The U.S. Economy:
U.S. construction spending rose 0.2% in October to a seasonal adjusted annual rate of $1,598.0 billion. The October figure was up 8.6% from October 2020. The October increase was driven by a robust 0.9% gain in nonresidential construction spending, which rose 0.2% to $470.3 billion. There were noted gains in communication facilities (+1.1%), amusement and recreation (+6.0%), and religious construction (+2.4%). Residential construction spending fell 0.5% to $774.7 billion. Single-family construction spending fell 0.5% and the multi-family sector declined 0.1%. Residential construction spending remains 16.7% above year-earlier levels. Total public construction spending rose 1.8% in October. Education spending rose 0.2% and highway and street construction rose 2.4% in October. After months of weakness, the increase in spending for the nonresidential sector was a nice surprise. 13 out of 16 nonresidential subcategories was an increase in spending in October. Nonresidential construction spending was at the highest level since July 2020 and has rebounded 3.1^ since bottoming out in June 2021. The outlook for construction looks decent, although the residential side may slide a bit next year as interest rates rise. The public side should be solid and non-residential since starting to recover from the pandemic.
The ISM manufacturing index improved slightly in November, rising from 60.8 in October to 61.1%. The new orders index increased by 1.7 percentage points to 61.5%, with 10 out of 18 industries reporting growth in new orders. The production index rose by 2.2 percentage points to61.5, with 11 industries reporting production growth. The employment index rose by 1.3 percentage points to 53.3 and 10 industries reported higher employment. The supplier delivery index fell by 3.4 percentage points to 72.2, still indicating slower deliveries. However, deliveries did slow from the previous month. The ISM noted that although we may be at a peak in slowing supply deliveries. If the supplier delivery index falls again in December, that would indicate a noted step in boosting the supply chains. The inventory index fell 0.2 of a percentage point to 56.8. 10 industries reported higher inventories in November. The price index fell 3.3 percentage points to a still elevated 82.4. It was the 15th consecutive month the index has been above the 60 mark and the 12th month above 70. The backlog index fell by 1.7 percentage points to 61.9, with 13 industries reporting higher backlogs. The import index increased by3.5 percentage points to 52.6, with seven industries reporting higher imports. The export index fell by 0.6 of a percentage point to 54.6.
The ISM report shows strong demand for manufactured products. There were some indications of improvement in labor and supply deliveries. All segments of manufacturing are still seeing record-long lead times for raw materials and capital equipment, difficulties in ascertaining labor, and difficulty in ascertaining materials from overseas. There were some signs that the supply chains problems started to ease slightly. Despite all the current obstacles, panel optimism is solid, with 10 positive readings submitted to the panel for every negative one. Responses from industry executives were generally positive and did note some improvements in the supply chains. The petroleum industry noted that supply is slowly showing signs of improvement from the weather-related disruptions of this summer. The transportation sector still noted a chip shortage. The price of hot-rolled steel and steel plate appears to be reaching a plateau. The supply of plastic resins has improved recently. Sales remain strong but seem to be slowing but commodity-based inflation is still widespread. We expect that demand will remain strong in 2022 but the rate of expansion will slow and ease some pressures on the supply chains. The supply chains will make progress to come into balance with demand next year and inflationary pressures will slowly subside. However, prices will remain at an elevated level for most of next year.
The ISM services index increased 2.4 percentage points in November, rising to 69.1%, setting another record. The business activity index increased 4.8 percentage points to 74.6, another record. Sixteen industries reported greater business activity in November. The new orders index was unchanged in November at 69.7, equaling the October record level. The employment index rose by 4.9 percentage points to equal 56.5, with 11 industries reporting greater employment. The supplier deliveries index was unchanged at 75.7 for November, tied at the second-highest level for a second consecutive month. The highest reading was in April 2020. 17 out of 18 industries reported slower deliveries. Inventories increased by 6 percentage points to 48.2, but that reading was below the 50 mark and indicates contraction. The price index fell 0.6 of a percentage point to82.3. All 18 industries reported higher prices in November. Backlogs fell by 1.4 percentage points to 65.9, with 13 industries reporting higher backlogs. The export index fell by 4.4 percentage points to 57.9. The services index hit another record in November, following the former record in October. The ISM reported that all 18 industries reported growth in November. Demand is strong and continues to outpace supply. Production is constrained by a lack of labor, long lead times for raw materials, and logistical challenges. This has resulted in a big jump in pricing. Respondents have noted that lack of labor and supply constraints are still a problem across the service industries. Building material shortages continue to hamper the construction industry. Some industries did report a lessening of the supply chain problems, but they are still widespread. Inflation is a problem. Demand for services will likely be strong in 2022.
