OVERVIEW: OUTLOOK REMAINS STABLE
GDP growth has likely lost some momentum in the third quarter, after accelerating slightly in Q2 on the back of stronger private consumption and rebounding exports. In August, the Chicago Fed National Activity Index—a leading indicator for GDP—moderated notably from July due to weaker industrial output and private consumption activity. Moreover, consumer confidence dropped to its lowest level since February in August, while the increase in nonfarm payrolls eased notably in the same month and average retail sales declined in July–August—all further pointing to a slowdown in private consumption in the quarter. Furthermore, despite remaining upbeat in July–August, the ISM manufacturing PMI was below Q2’s average. On the Covid-19 front, daily new cases of the virus have remained elevated in recent weeks, despite solid vaccination progress, which is likely dampening GDP prospects for Q4.
GDP growth has likely lost some momentum in the third quarter, after accelerating slightly in Q2 on the back of stronger private consumption and rebounding exports. In August, the Chicago Fed National Activity Index—a leading indicator for GDP—moderated notably from July due to weaker industrial output and private consumption activity. Moreover, consumer confidence dropped to its lowest level since February in August, while the increase in nonfarm payrolls eased notably in the same month and average retail sales declined in July–August—all further pointing to a slowdown in private consumption in the quarter. Furthermore, despite remaining upbeat in July–August, the ISM manufacturing PMI was below Q2’s average. On the Covid-19 front, daily new cases of the virus have remained elevated in recent weeks, despite solid vaccination progress, which is likely dampening GDP prospects for Q4.
GDP will expand rapidly this year as the impact of the pandemic fades and the labor market recovers. In 2022, growth should moderate on a less favorable base effect, but recovering household consumption and pentup demand will likely keep momentum upbeat nonetheless. Uncertainty over new Covid-19 variants and ongoing tense relations with China pose downside risks. FocusEconomics panelists see GDP growing 6.1% in 2021. In 2022, our panel sees the economy expanding 4.1%, which is unchanged from the previous month’s forecast. • Inflation ticked down to 5.3% in August from 5.4% in July. This year, inflation is seen overshooting the Fed’s 2.0% target due to ultra-low interest rates and rebounding economic activity. In 2022, price pressures are seen moderating as some supply chain disruptions ease and output normalizes. FocusEconomics panelists see inflation averaging 4.2% in 2021. In 2022, our panel expects inflation to average 2.9%, which is up 0.2 percentage points from the previous month.
At its 21–22 September meeting, the Fed kept the target range at 0.00%– 0.25% in order to spur the economy, but hinted at some tightening in the form of tapering its QE purchases due to healthier economic indicators and stronger price pressures in recent months. Most panelists see the first rate hike in 2023, although a minority expect some tightening in 2022. Our panelists project the federal funds rate to end 2021 at 0.25% and 2022 at 0.33%.
The dollar index appreciated slightly in recent weeks, likely due to a more hawkish tone from the Fed. On 24 September, the dollar index traded at 93.3, strengthening 0.4% month-on-month. Looking ahead, the course of the pandemic, the trajectory of the U.S. 10-year yield rate and geopolitical tensions will have a key bearing on the direction of the USD.
REAL SECTOR
ISM manufacturing index rises slightly in August The Institute for Supply Management (ISM) manufacturing index ticked up to 59.9 in August from 59.5 in July, consequently the index remained wellabove the 50-threshold that separates expansion from contraction in the manufacturing sector. August’s slightly stronger expansion was the result of faster growth in new orders and production. That said, employment levels decreased notably relative to the previous month. On the price front, input prices continued to rise on the back of higher raw material prices but at a slower rate compared to the month prior.
FocusEconomics Consensus Forecast panelists expect industrial production to increase 6.0% in 2021, which is unchanged from last month’s forecast. In 2022, panelists see industrial production rising 4.0%, which is down 0.1 percentage points from the previous month. FocusEconomics Consensus Forecast panelists expect GDP to grow 6.1% in 2021, which is down 0.3 percentage points from last month’s estimate. For 2022, the panel expects the economy to expand 4.1%, which is unchanged from last month.
Retail sales rebound in August Retail sales grew 0.7% in month-on-month seasonally-adjusted terms in August, which contrasted July’s 1.8% decrease. Looking at the details of the release, August’s pick up was broad-based. Food and beverages and general merchandise stores output gained steam, while motor vehicle and parts dealers production contracted at a softer rate. Lastly, non-store retailer sales rose at a stronger rate, while gasoline stations sales moderated. On an annual basis, retail sales rose 15.1% in August, which matched July’s expansion. Meanwhile, the trend improved significantly, with the annual average growth of retail sales coming in at 15.3% in August, up from July’s 14.3% reading. Commenting on August’s print, Francis Généreux, a senior economist at Desjardins, stated: “The growth in retail sales in August, particularly if we exclude motor vehicles, is encouraging and suggests the new wave of the pandemic is not having a major impact on the economy. This could further reassure Federal Reserve officials.” FocusEconomics Consensus Forecast panelists see private consumption growing 7.9% in 2021, which is down 0.1 percentage points from last month’s forecast. For 2022, the panel sees private consumption increasing 3.8%, which is down 0.3 percentage points from the previous month.
ISM manufacturing index rises slightly in August The Institute for Supply Management (ISM) manufacturing index ticked up to 59.9 in August from 59.5 in July, consequently the index remained wellabove the 50-threshold that separates expansion from contraction in the manufacturing sector. August’s slightly stronger expansion was the result of faster growth in new orders and production. That said, employment levels decreased notably relative to the previous month. On the price front, input prices continued to rise on the back of higher raw material prices but at a slower rate compared to the month prior.
FocusEconomics Consensus Forecast panelists expect industrial production to increase 6.0% in 2021, which is unchanged from last month’s forecast. In 2022, panelists see industrial production rising 4.0%, which is down 0.1 percentage points from the previous month. FocusEconomics Consensus Forecast panelists expect GDP to grow 6.1% in 2021, which is down 0.3 percentage points from last month’s estimate. For 2022, the panel expects the economy to expand 4.1%, which is unchanged from last month.
Retail sales rebound in August Retail sales grew 0.7% in month-on-month seasonally-adjusted terms in August, which contrasted July’s 1.8% decrease. Looking at the details of the release, August’s pick up was broad-based. Food and beverages and general merchandise stores output gained steam, while motor vehicle and parts dealers production contracted at a softer rate. Lastly, non-store retailer sales rose at a stronger rate, while gasoline stations sales moderated. On an annual basis, retail sales rose 15.1% in August, which matched July’s expansion. Meanwhile, the trend improved significantly, with the annual average growth of retail sales coming in at 15.3% in August, up from July’s 14.3% reading. Commenting on August’s print, Francis Généreux, a senior economist at Desjardins, stated: “The growth in retail sales in August, particularly if we exclude motor vehicles, is encouraging and suggests the new wave of the pandemic is not having a major impact on the economy. This could further reassure Federal Reserve officials.” FocusEconomics Consensus Forecast panelists see private consumption growing 7.9% in 2021, which is down 0.1 percentage points from last month’s forecast. For 2022, the panel sees private consumption increasing 3.8%, which is down 0.3 percentage points from the previous month.
