September 03, 2021 | 12:30
It was not a pretty week for the global economic outlook. A variety of major economies delivered underwhelming—or downright disappointing—results for August, as supply chain stresses and the Delta variant weighed on activity. Even Mother Nature got into the act, as Hurricane Ida and her remnants tore through a wide range of U.S. cities and flared energy prices higher. And, not to be forgotten, the week began with the sorry sight of the last U.S. troops leaving Kabul. Yet, even with a generally downbeat run of economic data, 10-year Treasury yields nudged slightly higher, at least in part on ongoing inflation concerns. But that didn’t halt the equity market train, as the MSCI World marched to record highs and was up roughly 1% for the week. That capped off a strong summer for stocks—had one sold in May, gone away, and come back on Labour Day, one would have missed out on a hearty 8.5% rise in the S&P 500.
On the economy, the world’s biggest ended the week with a decidedly dull jobs report. U.S. payroll growth cooled considerably to a modest 235,000, albeit after upward revisions to the two prior months (above 1 million gains on average). Delta’s impact was readily evident, as leisure & hospitality added precisely zero new jobs in the month, while retail trade, health care and government all fell. However, the jobs data were not all bad, as the household survey reported a solid 509,000 rise, the jobless rate fell two ticks to 5.2% (with the broader measure falling faster to 8.8%), and total hours worked edged up again (and are headed for a better than 4% a.r. rise in Q3).
The sluggish payrolls gain is almost certainly a story of a weak supply of workers, rather than a lack of demand for them, and that mismatch is reflected in rising wages. Average hourly earnings were well above consensus at +0.6% and 4.3% y/y. And the meaty reading is not due to low “base effects”, as they were also robust last summer. In fact, we estimate that the two-year trend in earnings is now running at its hottest pace since 1983 at just above 4.5% (not including the wild readings in the middle of last year’s lockdowns). Given that the number of those officially reported as unemployed has dropped below 8.4 million, at a time when there are more than 10 million job openings, points to ongoing upward wage pressures ahead.
Aside from the key jobs data, the secondary releases this week were mixed. The big downer was yet another drop in auto sales to just 13.1 million units (a.r.) last month, miles below the April peak of 18.5 million, and the lowest non-pandemic reading in 10 years. The auto sector is the tip of the spear for the chip shortage, and further announced production cutbacks for September suggest the pain will deepen. Somewhat blunting the downbeat news were solid ISM readings from both factories (59.9) and services (61.7) last month, pointing to still-solid activity in late summer. But it’s now clear that the mixed picture is not quite living up to previously rollicking expectations for growth, prompting us to shave our GDP forecast for both Q3 (to 5.0% from 6.0%) and Q4 (to 4.0% from 5.0%). This two-step reduction trims the annual estimate for 2021 to 5.8% (from 6.0%), but next year as well (to 3.5% from 4.0%). Fundamentally, we believe this milder forecast reflects the balance of risks more appropriately—risks that the recent deep slide in U.S. consumer confidence are loudly signaling.
The world’s second largest economy also flashed some signs of strain this week, with the blame again pointed squarely at supply chain issues and the spread of Delta. China’s August PMIs almost all landed on the low side of expectations, and on the wrong side of the key 50 level in many cases. Most notably, the private sector services PMI fell more than 8 points to 46.7 last month, its lowest ebb since April/20—not good. Consumers appear to be turning much more cautious, reinforcing the notable cooldown seen earlier in July’s retail sales sag. But even the factory PMIs were struggling last month around the 50 level (lower for the private measure), dinged by the recent port shutdown, as well as some moderation in demand for goods.
Japan mostly ran against the grain this week, with better-than-expected data for retail sales, industrial production and its jobless rate (down to 2.8%). Alas, these figures were all for July, and the more recent PMIs for August came in light of expectations. The week ended on a sour note, with the services PMI faltering to just 42.9 (from 47.4 in July), the lowest since May/20 and a sign of consumers in yet another economy turning cautious. Just to add a dash of spice to the mix, Japan’s PM Suga promptly resigned on Friday, a year after he took office. Markets were unperturbed, with the yen finishing the week roughly where it began at just under 110/US$.
The Euro Area was dealing with an entirely different sort of economic concern than most other major economies this week. Yes, the August PMIs also took a small step back and were a bit below the initial estimates. But, not unlike the U.S. results, both factories (61.4) and services (59.0) were still at solid levels. And while retail sales took a step back in July, a flattening in virus case counts leaves the continent in a different spot than others. Instead, the concern here was a surprise pop in inflation last month to 3.0% y/y (from 2.2%) on the headline, and to 1.6% (from just 0.7%) on the core. Europe hasn’t seen a 3% inflation reading since the dark days (for them) of 2011—a year the ECB opted to hike rates twice, in the teeth of the euro crisis. While we don’t expect this inflation bump to alter policy, it will at least make next week’s meeting a bit more lively.
Finally, the smallest member of the G7 delivered the biggest clunker this week. Canada’s Q2 GDP was supposed to be a bit of a snoozer, as StatCan had earlier informed one and all that the economy had grown about 0.6% (or roughly 2.5% annualized) in the quarter. Lo and behold, and after a few monthly revisions lower, the statistical agency duly reported that GDP in fact fell at a 1.1% annual pace in the spring quarter—the only major economy to post a setback in Q2 (U.S. GDP rose 6.6%, the Euro Area 8.2%). In hindsight—and ours is even better than 20/20—it’s no shock activity stumbled in the quarter. After all, much of the country was heavily restricted by the third wave through the spring, auto production was dented by the chip shortage, and home sales climbed down from the mountain. But perhaps even more disappointing was the companion news that July GDP also dropped 0.4%—a month that was supposed to mark the economy's grand reopening.
The triple-header of downward revisions to spring activity, sour July GDP, and further slippage in auto production and sales, as well as softer home sales, triggered a cut in our forecast. We reduced the Q3 estimate to 3.5% (from 6.0%; a much bigger cut than we would normally like to make), and we didn’t offset it with a big upward push later on. As a result, we now look for GDP to rise 5.0% in 2021, a full 1 point cut from the earlier estimate, while holding next year steady at 4.5%. And note that we were right in line with the Bank of Canada previously, and a snick below consensus—so we may have been the first to cut the 2021 call, but we certainly won’t be the last. Arriving in the heart of the election campaign, the GDP report will be greeted in some quarters as a skunk at a picnic and will make the Bank's communications a challenge at next week’s rate decision. We suspect the Bank will highlight the economic uncertainties, and punt until tapering further at the October meeting.
Tallying up this week’s wave of August info, we are slightly trimming our global growth estimate for this year another tick to 5.8% but maintaining next year at 5.0%. Those are still very robust readings and compare with a typical year of something closer to 3% growth. But after the ebullient expectations earlier this year, it’s the direction that’s important here, and the risks are still tilted a bit lower.