Economic Outlook – 9 January 2022


• Nonfarm payrolls rose just 199K in December, a lot less than the +450K figure expected by consensus. Partially compensating for this disappointing result, the prior months’ results were upgraded a massive 141K. The private sector added 211K jobs. Employment in the goods segment sprang 54K thanks to gain in manufacturing (+ 26K), construction (+22K) and mining/logging (+6K). Services-producing industries, meanwhile, expanded payrolls by 157K, with notable increases for leisure/hospitality (+53K), professional/business services (+43K), transportation/warehousing (+19K) and wholesale trade (+14K). Alternatively, the retail sector signaled minor job losses (-2K). Employment in the public sector retraced 12K. Average hourly earnings rose 4.7% YoY in December, four ticks less than in the prior month but still way ahead of analysts’ forecast calling for +4.2%

• The household survey painted a much more optimistic picture of the situation prevailing on the labour market, with a reported employment gain of 651K. This result, combined with an unchanged participation rate (61.9%), allowed the unemployment rate to drop from 4.2% to a post-pandemic low of 3.9%. Full-time
employment soared 803K, while the ranks of part-timers shrank 275K

• The two employment reports conveyed wildly different messages. Non-farm payrolls came in weaker than expected and that even after accounting for a sizeable revision to the prior months’ numbers. The household survey, on the other hand, showed much stronger gains. But which survey is more reliable? Judging by the pandemic track record, the household survey appears to be a better gauge of the situation on the job market, at least at the time of initial release. The establishment poll, for its part, has had a tendency to underestimate job gains before gradually revising them higher. Case in point, payroll growth estimates have been revised up by more than a million job in 2021 as a whole, their highest ever upward adjustment in a single year. Perhaps falling response rates are to blame for this

• The ISM Manufacturing PMI fell from 61.1 to an 11-month low of 58.7. Despite the pullback, the index remained at a level consistent with healthy expansion in the sector. It is also important to note that the monthly decline was due in large part to the easing of supply chain constraints, an undoubtedly positive development. Indeed, the sub-index tracking supplier delivery times dropped 7.3 points to a 13-month low of 63.9. The production sub-index (59.2 vs. 61.5 the prior month) and the new orders gauge (60.4 vs. 61.5) retraced as well, albeit to a lesser extent. Other signs of improving supply conditions, also, were visible in the report: The customer inventories sub-index sprang from 25.1 to 31.7, while the prices paid tracker slipped from 82.4 to 68.2. Comments collected from survey respondents highlighted greater ease in sourcing raw materials and little relief regarding input prices. Nonetheless, work backlogs (62.8 vs. 61.9 the prior month) continued to lengthen at a brisk clip. This encouraged U.S. factories to expand payrolls (54.2 vs. 53.3) at the fastest pace since April

• The ISM Non-Manufacturing PMI fell abruptly in December from a record-high 69.1 to 62.0. This was significantly below consensus expectations (67.0) but still comfortably above this indicator’s pre-pandemic levels and consistent with a solid pace of growth in the services economy. The new orders tracker (61.5 vs. 69.7 the prior month) and the business activity sub-index (67.6 vs. 74.6) retraced, as did the employment gauge (54.9 vs. 56.5). Contrary to what had been observed in the manufacturing sector, the report indicated that inflationary pressures continued to mount among service providers. The prices paid gauge climbed from 82.3 to 82.5, just a few tenths short of the all-time high of 82.9 reached in October. Of the 18 industries covered, 16 reported growth in the month

• The trade deficit widened $67.2 billion to $80.2 billion, drawing close to the all-time high of $81.4 billion reached in September. The increase was due in part to a 5.1% jump in goods imports to a record $253.2 billion, led by finished metal shapes (+$1.5 billion), crude oil (+$1.3 billion), pharmaceutical preparations (+$0.8 billion), and toys/games/sporting goods (+$0.6 billion). Goods exports, for their part, shrank 1.8% to $155.9 billion. With imports expanding and exports contracting, the goods trade deficit swelled to an unprecedented $99.0 billion. On a country-by-country basis, the U.S. goods deficit widened with Canada (from $3.1 billion to $5.4 billion), the European Union (from $16.6 billion to $19.4 billion), and Mexico (from $9.7 billion to $11.0 billion)

