Economic Outlook – 7 November 2021

• Non-farm payrolls rose 531K in October, more than the +450K print expected by consensus. Adding to the good news, the prior month’s results were upgraded by a sizeable 235K. The private sector added 604K jobs. Employment in the goods segment sprang 108K thanks to gains in manufacturing (+60K), construction (+44K) and mining/logging (+4K). Services-producing industries, meanwhile, expanded payrolls by 496K, with notable increases for leisure/hospitality (+164K), professional/business services (+100K), education/health (+64K) and transportation/warehousing (+54K). Employment in the public sector retraced 73K. Average hourly earnings rose 4.9% YoY in October, in line with the median economist forecast and up from 4.6% the prior month. Released at the same time, the household survey (similar in methodology to Canada’s LFS) reported a 359K job gain in October. This increase, combined with an unchanged participation rate (+61.6%) meant the unemployment rate fell from 4.8% to a post-pandemic low of 4.6%. Full-time employment advanced 279K, while the ranks of part timers expanded 159K

• New orders for manufactured goods increased 0.2% in September to US$515.9 billion after rising 1.0% the prior month. New orders for transportation fell 2.8%. Ex-transportation, new orders rose 0.7%. Overall durable goods orders climbed 0.3% to US$261.4 billion while those for nondurable goods advanced 0.8% to US$254.5 billion. Orders for non-defence capital goods excluding aircraft rose 0.8% in the month, while shipments of such goods progressed 1.4%. Unfilled orders for manufactured durable goods grew 0.7% in September to US$1,247.3 billion.

• Initial jobless claims fell 14K to 269K (seasonally adjusted) in the week ending October 30. The advance number for seasonally adjusted insured unemployment (i.e., continued claims) fell 134K to 2,105K in the week ending October 23. The total number of continued weeks claimed for benefits in all programs for the week ending October 16 was 2,673 million, down 157.7K from the previous week

• Construction spending fell 0.5% in September to US$1,573.6 billion from US$15,582.0 in August. Residential construction sagged 0.4% to US$773.5 billion while private sector non-residential construction dropped 0.6% to US$454.6 billion. Public construction spending retreated 0.7% to US$343.7 billion. Despite declining over the past three months decline, total construction spending in September was still up 7.8% from 12 months before

• Labour productivity among nonfarm business employees fell 5.0% in the third quarter. According to U.S. Department of Labor statistics, this was the steepest quarterly decline since the second quarter of 1981. Hours worked rose 7.0% (annualized) while output grew 1.7%. Compensation per hour rose 2.9%. While the data are still distorted by the impact of the pandemic, they nonetheless show that unit labour costs soared 8.3% in the quarter, stoking concerns about the inflation outlook

• In October, the ISM Manufacturing PMI slipped three ticks to 60.8 from 61.1 the prior month. The Production index was little changed from the month before at 59.3 (-0.1). Among the five sub-components used to calculate the headline index, the Supplier Deliveries index registered the largest increase, jumping 2.2 points to 75.6, thus indicating that supply-chain bottlenecks remained significant. Given these supply issues, port congestions and long waiting time for materials, the Prices Paid index unsurprisingly rose 4.5 points to 85.7. The New Orders index was the weakest link in the report, falling 6.9 points to 59.8

• The services sector surprised on the upside in October as the PMI index printed at 66.7, overshooting the median analyst projection of 62. With a 4.8-point surge in October, the ISM Service index rose to an all-time high since data collection began in 1997. The Business Activity index sprang 7.5 points from a month earlier to 69.8. The New Orders index increased as well, climbing from 63.5 in September to 69.7. Supply-chain disruptions, transportation bottlenecks and labour shortages combined to drive the Supplier Deliveries index up 6.9 points to 75.7. The Employment index, meanwhile, slipped 1.4 points to 51.6. As was the case in the manufacturing sector, the Prices Paid index headed higher in the services sector as well, rising from 77.5 in September to 82.9 in October

• The Fed announced it will begin reducing the pace of its monthly bond purchases later this month, with reductions of $15 billion each month — $10 billion in Treasuries and $5 billion in mortgage-backed securities — from the current $120 billion a month that the central bank is buying. The Fed slightly altered its view on inflation, acknowledging that price increases have been more rapid and enduring than central bankers had forecast, but the central bank still used the controversial word transitory. Fed Chair Jerome Powell said he expects inflation to keep rising as supply issues continue and then start to pull back around the middle of 2022, at which time the bond purchases would conclude. The Federal Open Market Committee voted not to raise interest rates from their anchor near zero, a move expected by the market. Officials don’t envision rate hikes beginning until tapering has ended

• Stocks posted impressive weekly gains as a relatively dovish Federal Reserve policy meeting, healthy economic data, and a strong tail end to the earnings season all boosted sentiment toward equities. The Dow Jones Industrial Average, the S&P 500 Index, and the Nasdaq Composite all reached record highs. Technology stocks and small-caps were particularly strong, and growth shares outperformed value stocks. Oil prices dropped from their recent highs after Biden administration officials mentioned the possibility of releasing supply from the strategic petroleum reserve, hurting energy sector stocks

• In terms of data release, the CPI is out on Wednesday. Next week’s Consumer Price Index report for the month of October is unlikely to offer much of a reprieve on the inflation front. Consensus forecast is for a 0.6% MoM increase on the headline index and a monthly increase of 0.4% on the core index. If realized, this would put headline CPI inflation at 5.9% YoY and core CPI inflation a bit lower at 4.4% YoY

