Economic Outlook – 6 November 2022


• The ISM Manufacturing PMI slipped from 50.9 in September to 50.2 in October, marking the weakest expansion in the sector since the early months of the pandemic. The output index rose from 50.6 to 52.3 and the new orders index went from 47.1 to 49.2but remained in contraction territory (<50) for the fourth time in five months. The employment gauge climbed from 48.7 to 50.0, indicating that payrolls stagnated after declining the prior month. Signs of improvement regarding the supply chain were also clearly visible in the report. The input price tracker fell for the seventh consecutive month (from 51.7 to 46.6), slipping below the 50-mark for the first time in two-and-a-half years. Supplier delivery times (from 52.4 to 46.8), meanwhile, shrank the most since March 2009. This, combined with declining orders, allowed firms to catch up on unfilled orders, as evidenced by a drop in the work backlog index from 50.9 to a 28-month low of 45.3

• The ISM Non-Manufacturing PMI slid from 56.7 in September to a post-pandemic low of 54.4 in October. The new orders tracker (from 60.6 to 56.5) and the business activity sub-index (from 59.1 to 55.7) signaled a deceleration in growth while the employment gauge (from 53.0 to 49.1) fell back into contraction territory. Input price inflation (from 68.7 to 70.7) accelerated, perhaps reflecting higher energy prices. Of the 18 industries covered, 16 reported growth in October

• Nonfarm payrolls rose 261K in October, significantly more than the +193K print expected by consensus. Adding to the good news, the Employment in the goods sector sprang 33K, reflecting a sizeable increase in the manufacturing sector (+32K). Headcounts in construction (+1K) and mining/logging (+0K), meanwhile, stayed virtually unchanged. Jobs in the services-producing industries expanded 200K, with notable increases for health/social assistance (+71K), professional/business services (+39K), leisure/hospitality (+35K) and wholesale trade (+15K). Employment in the public sector jumped 28K with gains at the federal (+6K) and state/local (+22K) levels. Average hourly earnings rose a consensus-matching 4.7% YoY in October, three ticks less than in September. Month on month, earnings progressed 0.4%, accelerating from the 0.3% pace recorded the prior month

• The Household survey a much less upbeat picture of the situation prevailing in the labour market, with a reported 328K decline in employment. This drop, combined with a one-tick decrease in the participation rate (to 62.2%), translated into an increase in the unemployment rate, from a post-pandemic low 3.5% to 3.7%. Full-time employment sank 433K, while the ranks of part timers swelled 164K

• Virtually every important series published in the establishment survey moved in the right direction: private employment (+233K), temporary help services (+12K) and aggregate hours (+0.2%) to name just a few. Job creation in cyclical sectors such as manufacturing (+32K) and construction (+1K) slowed a bit compared with the prior month but showed a lot of residual strength. Average weekly hours (34.5), meanwhile, remained unchanged for the fifth consecutive month at a level a touch above the pre-pandemic average for this indicator. The only major disappointment was a sizeable drop in the diffusion index (from 64.3 to 61.7%), which suggests job creation is growing less diffuse. The less volatile 6-month diffusion index also weakened, from 78.9% to a 12-month low of 78.5%

• The Job Openings and Labor Turnover Survey (JOLTS) showed that positions waiting to be filled jumped from 10,280K in August (initially estimated at 10,053K) to 10,717K in September. As a result of this increase, the ratio of job offers to unemployed person increased from 1.71 to 1.86, a level far above anything observed before the pandemic. The monthly gain was led by the following categories: accommodation (+215K), health care/social assistance (+115K), transportation (+11K), and professional/business services (+104K). Alternatively, job postings declined in these categories: wholesale trade (-104K), finance/insurance (-83K), financial activities (-56K), and manufacturing (-40K)

• The trade deficit widened for the first time in seven months in September, moving from $65.7 billion to $73.3 billion. The increase was due in part to a 2.0% decline in goods exports (to $180.2 billion), led by soybeans (-$1.7 billion), crude oil (-$1.0 billion), and nonmonetary gold (-$0.8 billion). Goods imports, for their part, sprang 1.1% (to $272.9 billion) as increases for cell phones (+$1.4 billion), pharmaceutical preparations (+$1.4 billion), and semiconductors (+1.1 billion) were only partially offset by retreats for fuel oil (-$0.8 billion), crude oil (-$0.5 billion), and other petroleum products (-$0.5 billion). With exports down and imports up, the goods trade deficit went from -$86.2 billion to -$92.7 billion

• Initial jobless claims stayed virtually unchanged in the week to October 29, moving from 218K to 217K. Continued claims, for their part, rose from 1,438K to 1,485K, their highest level since late March. Although these two figures remained very low on a historical basis, the latter has clearly been trending upward in recent weeks. This discrepancy between stable initial claims and rising continuing claims suggests that, although few people are getting laid off right now, those who are have more difficulty finding a new job and, therefore, must continue to claim unemployment benefits. A slowdown in hiring is usually the first signal of a trend change on the labour market