• According to the S&P CoreLogic Case-Shiller 20-City Index, home prices rose for the 115th consecutive month in October, springing a seasonally adjusted 0.92% after climbing 0.96% the prior month. Although solid by historical standards, this monthly gain was still the smallest recorded in 15 months, 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 September, led by Miami (+1.85%), Tampa Bay (+1.82%), and Las Vegas (+1.75%). YoY, the index was up 18.4%, down from 19.1% the prior month but still one of the sharpest 12-month jumps ever recorded

• Construction spending advanced 0.4% in November, the same as in October (initially estimated at +0.2%). Public expenditures edged down 0.2% while spending in the private sector sprang 0.6%. Higher private outlays were due almost entirely to an increase in the residential segment (+0.9%). Construction in the non-residential category, meanwhile, inched up 0.1%. Residential construction remains far ahead of non-residential construction since the start of the pandemic. Relative to their pre-crisis levels, while outlays are up 30.6% in the former, they are down 8.3% in the latter

• The Job Openings and Labor Turnover Survey (JOLTS) showed positions waiting to be filled fell a little in November from 11,091K to 10,562K. Despite the slight dec line, the ratio of job offers per unemployed person continued to rise, going from 1.49 to an all-time high of 1.54. The report also showed that hires jumped from 6,506K to 6,697K, a level 12.0 % above this indicator’s pre-pandemic peak. Total separations, for their part, sprang from 5,891K to 6,273K as quits reached a new record high of 4,527K. Indeed, the quit rate —the number of voluntary separations as percent of total employment —ticked up to 3.0%, its highest level ever. The high number of quits is encouraging in that it may reflect growing confidence among employees and stiffer competition among employers

• US jobs data offered decidedly mixed signals. The monthly payrolls report showed that employers added only 199,000 jobs in December, roughly half of consensus expectations. Average weekly hours worked also fell slightly. The household survey, on the other hand, showed that the unemployment rate fell to 3.9%, lower than the 4.2% expected and near levels seen just before the pandemic. Average hourly earnings rose 0.6% in December, beating expectations for a 0.4% gain. The conflicting data suggested that many Americans were choosing self-employment, especially considering the record 4.5 million people quitting their jobs in November.

• The Federal Reserve at its December meeting discussed plans to cut the amount of bonds it is holding, with members saying that a reduction in the balance sheet will likely start sometime after the central bank starts raising interest rates, according to minutes released. While officials did not determine when the Fed will start rolling off the nearly $8.3 trillion in bonds it is holding, statements out of the meeting indicated that process could start in 2022, possibly in the next several months, which is earlier than expected. Officials said they foresee up to three quarter-percentage-point rate increases in 2022, as well as another three hikes in 2023 and two more than the year after that. The market currently expects the central bank to start raising its benchmark interest rate in March

• The S&P 500 Index rose 26.9% in 2021, marking the benchmark’s third straight positive year. The Dow and Nasdaq also notched three-year winning streaks, gaining 18.7% and 21.4% for the year, respectively. The S&P 500 notched 70 record closes this year, the second-highest annual tally behind 1995′s 77 closing highs, posting at least one new record close every month since November 2020. The longest span without a new high in 2021 was 33 trading days between record closes on 2 September and 21 October. Energy and real estate were the best-performing sectors in the S&P 500 this year, surging more than 40% each. Tech and financials also rose more than 30%. The MSCI World Index rose 20.1%. The estimated year-over-year earnings growth rate for 2021 was 45.1%, according to FactSet, which marked the highest annual earnings growth rate for the index since it began tracking the metric in 2008. According to Bank of America’s Flow Show report, global equities attracted a record $949 billion of inflows in 2021, exceeding the cumulative inflow of the past two decades

• In terms of data release, CPI is out on Wednesday. Elevated demand for goods coupled with snarled supply chains has led to the highest inflation that the United States has seen in a generation. November’s consumer price index (CPI) rose 6.8% over the year, the largest annual increase since 1982. Price pressures have broadened out beyond goods categories, with services inflation starting to reflect the pandemic’s effects on housing costs and medical care. The acceleration in service sector prices amid stubbornly high goods inflation has created a challenging environment for consumers and policymakers alike

• Retail sales is out on Friday. Consumers are feeling the pressure from inflation. Retail sales came in well-below expectations in November, rising just 0.3% over the month. Higher prices for necessities, such as food and gas, have forced hard choices in more discretionary categories, such as electronics & appliances and department stores during the holiday shopping season. However, it is likely at least some consumers’ holiday shopping was pulled forward, heeding advice from well-publicized supply chain issues and aggressive messaging from retailers


