsteps of four solid expansions, this gain nonetheless hoisted economic output 1.4% above its pre-crisis level. After growing at a blistering pace in the past few quarters, domestic demand decelerated sharply. Rather surprisingly given rising COVID-19 cases in the country, spending on services was not to blame for this slowdown. On the contrary, consumption in the segment rose 7.9% in annualized terms and settled just 1.6% below its pre-pandemic level. Rather, it was spending on goods (-9.2% QoQ annualized) that suffered in the quarter, hit by severe shortages in the auto industry. It is worth recalling that inventories of motor vehicles/parts remained extremely depressed in the quarter and that chip shortages continued to limit production worldwide. This, combined with a surge in sales earlier this year, left dealership lots virtually empty. As a result, spending on autos collapsed a whopping 53.9% in annualized terms in Q3, a development that subtracted 2.4 %age points from growth

• The employment cost index rose 1.3% in Q3, the most since data collection began in 2001. In the quarter, benefit costs rose 0.9% while wages and salaries soared an unprecedented 1.5%. YoY, the employment cost index was up 3.7%, the highest reading since 2004

• Nominal personal income contracted 1.0% in September. As the labour market continued to recover, the wage/salary component of income progressed 0.8%. Income derived from government transfers, on the other hand, declined 7.0% as emergency unemployment benefits were phased out. All this translated into a 1.3% monthly decline for disposable income. Nominal personal spending, for its part, progressed 0.6% in September with gains for both goods (+0.5%) and services (+0.6%). As income shrank and spending expanded, the saving rate slipped from 9.2% to 7.5%, roughly in line with in line with its pre-pandemic level

• Durable goods orders retraced for just the second time in 18 months in September, slipping 0.4% MoM. Analysts were expecting a 1.1% decline. Orders in the transportation category dropped 2.3% as declines for motor vehicles/parts (-2.3%) and civilian aircraft (-27.9%) were only partially offset by a spike in the defence aircraft category (+104.3%). Excluding transportation, orders progressed 0.4% and reached a new all-time high. Notable gains were recorded for machinery (+1.1%) and fabricated metals (+0.7%). The report showed, also, that orders of non-defence capital goods excluding aircraft, a proxy for future capital spending, grew 1.4% MoM, capping a 10.6% annualized expansion in Q3 as a whole. This bodes well for business investment in Q4

• The Conference Board Consumer Confidence Index rose from 109.8 in September to 113.8 in October, instead of sliding to 108.0 as per consensus. Though better than expected, this result remains significantly below the post-pandemic peak of 128.9 observed back in June. Renewed optimism among U.S. consumers in October was perhaps linked to reduced COVID-19 caseloads across the country and the continued re-opening of the sectors most affected by the pandemic

• New-home sales jumped 14.0% MoM in September to a six-month high of 800K (seasonally adjusted and annualized), easily surpassing the 756K print expected by consensus. September’s positive surprise was offset in part by a downward revision to the prior month’s result from 740K to 702K. With the number of homes available on the market remaining unchanged at 379K, the increase in sales in September resulted in the inventory-to-sales ratio declining eight ticks to 5.7, a level below its long-term average and indicative of scarce supply. On a quarterly basis, new-home sales barely budged in Q3, expanding just 0.4% in annualized terms

• According to the S&P CoreLogic Case-Shiller 20-City Index, home prices rose for the 113th consecutive month in August, springing a seasonally adjusted 1.43% after climbing 1.59% the prior month. Although solid by historical standards, this monthly gain was still the smallest recorded since July of last year, perhaps a sign that the moderation observed on the real estate market is starting to have an impact on home price growth. All the cities in the index saw higher prices in August, led by Tampa Bay (+2.52%), Las Vegas (+2.36%), and Phoenix (+2.34%). YoY, the index was up 18.6%, down from 19.2% the prior month but still the third sharpest 12-month jump ever recorded. Prices were up 20% or more in an unprecedented 11 of the 20 urban areas surveyed

• Relief on supply chains was expected as consumer spending started shifting back to services. For the quarter, the ratio of services to goods spending ticked up 3.6%, the biggest move since the pandemic started. Even stripping out the troubled automotive sector, services spending growth still won out. Circumstances are still a long way from normal but, combined with the easing of port volumes, the rebalancing in expenditures is a sign that some of the supply chain pressures may be set to ease. This was perhaps most evident in the prices of imported goods whose increases slowed to 5.8% QoQ (annualized) from the over 14% pace registered in each of the prior two quarters. Import prices are still growing well beyond what would be considered a normal range, but at least moving in the right direction

