Economic Outlook – 5 September 2021


• Non-farm payrolls rose 235K in August, a lot less than the median economists forecast calling for a +733K print. Partially compensating for this disappointing result, the prior month’s results were upgraded by a sizeable 134K. The private sector added 243K jobs. Employment in the goods sector sprang 40K thanks to gains in manufacturing (+37K) and mining/logging (+6K). Construction payrolls, for their part, edged down 3K. Services-producing industries, meanwhile, expanded payrolls by 203K, with notable increase for professional/business services (+74K), transportation/warehousing (+53K), education/health (+35K) and other services (+37K). Employment in the public sector retraced 8K albeit after a massive 255K progression the prior month. Average hourly earnings rose 4.3% YoY in August, significantly more than the median economist forecast calling for a 3.9% increase and up from 4.1% the prior months

• Non-farm payrolls came in much weaker than expected in August and that even after accounting for a sizeable revision to the prior months’ numbers. The household survey showed bigger gains but nonetheless hinted at a slowdown in the job market recovery. The details of the report were rather disappointing, with private employment advancing much less than expected and full-time positions registering an outright decline. The sectors that had been most affected by social distancing measures – notably leisure/hospitality and education/health – registered only small gains, a sign that rising COVID-19 caseloads in the country are affecting the re-opening process

• Long-term unemployment fell 246K in the month, a positive development since the consequences of joblessness tend to increase with duration. The headline unemployment rate also decreased but remained depressed by ow participation rates. Indeed, if participation levels had been the same in August as in the pre-crisis period, the unemployment rate would have been closer to 7.5%. For a better idea of the labour market shortfall, it is worth taking a look at the U-6 unemployment rate, which remains relatively far off its pre-pandemic levels but is moving in the right direction (from 9.2% in July to 8.8% in August). There is, therefore, still some way to go for the labour market. Despite August’s gain, non-farm payrolls remained 3.5% (or 5.3 million) below their pre-crisis level. Of the jobs still to be regained, around 4.7 million are in services, which may take some time to recover from the pandemic shock

• The ISM Manufacturing PMI drifted up to 59.9 from 59.5 the prior month. Production was up 1.6 points to 60.0, regaining part of the ground lost in July (-2.4 points). New orders rose 1.8 points to 66.7, suggesting demand remained strong in the month. The inventories index rose to 54.2, which bodes well that inventories will contribute positively to Q3 GDP. The supplier delivery index slipped slightly but remained elevated at 69.5. This was surprising at a time where manufacturers continued to complain about supply chain delays and shortages. The employment index dipped into contraction territory, sliding 3.9 points to 49. The price paid index declined for a second month in a row: It fell from 92.1 in June to 85.7 in July and further to 79.4 in August

• The trade deficit narrowed US$3.2 billion (4.4%) to US$70.1 billion from a revised deficit of US$73.2 billion in June. Imports of goods decreased US$2.9 billion to US$236.3 billion while imports of services increased US$2.4 billion to US$46.6 billion. As a result, total imports of goods and services stood at US$282.9 billion. On the other side of the ledger, exports increased US$2.7 billion to $148.6 billion for goods and US$0.1 billion to US$64.2 billion for services. Total goods and services exports reached US$212.8 billion, US$2.8 billion more than a month earlier. In real terms, the goods deficit fell US$4.8 billion to US$100.1 billion as exports increased US$1.5 billion and imports fell US$3.4 billion

• Auto sales fell 14% in August from a year earlier. The slow selling pace does not reflect lack of demand but rather lack of availability of products. A combination of U.S. car factories having been shut down this spring to curb the spread of Covid-19 and production still being hampered by computer-chip shortages did translated into auto dealerships’ inventories being already down significantly by the end of July. With Ford and GM recent announcement of production cut back, one can expect sales to remain depressed for longer this year

• The Pending Home Sales Index of the National Association of Realtors fell 1.8% in July after declining a revised 2.0% in June and rising 8.3% in May. Compared with a year earlier, the index was down 8.5% (seasonally adjusted). On a regional basis, pending sales rose 1.9% MoM in the West, but fell in all other regions. They were down 6.6% in the Northeast, 3.3% in the Midwest, and 0.9% in the South. The index is based on contracts signed a month earlier for existing single-family homes, condos, and co-ops and usually leads the Existing-Home Sales Index by a month or two

• The S&P CoreLogic Case-Shiller home price index for the country’s largest 20 metropolitan areas jumped 1.8% (seasonally adjusted) month over month and 19.1% YoY. MoM, home prices were up in all 20 cities, with increases ranging from 3.5% in Phoenix to 0.99% in New York.