• UK composite PMI’s remained positive but fell away in December to 53.6 as concerns over the Omicron variant slowed face to face contacts. The UK economy, with its significant orientation to services, will naturally be feeling this impact particularly acutely. But the good news is that with Omicron looking likely to have less impact than initially feared, a rapid reversal is to be expected in Jan and into the spring. Cost burdens remain problematic, and expectations of slowly improving supply chain constraints point to this being an ongoing concern throughout at least the first half of 2022. Inflation is also expected to tick upwards, largely driven by higher energy prices and increases in salaries

• Longer term UK Businesses are optimistic about prospects for 2022, with reports of a strong pipeline of work (although the hard hit sectors of restaurants and hotels as well as entertainment are continuing to take longer to recover). This is important as business investment, chiefly through spending a portion of the extra pandemic accumulated saving of £240 billion, is the critical driver of GDP growth. One of the more positive results of all of this is that PMI’s indicate that the employment market is expected to remain good, with businesses reporting their intention to increase hiring as the year progresses

• The UK’s FTSE 100 Index gained 1.36% as banks and energy—industries that include some of the index’s largest stocks—rallied


• Inflation in the eurozone accelerated to a record level in December, driven by a surge in energy and food costs. Consumer prices rose 5% year over year—an acceleration from the 4.9% inflation rate registered in November—according to the European Union’s harmonized index. German inflation came in near a 30-year high, prompting Finance Minister Christian Lindner to announce that the government was considering financial aid for lower-income households to pay for rising heating bills

• German factory orders rebounded more than expected in November, rising 3.7% sequentially in seasonally adjusted terms, on increased international demand for capital and intermediate goods

• IHS Markit’s Composite Purchasing Managers’ Index (PMI) fell to 53.3 from 55.4 in November—a downward revision from the initial reading of 53.4 and the lowest level since March. (PMI readings greater than 50 indicate an expansion in activity.) Inflation remained elevated at the end of 2021, with input and output cost increases coming in just below November’s record levels

• Shares in Europe pulled back amid worries that central banks may reduce asset purchases and raise interest rates at a faster pace to contain persistent inflation. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.32% lower. The main equity indexes in Germany, France, and Italy advanced


• The Caixin/Markit Manufacturing PMI for China swung back into expansion territory in December, but only just so, as it rose from 49.9 to 50.9. Output growth (52.7 vs. 50.1 the prior month) was the most sustained since December 20 20 despite new orders rising only marginally. New work from abroad was particularly subdued with a number of firms indicating “that the global pandemic and difficulties in shipping items continued to impact external sales”. Employment retraced for the fifth month in row and at its fastest pace since February. Factory inflation eased as input prices rose the least in 19 months. Finally, supplier lead times lengthened at the slowest rate in nine months, with purchasing managers reporting “signs of supply chains moving closer to stabilising”

• The Caixin/Markit Services PMI improved from 52.1 in November to 53.1 in December as firms saw both business activity and new orders grow at a faster rate

• China’s cash-strapped property developers, which are grappling with an unprecedented liquidity squeeze due to a housing slump and high debt levels, continued to make headlines. China Evergrande, the world’s most indebted developer with over USD 300 billion in borrowings, said it would seek approval for a payment delay on one of its yuan-denominated bonds at a meeting with creditors over the weekend. Evergrande has not yet missed any payments on its onshore bonds, which are more senior than the offshore debt, after missing USD 82.5 million in offshore interest payments last month

• Shimao Property failed to pay off part of a local loan after its creditor demanded early repayment, causing a sell-off in its bonds and shares. Guangzhou R&F Properties said it did not have enough funds to buy back a USD 725 million bond as the developer’s asset sales failed to come through as planned. Kaisa Group, which became the first Chinese developer to default on its dollar bonds in 2015, is under pressure from local authorities to repay investors in its wealth management products, Reuters reported. Kaisa, which defaulted on a USD 400 million bond in December, has started restructuring USD 12 billion in offshore debt out of liabilities totaling nearly USD 20 billion

• Central bank data showed that China’s foreign exchange reserves rose by USD 28 billion in December to USD 3.25 trillion, boosted by stronger capital inflows

• Chinese stocks fell for the week. The CSI 300 Index slid 2.3%, and the Shanghai Composite Index shed 1.7% amid ongoing turmoil in the property sector and the U.S. Federal Reserve’s hawkish tilt. The yuan posted its biggest weekly drop since mid-September, reflecting expectations of U.S. monetary tightening. The currency struck a three-week low of 6.3832 against the U.S. dollar before recovering to 6.376

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