• Monthly Budget Statement is also out on Wednesday. Federal fiscal year 2021 ended on September 30, and the federal budget deficit totaled $2.7 trillion for the year. Although this was down from $3.1 trillion in FY 2020, it was still well-above the roughly $1 trillion budget deficit recorded in FY 2019. Next week’s budget statement for the month of October will be the first data point for this fiscal year’s budget deficit, and the red ink to recede markedly this year. The U.S. economy has improved significantly, and further improvement is to be expected in the year ahead as household and business incomes recover from their COVID-induced slump. In addition, many of the temporary, deficit-financed COVID relief programs of the past two years, such as the Paycheck Protection Program, the enhanced unemployment benefits and the direct household checks, have largely expired


• While market expectations had been for the Bank of England to raise rates to 0.25%, the Bank’s Monetary Policy Committee has by a vote of 7-2 decided to keep rates on hold at 0.1% for the moment. The next meeting is in Dec and if expectations had been for a rise, there will be even greater expectation for a rise next month. A rise this month was always something of an uphill task, given it meant moving on from last MPC meetings 9-0 vote to hold rates. Investors concerned about inflation and viewing the BoE Governor Bailey’s expressing his concerns about inflation as a hawkish signal will be disappointed, and the inflationary concerns are not set to fade anytime soon. The latest data puts inflation at 3.1%, well above the BoE target rate of 2% and inflation looks set to rise further over the autumn and winter as energy prices are passed through to consumers. It is possible that much of the inflation story is transitory, and that the base effect as well as frictional effects in the labour market opening up post COVID will pass over the course of 2022. But there have equally always been longer-term inflationary concerns as well, from the potential for above productivity justified wage rises seen in recent months becoming a widespread expectation, through to the ultimate impact of significant expansion of the monetary base

• With the Fed indicating that it is to begin winding down its Quantitative Easing program, it is also notable that the Bank of England, by a vote of 6-3, is not following suit. The UK programme of buying bonds (GBP 875bn Gilts, GBP 20bn in corporate bonds) is due to reach its target next month. The precise economic impact of the QE programme is open to some speculation (as highlighted in the House of Lords report on the subject earlier this year), but as a signal that they understand the inflationary pressure it could have been a useful measure. Without such a signal the MPC is left with either raising rates, giving lots of speeches that they understand people’s inflationary concerns or finding some new ways of reinforcing their credibility.


• In the Euro area, according to Eurostat, the volume of retail trade grew 0.3% in September from the previous month. Sales of non-food products declined 1.5%, while those of automotive fuels and of food, drinks and tobacco rose 1.1% and 0.7%, respectively. The calendar adjusted retail sales index increased by 2.5% in the euro area compared to September 2020

• Lagarde hardened her message on the central bank’s policy stance at an event in Lisbon, saying an interest rate hike is “very unlikely” next year and that financing conditions must remain favorable. “In our forward guidance on interest rates, we have clearly articulated the three conditions that need to be satisfied before rates will start to rise,” she said. “Despite the current inflation surge, the outlook for inflation over the medium term remains subdued, and thus these three conditions are very unlikely to be satisfied next year.”

• French and German industrial production fell unexpectedly in September, as supply chain bottlenecks caused shortages. In Germany, production declined 1.1% sequentially, after dropping 3.5% in August. Output in France slipped 1.3% MoM

• Shares in Europe rose on strong corporate earnings results and signals from the European Central Bank (ECB) that interest rates would stay low for some time. In local currency terms, the pan-European STOXX Europe 600 Index ended 1.67% higher. Germany’s Xetra DAX Index gained 2.33%, France’s CAC 40 Index rallied 3.08%, and Italy’s FTSE MIB Index climbed 3.42%. The UK’s FTSE 100 Index advanced 1.25%, as the UK pound weakened against the U.S. dollar after the Bank of England (BoE) unexpectedly kept interest rates unchanged


• China’s official manufacturing Purchasing Managers’ Index fell to a worse-than-expected 49.2 in October from 49.6 in September, below the 50-point mark separating growth from contraction. October marked the second month that factory activity contracted and was the latest sign that the economy was losing steam after a strong recovery from the pandemic. In addition to slowing industrial growth, the troubled property sector, and tepid consumption, China is also grappling with a worsening power crunch. Last week, miners in the coal-producing provinces of Shanxi, Shaanxi, and Inner Mongolia pledged to cut prices after Beijing intervened in the sector to alleviate the energy crisis

• Kaisa Group Holdings became the latest developer in China’s USD 5 trillion property sector to reveal that it was having debt problems. The Shenzhen-based company, which has the most offshore debt coming due over the next year in the sector after China Evergrande Group, reportedly put 18 property projects valued at USD 12.8 billion on the auction block. The Kaisa asset sale plan follows a missed payment on a wealth management product and USD 11 billion of dollar bonds from the company, which guaranteed the wealth management product and said it was facing unprecedented liquidity pressure

• China’s property sector is grappling with a deepening liquidity crisis reflected in a wave of offshore debt defaults, credit rating downgrades, and selling in the stocks and bonds of major developers. Seven of the top 10 China-listed developers by revenue recorded steep declines in profitability in the July-to-September quarter, which has increased pressure on Beijing to support the stressed sector. Earlier in the week, Premier Li Keqiang was quoted in state media warning of downward pressure in the economy, though Li said that policymakers would keep economic operations within a reasonable range and take measures to support industrial sectors

• Chinese markets recorded a weekly loss. The CSI 300 Index slipped 1.4% and the Shanghai Composite Index retreated 1.6% as headlines about the beleaguered property sector and a growing COVID-19 outbreak across the country dampened sentiment. Renewed restrictions in many places raised worries about supply chain constraints dampening the country’s growth outlook as infections spiked near a three-month high. Reflecting the flight to safety, the yield on the 10-year Chinese government bond fell 8 basis points to 2.908% from the previous week’s 2.989%, while the yuan rose 0.16% to 6.3995 against the U.S. dollar

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