• The Conference Board Consumer Confidence Index declined from 125.1 in July to 113.8 in August, its lowest reading in six months. The cut-off date for the preliminary results was August 25. This was 11 days after the start of the U.S. evacuation from Afghanistan. Aside from the depressing media coverage from Afghanistan, this period also saw restrictions re-imposed to contain the spread of the Delta variant and news reports of hospitals being overwhelmed by the surge of new COVID cases. Consequently, it is easy to explain the less favourable view of current economic conditions and short-term growth prospects reported in the Conference Board survey. Rising food and gas prices van be added to the list of factors weighing on the consumer mood. According to the Conference Board, the Present Situation Index, which gauges the consumer view of current business and labour market conditions, fell 9.9 points to147.3 in the month. Meanwhile, the Expectations Index, which measures the consumer short-term outlook for income, business, and labour market conditions, fell from 103.8 in July to 91.4 in August

• Construction spending rose 0.3% to a seasonally adjusted rate of US$1,568.8 billion. Public expenditures rose 0.7% while spending in the private sector advanced 0.3%. Higher private outlays were attributable entirely to a 0.5% gain in the residential segment (+US$4.1 billion). In the private non-residential segment, spending fell 0.2% or US$0.4 billion. Relative to 12 months earlier, construction spending was up 9.0% in the month

• The market wrapped up its seventh consecutive month of gains in August. The S&P 500 Index rose 2.9% last month, the Nasdaq Composite climbed about 4% for its third winning month in a row while the Dow Jones Industrial Average added 1.2%. The FTSE 100 Index was up 1.2% in August for its best monthly performance since April. The S&P 500 experienced its longest winning streak since a 10-month run ended in December 2017. August was also the benchmark’s 9th positive month in the last 10. The index has notched 53 record closes thus far in 2021. Ten out of 11 S&P 500 sectors rose in August, led by financials, with a gain of 5%, and all sectors are positive for the year. September is traditionally the toughest month for stocks: According to CFRA, since 1945, the S&P 500 has been down an average of 0.56%, though it has risen three out of the past four years

• The national eviction ban in the US is no longer in effect after the Supreme Court struck it down last week, leaving the more than 11 million Americans behind on their rent at risk of being forced out of their homes. However, at least five states and Washington, D.C. will continue to ban evictions: Illinois will do so until 19 September; California’s ban will last through 30 September; and New York, New Jersey and D.C. keep their bans until January 2022. New Mexico also has an eviction moratorium in effect, and an expiration date has not yet been announced.

• The US Department of the Treasury’s annual report said that the Social Security trust fund will run out of money in 12 years, one year sooner than expected. The outlook, which was influenced by the COVID pandemic, also threatens to shrink retirement payments and increase health care costs for older Americans. Treasury Department officials detailed that the Old Age and Survivors trust fund is now able to pay scheduled benefits until only 2033, a year sooner than reported last year. The Disability Insurance fund is estimated to be adequately funded through only 2057, eight years shy of the date published in 2020.

• In terms of data release, JOLTS is out on Wednesday. Next week’s Job Opening and Labor Turnover Survey (JOLTS) should provide a deeper dive into the labor market’s underlying dynamics this summer, as the fall approaches. The June JOLTS report showed all the signs of a strong job market, with job openings at a series high of 10.1 million and layoffs at a series low of 1.3 million. Quits, which show workers’ willingness or ability to leave their jobs, also picked up in June, only slightly below the April series high. Next week’s report will likely show that July was still a good time to be looking for a job

• Production Price Index is out on Friday. Coming in before the Consumer Price Index during a slow week for economic indicators, August’s Producer Price Index report may get a bit more attention than usual. While there was monthly growth in the CPI moderate in July, the PPI for final demand increased 1.0% for the second month in a row, bringing the three-month annualized rate up to 11.8%. Further up the pipeline, the PPI for intermediate services demand saw another healthy increase in July, while the PPI for intermediate processed and unprocessed goods slowed slightly. All of these measures, however, remain quite elevated relative to last year, reflecting the broad price pressures that firms are facing


• UK purchasing managers’ indexes (PMIs) showed that business activity in August slowed more than indicated by preliminary estimates. IHS Markit said the UK composite activity fell to a six-month low due to a decline in service sector activity that appeared to stem from normalizing demand, labor shortages, and supply chain obstacles.


