Economic Outlook – 9 May 2021


• Construction spending rose 0.2% to US$1,513.1 billion, which is 5.0% above the February 2020 level. Residential spending increased 1.7% MoM to a seasonally adjusted annual rate of US$725.2 billion. Spending on new single-family homes rose 2.0% m/m and 26.7% y/y. Spending on new multi-family homes dipped 0.3% MoM. Private non-residential activity fell 0.9% MoM to US$444.0 billion. Public expenditures declined 1.5% to US$343.9 billion

• The ISM Manufacturing PMI fell four percentage points in April to 60.7. This was still well above the index’s long-term average of 53.1 for the past 61 years, which suggested that the manufacturing sector was still expanding strongly. Given the well-documented supply chain problems and shortages of microchips, processors, and plastic and rubber products, it came as no surprise to see the Production Index drop from 68.1 in March to 62.5 in April. The Prices Paid Index rose four percentage points to 89.6 in April. This was well above its median print (62) for the past 61 years. It is worth noting that the index has topped the 89.6 mark only 2% of the time (on 14 occasions) over that horizon. The Employment Index fell 4.5 points to 55.1 in April but held above the 50.6 threshold for a fifth straight month. (This level is usually consistent with an increase in the Bureau of Labor Statistics data on manufacturing employment.) The Supplier Deliveries Index slid 1.6 points to 75.0, but this was still its third-highest reading since 1980. The New Orders Index fell 3.7 points to 64.3 in April from 68.0 in March, which was still a solid pace

• The Services Index reflected a sector affected by transportation bottlenecks and other supply chain problems rather than softer demand. The Supply Delivery Index rose 5.1 points in April to 66.1, its fourth-highest reading on record, indicating longer delivery delays. This development rippled through business activity and translated into a 6.7 points drop in the Business Activity Index to 62.7 in the month. Prices paid in the services sector, too, were on the rise, as indicated by the 76.8 print (+2.8 points) for the corresponding sub-index. The New Orders Index remained comfortably above its average (57.9) for the past 11 years, though it did drop to 63.2 in April from 67.2 in March. Employment slipped 1.6 points to 58.8 in the month. In this context, the headline Services Index edged down from 63.7 in March to 62.7 in April

• Nonfarm payrolls rose just 266K in April, a lot less than the +1,000K print expected by consensus. The negative surprise was compounded by a 78K downward revision to the prior month’s results. The private sector added 218K jobs. Employment in the goods sector fell 16K as a decline for manufacturing (-18K) was only partially offset by a small gain for mining/logging (+2K). Employment in the construction segment was flat. Services-producing industries, meanwhile, expanded payrolls by 234K thanks in large part to a 331K jump in the leisure/hospitality category. Alternatively, there were retreats observed for professional/business services (-79K), transportation/warehousing (-74K) and retail trade (-15K). Employment in the public sector advanced 44K as state/local administrations added 39K jobs. Average hourly earnings rose just 0.3% on a 12-month basis, down from 4.2% the prior month.

• Non-farm-payrolls came in a lot weaker than expected in April. As COVID-19 caseloads continued to ease and several states gradually reopened their economies, several analysts (us included) had expected a blockbuster print in the month. There were indeed gains recorded in some of the sectors most affected by social distancing measures, notably leisure/hospitality. Without the latter category, however, payrolls were down month on month. Weak hiring apparently did not result from lack of demand for workers on the part of businesses; the latest JOLTS survey showed job openings standing at a 25-month high. Rather, it seems businesses are having problems finding suitable candidates at the moment. Indeed, according to a recent survey compiled by the National Federation of Independent Businesses, 42% of small businesses had difficulty in filling one or more vacant positions in April, a record high. This may seem surprising at a time when payrolls remain roughly 8 million below their pre-crisis level. In fact, several reasons can explain this phenomenon. The first is lack of skill transferability. For the most part, the people who had yet to return to work after losing their job during the pandemic used to be employed in the sectors hardest hit by social distancing measures. Their skill sets might not fit the industries that have fully recovered from the crisis and where demand for workers is highest at the moment. In sectors where wages are relatively low, the generous unemployment handouts provided by Washington might also be acting as a disincentive to return to work. If this is the case, “artificial” labour shortages could persist until enhancements to unemployment insurance are phased out (i.e. in September)