U.S. seasonal adjusted vehicle sales came in at a 12.8 million pace in November. Total sales were down 200,000 units from October and the second-lowest of the year, behind September. However, the daily selling rate did grow to 41,700 units, up from 39,000 units in October. November had 24 selling days, one more than in November 2020. Sales of light trucks were down 15.2% from November 2020 and 1.2% from October. Passenger car sales decreased 31% year-on-year but rose 1.1% m/m. Analysts noted that the sales pace was much stronger earlier in November, suggesting there were batch releases of new vehicles to sell. Retail sales were below the 1 million mark for a fourth consecutive month, at an estimated 850,000. Average transition prices were above US$40,000 for a sixth consecutive month, adding additional downside risk. Retail demand fared worse than fleet, with 17% and 12%, respectively. Fleet deliveries likely accounted for 15% of total sales. Underlying demand is strong, but the general shortage of new vehicles has restrained sales so far this year. The supply chain problems should ease next year, with slight progress in the first half of the year and a better outlook for the second half.
Factory orders increased 1% in October, following a 0.5% gain in September. Orders in October were up 17.1% on a year earlier basis. Manufacturing, which accounts for roughly 12% of the economy, is being driven by still strong demand for goods, despite spending starting to shift back to services. Businesses are trying to build depleted inventories, but shortages of labor and raw materials remain challenges. Factory shipments rose 2.0% in October, after a 1.0% advance in September. Unfilled orders rose 0.3%, after advancing 0.7% in the prior month. Orders for non-defense capital goods, excluding aircraft, increased 0.7% and shipments were up 0.4%. The report suggests that business spending on equipment, which fell in the third quarter after four quarters of double-digit growth, may rebound in the fourth quarter. Inflation will likely play a part in the calculations, limiting some of the gains.
Payrolls gains in November came in weaker than expected, but the overall report was mixed. Payrolls increased by only 210,000 jobs. The revisions to September and October were modest, adding 82,000 jobs. Leisure/hospitality, which had seen some of the biggest job gains in recent months, added just 23,000, after October’s large 170,000 gain. Retail trade employees saw jobs dipping by 20,000 in November, following gains of nearly 40,000 in each of the two previous months. Motor vehicle companies cut 10,000 jobs in November after adding 19,300 in October. The labor participation rate ticked up slightly more than expected in November, rising to 61.8% from 61.6% in October. The labor participation rate was 63.3% in February 2020 before the pandemic hit. The unemployment rate dipped to 4.2% from 4.6% in October. Average hourly earnings advanced 0.3% bringing the year-over-year increase to 4.8%. As of November, the civilian labor force was still down 2.4 million participants compared to February 2020. Future employment gains may be restrained by the increased rate of COVID infections, which were on the increase even before the emergence of the Omicron variant. Employment in the leisure/hospitality sector may be weak for the upcoming winter months. The report shows that the labor market continues to tighten and with inflation at 30-year highs, the Fed will likely start raising rates next year.
Important Data Releases This Week
- The October ISM manufacturing index will be released on Wednesday, December 8 at 8:30 AM. Domestic demand has rebounded strongly over the past year, helping fuel a faster pace in imports relative to exports. As a result, the trade deficit has widened in eight of the last 12 months, reaching a record $80.9 billion in September, as exports fell 3% and imports gained over 0.6%. While demand for goods is moderating, the need for businesses to restock inventories means strong imports for some time to come. The advance trade report for goods showed exports jumping more than 11%, more than reversing the 4.7% decline seen in September. Goods imports rose a more modest 0.5%, This suggests the trade deficit will moderate to $66.8 billion for October.
- The October job openings report will be released on Wednesday, December 8 at 10:00 AM Demand for labor remains strong, although the level of job opening has slipped for two months. Openings were at 10.4 million in September. A soft leisure/hospitality sector that was hurt by rising COVID infections, likely tempered job openings in September. The abundance of openings is allowing workers to quit jobs at a record pace and is also driving up wages. The quit rate rose to a record 3% in September and appears to remain at high levels through the end of 2021.
- The November CPI report will be released on Friday, December 10 at 8:30 AM. With supply chain shortages likely to hang around until next year and service sector prices edging higher, we expect inflation may get worse before it gets better. The CPI rose 0.9% in October, bringing the index up 6.2%, the highest in 30 years. The core rate was up 0.6%, up 4.6% on a year-ago basis. The big push for inflation has been the surge in goods demand, which is showing little signs of easing. Prices for everything went up in October and are not likely to fall in the holiday season. Service inflation has been more moderate as service demand took more time to escape the pandemic. Taken together, that likely means another strong inflation report with the headline CPI rising 0.8% and the core index rising 0.6%.