• Eurozone inflation increased in August to 3% year-on-year, compared to 2.2% in the previous month, and was above expectations. Energy had the highest annual rate (15.4%, compared with 14.3% previously), followed by non-energy industrial goods (2.7%, compared with 0.7%), food, alcohol & tobacco (2.0%, compared with 1.6%) and services (1.1%, compared with 0.9%). Meanwhile, core inflation rose to 1.6% this month, compared to 0.7% last month, slightly above expectations. The large YoY figure is a combination of a number of largely transitory factors ranging from base effects from last year’s second pandemic wave, energy price increases, tax changes in Germany and earlier-than-expected summer sales in France. Strong headline inflation could continue for the remainder of the year, even with weaker underlying inflationary pressures going forward, largely due to the base effects from last year and continued energy price increases. The releases for France, Germany, Italy, and Spain were 2.4% (1.5), 3.4% (3.1), 2.6% (1.0) and 3.3% (2.9) respectively in August (July)

• The ECB has its next meeting on September 9, and according to recent accounts and speeches, the Governing Council still appears undecided as to how to manage the end-game of the PEPP, as well as how to allow the APP to take on a more active role after PEPP is closed down. Since the ECB completed its strategic review in July it has published updated interest rate guidance, but has thus far not updated how it QE programmes will contribute to achieving its monetary policy goals beyond the pandemic. A contributing factor to the ECB dragging its feet on this is the apparent disunity within the GC. In its recent account of the latest July meeting, a minority expressed concerns over the inflationary risks as well as the potential overuse of QE. While this minority is unlikely to lead to short-term changes in policy, the ECB will effectively require consensus for much of its upcoming changes, and this is where the dissenting minority matters most. The ECB has previously explained recent larger annual increases in consumer prices as driven by temporary and transitory factors. Therefore, a continued communication is expected of weak underlying inflationary pressures going forward. Since the meeting on June 10, where the GC decided to ramp up PEPP purchases, financial conditions have loosened, which could fuel discussions over tapering at the upcoming meeting. PEPP will likely run until June 2022 (the ECB has said “at least until March 2022”) and that monthly purchases will decline successively, leaving a fraction of the total envelope unused at the endpoint

• Shares in Europe were little changed, as investors assessed signs of slowing economic momentum. In local currency terms, the pan-European STOXX Europe 600 Index ended the week roughly flat. Major indexes were mixed. Germany’s Xetra DAX Index fell 0.45%, while Italy’s FTSE MIB Index gained 0.22%. France’s CAC 40 Index


• President Xi Jinping announced the launch of a new stock exchange in Beijing. The new exchange is aimed at providing equity financing for small and mid-size enterprises and reflects China’s strong commitment to its capital markets. News of the new bourse comes as many foreign investors have grown more wary of investing in Chinese assets following a regulatory clampdown on a number of industries. Foreign investors’ share of domestic Chinese equities fell in August to the lowest level since 2014, according to fund flow data from EPFR

• The People’s Bank of China said that it would provide RMB 300 billion in low-cost funding to banks for lending to small and medium-sized enterprises (SMEs). Improving credit access for SMEs is a long-term objective for the central bank and does not necessarily signal a shift in monetary policy, according to analysts. Local governments have assumed a greater role in ensuring financial stability within their regions after they were allowed to sell bonds to recapitalize smaller local banks late last year, according to a recent Moody’s report

• China’s PMI readings for August offered the first sign of the economic impact following July’s outbreak of the delta variant, which triggered renewed lockdowns and restrictions across the country.

• On the services side, the official nonmanufacturing PMI fell to 47.5 from 53.3 in July, its lowest reading since February 2020 (readings below 50 indicate contraction). The Caixin services PMI, a private survey that focuses on smaller businesses, fell to a worse-than-forecast 46.7, its first contraction in 16 months. Meanwhile, manufacturing PMIs from the government and Caixin suggested weakness for China’s manufacturing companies as they grapple with rising cost pressures. The latest PMIs also pointed to growing labor market pressures as service sector employers cut jobs in response to weak demand and rising costs.

• Chinese stocks rose for a second consecutive week. The Shanghai Composite Index gained 1.7% and outperformed the large-cap CSI 300 Index, which rose 0.3%, according to Reuters. Chinese companies posted robust earnings for the June quarter, with a 36% annual increase in earnings per share, according to mainland broker CITIC. Upstream resources sectors saw the strongest earnings growth, followed by new energy vehicles and semiconductors. The consumer, pharmaceutical, and telecom sectors lagged. On a two-year basis to smooth out impacts from the pandemic, net profits increased by over 10% over the second quarter of 2019, according to CITIC

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