• The goods and services trade deficit amounted to US$74.4 billion, up US$3.9 billion from a revised US$70.5 billion in February. Trading activity picked up in the month despite continued transportation bottlenecks and port congestion. Imports of goods rose US$15.3 billion (+6.98%) to US$234.4 billion. All six of the broad import categories recorded significant increases in the month. Among these, capital goods rose 5.6% (boosted by a 26.1% increase in semiconductors), consumer goods 7.4%, industrial supplies 7.9%, and automotive vehicles 7.3%. Goods exports grew US$11.7 billion (+8.9%) to US$142.9 on the back of broad-based increases. These exports topped their pre-pandemic levels in the month. The increase in the goods and services deficit reflected a US$3.6- billion increase in the goods deficit to US$91.6 billion and a $0.3-billion decrease in the services surplus to $17.1 billion

• Initial jobless claims fell 92K to 498K in the week ending May 1. The previous week’s level was revised up from 535K to 590K. The advance number for seasonally adjusted insured unemployment (i.e., continued claims) increased 37K to 3,690K in the week ending April 24. Data on claims for benefits under all programs, including those introduced since the start of the health crisis (i.e., Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation), are available only after a longer lag. In the week ending April 17, continued claims for UI benefits across all programs fell 405K to 16.2 million

• The Fed said that rising asset prices in the stock market and elsewhere are increasingly threatening the financial system. In its semiannual Financial Stability Report, the central bank said that while the system has remained stable even through the COVID-19 pandemic, a tailing off of the aggressive run on stocks could be dangerous. The Fed said that high asset prices are partly a reflection of the continued low level of US Treasury yields. However, valuations for some assets are elevated relative to historical norms even when using measures that account for Treasury yields. In this setting, asset prices may be vulnerable to significant declines should the appetite for risk fall

• In April 2020, two dozen companies in the S&P 500 Index reduced or suspended their dividends, and more suspensions and dividends came later in the year. In April 2021, the opposite happened: Thirty-three companies in the S&P 500 announced dividend increases, and no companies decreased or suspended dividends. Most important, 11 companies that suspended dividends in 2020 began paying again in April, and three of them are paying higher dividends than they were before they suspended payments. S&P estimates that the overall dividend payout for the S&P 500 will increase 5% in 2021. That would mean a payout to investors of about $515 billion, up from $483 billion in 2020

• US Secretary of the Treasury Janet Yellen conceded that interest rates might have to rise to keep a lid on the burgeoning growth of the US economy brought on in part by massive government stimulus spending. Inflation concerns have arisen due to the spending and the rapid growth, but US Federal Reserve officials have said that after a brief rise this year, price pressures are likely to ebb. However, Yellen later tempered her initial statement back by saying she is largely not particularly concerned about inflation becoming a problem, as price increases during the recovery should be transitory

• The major indexes produced mixed returns across a wide range as a Friday rally erased some losses from early in the week. The narrowly focused Dow Jones Industrial Average fared best, while the technology-heavy Nasdaq Composite Index recorded its worst weekly loss in two months. Technology shares underperformed within the S&P 500 Index, along with consumer discretionary, utilities, and real estate stocks. Value stocks outperformed their growth counterparts for the third week in a row

• The consumer prices is out and is expected to continue to firm in April. While frequently purchased items like food and gasoline were more expensive last month, the overall inflation story continues to very much be a reawakening of the service sector and increasingly constrained supply giving way to price pressure. We expect to see a continued pickup in services inflation, as demand resumes and nudges prices higher. Supply problems and shortages continue to intensify and are adding to price pressure across the goods sector. This is particularly visible in the used auto market recently

• Retail sales data is out on Friday and, in the recent past, have ebbed and flowed with stimulus support in recent months. Direct checks from the recent COVID-relief packages boosted spending in the months they were delivered (January & March) and what we’ll know on Friday is if consumers clamped down on spending in April as they did following stimulus in February. Consumers are expected to continue to spend and forecast retail sales rose 1.9% last month. The improved public health situation from February helped boost activity. Separately released data show auto sales rose to a level not seen since 2005 in April. Outside autos, sales likely rose 1.2%. High-frequency data from OpenTable and Google suggest households visited restaurants and retail locations last month at the fastest clip since the start of the pandemic and is indicative of an improvement in sale


• The Bank of England’s Monetary Policy Committee has kept interest rates at their record low of 0.1 percent (next review 24 June), and it has indicated that it intends to continue to progress with the programme of quantitative easing (by a majority of 8-1; the Bank’s outgoing Chief Economist voted to reduce holdings) up to the present limit of GBP 895bn (GBP 875bn in government debt, GBP 20bn in investment grade corporate debt). The MPC noted that the economy recovery was stronger than it had seen at its last meeting in February, and that risky asset prices had increased, although bond yields had stabilised. All of this is in line with broader market expectations and forecasts