• The Federal Reserve raised the target range for federal funds rate 75 basis points to 3.75-4.00% and stated that it would continue to reduce its holdings of Treasuries and mortgage-backed securities. This was the fourth successive 75- bp hike and the sixth move in total, bringing cumulative policy rate tightening since the beginning of the year to 375 bps. The wording of the statement did not change much from the last which prompted the FOMC to reiterate its commitment to bring it back towards the 2% objective. Still, some additions were interesting:

• The committee still anticipated that additional rate increases would be appropriate but added that these would be implemented “to attain a stance of monetary policy that [would be] sufficiently restrictive to return inflation to 2% over time

• The statement added that “in determining the pace of future increases in the target range, the Committee [would] take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments”

• Fed Chair Jerome Powell’s tone sounded hawkish but, on the one hand, he acknowledged the lags with which policy operates and the associated uncertainly surrounding the effects of rate hikes implemented up to now. But on the other, he made clear there said that there was still some ground to cover, to reach the terminal rate. Powell even went as far as to say that recent data were consistent with policy settings higher than those laid out in the September dot plot. He recognized that the pace of tightening could shift down at upcoming meetings but reminded his audience that the final destination for rates might well be higher than initially expected and that the time spent there could be longer. In this context, he admitted that the path to a soft landing had narrowed, but he still believed it could be achieved

• President Joe Biden this week called US oil companies “war profiteers” and threatened to impose a windfall profits tax unless they increase domestic production. Such a proposal is seen as unlikely to receive congressional approval even in the unlikely event that Democrats are able to retain control over both houses of Congress in next week’s midterm elections

• Stocks fell after the Federal Reserve dashed market hopes for an impending pivot in monetary policy in the form of a pause or slower pace of rate hikes. The technology-heavy Nasdaq Composite Index was hit particularly hard as growth stocks declined more than value companies. The Dow Jones Industrial Average held up much better, extending its relative outperformance from October. Tech stocks suffered as the fallout from a largely disappointing earnings season for bellwethers such as Facebook parent Meta Platforms,, and Microsoft continued. Late in the week, announced that it was pausing its corporate workforce hiring, further dampening sentiment. Although it is now a private company, the deep job cuts expected at Twitter under new owner Elon Musk added to the malaise of the tech sector

• In terms of data release, the NFIB Small Business Optimism is out on Tuesday. Over the past few months, small business optimism has dissipated, with rising inflation and labor market issues crowding out sales as the top problem facing owners today. Despite the decline in optimism, a large net percentage of business owners still plan to hire workers, a sign that labor market tightness persists with elevated labor demand. Business owners may be fearing inflation, having under-qualified workers or not being able to hire workers altogether, but the concerns around their demand outlook today are not the same as the drivers of flagging demand that characterized this survey in the first half of the post-Great Recession expansion. Demand is still there, even if storm clouds are coming in

• CPI is out on Thursday. The CPI looks set to make waves again in October, the headline index is expected to slip to 8.0% YoY. A rebound in the price of gasoline and a still-high, albeit moderating, rate of food inflation drive the headline increase are possible. Core inflation is likely to slow a touch, but remain uncomfortably high with a 0.5% monthly increase. September’s core goods inflation slowdown could continue in October with a 0.1% monthly drop in prices, led by a decline in used vehicle prices. Furthermore, inventory rebuilding among retailers suggests that the basis for sustained goods inflation is limited. However, core services inflation appears set to remain strong. Price increases in labor-intensive services have lagged increases in the cost of labor, providing scope for continued growth in services inflation


• While net borrowing of mortgage debt by individuals remained at GBP 6.1 billion in September – which is above the past six-month average – there are signs of the housing market cooling. Approvals for house purchases, which is an indicator of future borrowing, registered at 74,400 in August (above the past six-month average) but have dropped considerably to just 66,800 in September. This suggests that the spike in mortgage approvals in August was not due to any underlying strength in the housing market, but more to do with households seeking to get in ahead of rapidly rising mortgage rates. Households deposited an additional GBP 8.1 billion with banks and building societies in September, compared to just GBP 3.2 billion in August. This was the biggest increase of household deposits since June 2021 and suggests that many consumers are increasing their savings in anticipation of growing costs associated with inflation and mortgage rates

• The Bank of England’s (BoE) Monetary Policy Committee (MPC) has voted by 7-2 to raise interest rates by 75bp to 3%. This is the biggest upwards step since October 1989 when Sterling was attempting to shadow the Deutsche Mark in order to combat inflation. The 1992 reversal of those 15% rates saw the start of a prolonged economic boom, but these rates are not expected to be reversed anytime soon, nor economic growth is expected to grow over the course of the coming year. The average home owner coming off a fixed rate mortgage (approximately 7% of households p.a.) is going to see a steep rise in debt servicing costs; in many cases mortgage costs will be rising from 17% of disposable income to as much as 25%. This alone is going to result in a 2% decline in consumer spending across the economy as a whole. This pain will of course be concentrated, but there is broader evidence that consumers across the board are increasing savings in anticipation of future interest rate and taxation rises, as well as an expectation that unemployment is set to rise. Overall, the Bank now expects GDP to decline by 0.75% in the second half of the year