• US President Joe Biden announced that his administration and Democratic lawmakers had agreed to a $1.75 trillion spending framework, though negotiations over the details continue. The slimmed-down package will target climate change and expand the social safety net. A number of programs have been removed from the proposal, which initially cost $3.5 trillion. A “billionaires’ tax” on unrealized capital gains was floated early in the week before being scrapped and replaced with an additional 5% income tax on those earning more than $10 million annually and a further 3% levy on those with incomes above $25 million. Also being considered is a minimum corporate tax rate of 15% and a 1% surtax on stock buybacks. Meanwhile, progressive Democrats blocked consideration of a $1.2 trillion bipartisan infrastructure package on Thursday evening, a setback for the administration

• Most of the major indexes recorded gains and reached new highs. The week was the busiest of the third-quarter earnings reporting season, with several technology and internet-related giants announcing results, helping to keep trading volumes elevated. Consumer discretionary shares fared best within the S&P 500 Index, boosted by a jump in Tesla shares—bringing the firm’s market capitalization above USD 1 trillion—following news that rental firm Hertz Global agreed to buy 100,000 of its electric vehicles. Energy shares underperformed as oil prices fell back from multiyear highs. Supply chain problems appeared to remain at the forefront, with both and Apple (capitalized at roughly USD 1.7 trillion and USD 2.5 trillion, respectively) falling back and dragging the indexes lower on Friday morning after reporting lower growth forecasts because of labor and input shortages

• In terms of data release, the ISM (both manufacturing and services) is out on Monday and Wednesday. In normal times, the 60+ readings in the ISM manufacturing and services surveys registered in September would signal a blistering pace of expansion, but these are hardly normal times. The composite indices of both series have been propped up by the near-record highs in the supplier delivery components as supply chain bottlenecks have yet to ease. The logjams look to have worsened in October. The average number of ships awaiting anchor at the country’s largest port climbed to 66 this month, with the resulting delays leading to a fresh cycle high in the average supplier delivery index among the Fed’s regional manufacturing PMIs

• Job’s report is out on Friday. September’s jobs report illustrated that the supply of workers is the primary challenge to the labor market’s recovery at present. Payrolls increased by 194K last month, well short of estimates. Difficulty staffing up this school year led to a 161K decline in public education after adjusting for typical seasonal hiring patterns. Seasonal adjustment effects should not be as severe in October, and while the factors deterring workers from looking for employment have not disappeared over the past month, many have eased. The latest Household Pulse survey showed nearly 700K fewer people not working due to COVID fears compared to the second half of September, while 1.6M fewer individuals report not working due to childcare compared to this time last year


• The UK Office of Budget Responsibility (OBR) revised its outlook for 2021 GDP growth to 6.5% from its previous estimate of 4% and forecast a 6% economic expansion in 2022. The OBR likewise reduced its estimate of the lasting economic damage caused by the coronavirus pandemic to 2% from 3%. In light of this improved outlook, the OBR cut its forecast for government borrowing over the remainder of the fiscal year. With the improved economic outlook and tax increases announced in March and September expected to boost the UK government’s revenue, Finance Minister Rishi Sunak unveiled plans to step up spending on infrastructure as well as education and other public services while cutting or freezing business tax rates for some industries that were hit hard by the pandemic


• Flash estimates for eurozone GDP in the third quarter of 2021 showed an expansion of 2.2 % q-o-q, slightly above expectations and the same rate as in the previous quarter. The corresponding year-on-year (YoY) growth rate was 3.7, compared to 14.3 % in the earlier period. Country-specific estimates for France, Germany, Italy, and Spain were 3 %, 1.8 %, 2.6 % and 2 % QoQ respectively. The numbers for France and Italy (Germany and Spain) were above (below expectations). France became the first of the major eurozone countries to reach pre-pandemic GDP levels. Eurozone inflation increased in October to 4.1 % YoY, compared to 3.4% in the previous month, and was above expectations. Energy saw the highest annual rate in October (23.5 %, compared with 17.6 % in September), followed by services (2.1 %, compared with 1.7 %), non-energy industrial goods (2.0 %, compared with 2.1 %) and food, alcohol & tobacco (2.0 %, unchanged). Meanwhile, core inflation rose to 2.1 % this month – the first time since 2008 – compared to 1.9 % in the previous one, which was above expectations. The harmonized consumer price inflation releases for France, Germany, Italy, and Spain were 3.2 % (2.7), 4.6 % (4.1), 3.1 % (2.9) and 5.5 % (4) respectively in October (September). In addition, the ECB released the fourth quarter’s update to the Survey of Professional Forecasters, which showed that HICP inflation expectations were revised up to 2.3, 1.9, and 1.7 % for 2021, 2022 and 2023 respectively. Compared with the previous round (third quarter of 2021), these were 0.4 %age points higher for 2021 and 2022 and 0.2 %age points higher for 2023. In addition, longer-term inflation expectations for 2026 were revised upward to 1.9% from 1.8% in the previous round. GDP growth expectations remained broadly unchanged. The publication also noted that “indicators of the uncertainty surrounding expectations for the main macroeconomic variables mostly eased somewhat further, but still remained elevated when compared with levels that prevailed pre-coronavirus.”