• The Bank has noted that the economic boom is going to be underpinned by a significant rise in consumer spending, largely fuelled by redirecting consumer income from savings to spending, as well as by the spending of savings that have been accumulated over the past year. It estimates that 10% of the additional accumulated savings are likely to be spent

• British construction activity expanded quickly last month, almost matching the six-and-a-half-year record struck in March as a lifting of coronavirus lockdown measures boosted new orders, a survey showed on Friday. The IHS Markit/CIPS Construction Purchasing Managers’ Index (PMI) eased to 61.6 in April from 61.7 in March, despite the survey’s gauge of new orders rising to its highest level since September 2014. A Reuters poll of economists had pointed to a reading of 62.3. “The UK construction sector is experiencing its strongest growth phase for six-and-a-half years, with the recovery now evenly balanced across the house building, commercial and civil engineering categories,” said Tim Moore, economics director at data company IHS Markit, which compiled the survey

• Demand for workers from British employers soared this month at the fastest rate since the late 1990s as much of the economy reopened following the latest coronavirus lockdown, a survey of recruitment consultants showed on Friday. The monthly index of demand for staff from the Recruitment and Employment Confederation (REC) and accountants KPMG rose this month to its highest level in just over 23 years. Permanent staff placements grew at the fastest rate since October 1997. Non-essential retailers in England reopened on April 12 along with pubs and restaurants operating outdoors, and from May 17 more restrictions are due to be lifted to allow indoor hospitality, performances and sporting events. While the labour market remains a long way from its pre-pandemic state, the REC survey adds to signs that a swift recovery is underway, helped by Britain’s swift roll-out of COVID-19 vaccines.


• The volume of retail trade rose 2.7% in March after growing 4.2% the previous month. Sales were up 4.2% for non-food products and 1.0% for food, drinks and tobacco, but were down 2.9% for automotive fuels. According to Eurostat, relative to 12 months earlier, the calendar-adjusted volume of retail trade in the Eurozone increased 12.0%

• German manufacturing orders in March rose 3.0% sequentially, beating a consensus estimate for 1.7% and accelerating from a 1.2% expansion in February. Exports from Germany continued to recover in March despite the continuation of lockdown restrictions, rising 1.2% sequentially in adjusted terms

• Shares in Europe climbed on stronger-than-expected earnings results and growing confidence in an economic recovery. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.72% higher. The German and French stock indexes rose by more than 1.5%. Italy’s FTSE MIB Index added 1.95%


• The Caixin services Purchasing Managers’ Index rose to 56.3 in April, the fastest growth pace this year for the private survey. Domestic tourism surged over the five-day Labor Day holiday and surpassed pre-pandemic levels, according to the government, though revenue over the period fell short of forecasts. However, box office and cinema admissions set new records, reflecting strong pent-up demand among Chinese consumers for entertainment and other services. Among other economic readings, China reported that April exports surged a stronger-than-expected 32.3% in dollar terms from a year earlier, when the pandemic disrupted the economy, while imports increased roughly 43%. Stripping out the base effect, the two-year growth rate rose to 16.8% in April, much stronger than pre-pandemic levels

• Calm returned to credit markets a week after Beijing offered financial support to troubled state-owned China Huarong Asset Management. Given the government’s recent focus on deleveraging, many investors have braced themselves for an uptick in corporate defaults in the coming months. In foreign exchange trading, few analysts appeared concerned over China’s recent currency depreciation. On the other hand, many analysts expect continued capital inflows into China and see a stronger currency as a greater risk. For the week, the renminbi strengthened slightly against the U.S. dollar and closed at 6.454 per dollar

• Chinese stocks fell in a holiday-shortened week. The large-cap CSI 300 Index fell 2.5% from the previous Friday, while the Shanghai Stock Exchange Composite Index shed 0.8%. Mainland markets reopened Thursday after being closed Monday through Wednesday for the Labor Day holiday. Consumer stocks were among the best performers as preliminary holiday sales and travel data were positively received by investors, though a 40% surge in tourism in Macau was seen as disappointing. Select pharmaceutical names fell after the U.S. announced that it might waive COVID-19 vaccine-related intellectual property rights, a move that would increase competition for many vaccine makers

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