• The BoE’s target for inflation is 2%. September’s CPI was 10.1%. but the Bank does expect inflation to peak at 11% in the coming weeks before falling precipitously over the course of the next 18 months, moving below target in mid-2024. There is an assumption by the MPC that there will be some form of energy support continuing beyond the present program’s expiry in April 2023: to have energy prices rocket to market rates would be crippling not only for consumers, but for the government’s own debt servicing costs. Caution is needed about how quickly inflation will fall. Not only are issues such as the Ukrainian crisis and attendant impact on energy far from settled, there is the prospect of a crisis in Taiwan as well. Moreover if inflation rapidly spikes, it can be rapidly overcome. But when it goes above 8% and remains there for some time, as is now the case, businesses have to adjust to the higher cost base. Thus, an iterative process which can take a year or more is started, with firms looking to see where they can reduce costs or increase prices, and gauging the market reaction to such moves

• Speculation on the taxes that may be unveiled in the November 17 budget ran rife in the media. Newspapers and television channels cited unnamed government officials as saying that UK finance minister Jeremy Hunt is considering whether to raise taxes on dividend income and capital gains tax. Other options reportedly could include increasing a proposed windfall tax on oil and gas company profits to 30% from 25% and extending this levy to include electricity generators


• Eurozone GDP growth QoQ was slightly higher than expected at 0.2 percent in the third quarter of this year, compared to 0.8 percent the previous quarter. The annual GDP growth was 2.1 percent. Meanwhile, France’s GDP grew by 0.2 percent QoQ, and Germany’s grew by 0.3 percent. Spain’s GDP increased by 0.2 percent compared to the previous quarter, and Italy’s rose by 0.5 percent

• Eurozone inflation in October rose more than expected to 10.7 percent YoY, compared to 10 percent the month before. Energy is expected to have the highest annual rate in October (41.9 percent, compared with 40.7 percent in September), followed by food, alcohol & tobacco (13.1percent, compared with 11.8 percent), non-energy industrial goods (6.0 percent, compared with 5.5 percent) and services (4.4 percent, compared with 4.3 percent. Meanwhile, core inflation also rose as expected to 5 percent, compared to 4.8 percent the previous month. The HICP releases in September (August) for major eurozone countries were as follows: France 7.1 percent (6.2), Germany 11.6 percent (10.9), Italy 12.8 percent (9.4) and Spain 7.3 percent (9)

• Shares in Europe rose for a third week running, as central banks signaled that they may curb the pace of rate increases. Investor sentiment also received a boost from hopes that China might walk back its zero-COVID policies. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.51% higher. Germany’s DAX Index added 1.63%, France’s CAC 40 Index gained 2.29%, and Italy’s FTSE MIB Index advanced 3.34%.


• Operating conditions at Chinese factories deteriorated for the third straight month in October as COVID containment measures continued to take a toll on activity. The decline was only marginal as indicated by a 1.1-point rise in the Caixin/Markit Manufacturing PMI to 49.2. Production and new orders continued to decline but at a slower pace than in September. As demand dipped, work backlogs fell for the fourth time in five months, forcing goods-producing industries to slash payrolls for the seventh month running. Supplier delivery times, for their part, increased slightly, with vendor performance continuing to be affected by disruptions associated with COVID-19 lockdowns. Cost pressures continued to ease, output charges were again reduced “in a bid to stimulate sales and improve competitiveness”

• The Caixin/Markit Services PMI weakened from 49.3 in September to five months low of 48.4 in October “as ongoing efforts to stop the spread of COVID-19 disrupted business operations and weighed on demand”. New business eased for a second month in a row but this did not prevent payrolls from expanding at the fastest pace since May 2021, ending a streak of job losses stretching back to the start of the year

• Signs of progress in a longstanding auditing dispute between the U.S. and China also bolstered sentiment. U.S. audit officials completed their first on-site inspection round of Chinese companies ahead of schedule, with dozens of accounting inspectors scheduled to leave Hong Kong over the weekend, Bloomberg reported. The news was seen as a positive development in the yearslong standoff over the audit inspections of publicly traded companies in the U.S. that threatened to kick off hundreds of Chinese companies listed on U.S. exchanges. However, the U.S. will likely take its time to file an initial report on its findings and could seek additional information from China, analysts believe

• China’s stock markets rallied amid speculation that the country was preparing to relax its zero-tolerance approach to the coronavirus. The broad, capitalization-weighted Shanghai Composite Index gained 5.3% and the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, advanced 6.4%, Reuters reported

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