• In the ECB’s press statement, the bank left policy instruments unchanged, with the only difference being that it expected PEPP purchases to continue at a lower pace than in Q3 and Q2, whereas in the September meeting it expected purchases to be lower than those in Q2 and Q1. Taken literally, this means Q4 purchases ought to continue below EUR 75.9bn per month (the average monthly purchase rate in Q3), whereas in Sep the corresponding threshold would’ve been EUR 62.2bn (the average monthly purchase rate in Q1). That said, Q3 purchases did not follow this guidance – it was below Q2’s but above Q1’s purchase rate. It might therefore be more meaningful to interpret this quarter’s purchase rate to be lower than the previous quarter’s. In the press statement and Q&A, President Lagarde said that the eurozone continued to recover strongly, even though momentum had moderated somewhat. Shortages of material and labour were holding back production as demand outpaced supply. She warned that supply constraints had clouded the outlook for the next quarters. Moreover, inflation is likely to rise in the coming months, but inflationary pressures should ease during the course of 2022. Lagarde noted three reasons in particular: energy prices (for oil, gas, and electricity); recovering demand following the reopening of economies, and base effects including VAT changes in Germany, as factors that were currently driving inflation upwards, all which were expected to ease during the course of next year

• The pan-European STOXX Europe 600 Index gained 0.77% in local currency terms, supported by solid corporate earnings that may have helped to offset concerns about inflation and the potential for central banks to rein in some of their accommodative policies. Germany’s Xetra DAX Index advanced 0.94%, France’s CAC 40 Index added 1.44%, and Italy’s FTSE MIB Index rallied 1.14%


• Debt-laden China Evergrande paid a delayed coupon within the grace period on Friday, averting what would have been the world’s second-largest emerging market corporate debt default. Evergrande, which is shouldering more than USD 300 billion in liabilities, missed coupon payments totaling nearly USD 280 million on its dollar bonds on September 23, September 29, and October 11, kicking off 30-day grace periods for each. The company has nearly USD 338 million in other offshore coupon payments coming due in November and December. On Tuesday, China’s National Development and Reform Commission said that it and the State Administration for Foreign Exchange (SAFE), the country’s foreign exchange regulator, instructed foreign debt issuers to use funds for approved purposes and “jointly maintain their own reputations and the overall order of the market.”

• The People’s Bank of China (PBOC) injected CNY 200 billion (USD 31.29 billion) through seven-day reverse repurchase agreements into the banking system on Friday, bringing the weekly net cash injection to the highest in 21 months

• Beijing’s clampdown on the tech sector continued as the country’s internet watchdog proposed restrictions on companies with more than 1 million users with a security review before they can send user-related data abroad. Also, the PBOC warned that online brokerages unlicensed in China are acting illegally if they serve Chinese clients via the internet. In a speech, a PBOC official compared cross-border online brokerages to “driving in China without a driver’s license.”

• A planned pilot real estate tax scheme and a missed payment by Modern Land kept the sector under pressure. In a statement, the developer said that it had not paid principal and interest on its USD 250 million 12.85% senior notes that matured on Monday “owing to unexpected liquidity issues” arising from the macroeconomic environment and other factors. On the ratings front, both Fitch and S&P Global reduced their credit ratings on several Chinese developers as liquidity concerns and slowing sales continued to weigh on the property sector

• China’s stock markets retreated amid continued concerns about the strength of the property sector. For the week, the large-cap CSI 300 Index benchmark and the Shanghai Composite Index each lost around 1%. The property sector, which accounts for about one-third of China’s overall economy, has stirred investor anxiety in recent weeks following defaults, credit rating downgrades and, most recently, a proposed tax plan as authorities seek to reduce leverage among leading developers

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