The Top-Line
In the Macro
- Employment numbers slump as the Delta variant leads to concern about economic recovery
- An update from the Bank of Canada – economic rebound in H2 2021?
In the Micro
- Two prominent American banks slash GDP forecasts
The Bottom-Line
In the Macro
Employment numbers slump as the Delta variant leads to concern about economic recovery
After knocking it out of the park in July with 1.1 million new jobs, August’s employment report is nothing short of disappointing. A pullback was anticipated with analysts expecting 720,000 new positions, though the jobs report fell short with 235,000 new jobs. While economists may have missed the mark on the number of new hires, they correctly predicted the unemployment rate would fall to 5.2%, down another 20 basis points from July. Before the World Health Organization declaring a pandemic, the unemployment rate was 3.5%. This equates to 5.3 million fewer jobs than in February 2020.
Source: The New York Times
The shortfall in jobs growth has been blamed on the Delta variant, evidenced by the drop in leisure and hospitality workers. In the past few months, these sectors had seen substantial gains, but now, consumer sentiment has dropped it seems, thanks to renewed Covid-19 concerns. Consumers are turning away from travel and in-person dining, causing a problem for employers in the industry who are beginning to lay off workers. Since the middle of July, the number of hospitality workers fell 35%, with entertainment jobs dropping 20%. Prior to August, an average of 350,000 new jobs were attributed to leisure and hospitality each month.
The report may have shocked analysts, but the concerns around Delta’s impact on the economy are very real. President Biden even commented on the news, saying, “there’s no question the Delta variant is why today’s jobs report isn’t stronger. I know people were looking, and I was hoping, for a higher number.” During the speech, Biden references the American Rescue Plan and his infrastructure bill, which, if passed, would “create millions of good-paying jobs.”
An update from the Bank of Canada – economic rebound in H2 2021?
Source: Financial Post
In an announcement from the Bank of Canada last week, the overnight lending rate was held at its current historical low of 0.25%. The pace of the bond purchasing program will also remain at its status quo rate of CAD$2 billion weekly. Economists widely anticipated the decision, though many expect tapering by another CAD$1 billion to begin again in the next couple of months after data can be analyzed for the summer months.
Source: Bloomberg
Throughout the pandemic, the central bank has expanded its balance sheet. According to Bank of Canada Governor Tiff Macklem, “when we do eventually need to reduce monetary stimulus, our first move will be to raise the target for the overnight rate — our policy interest rate.” Macklem suggested that when the time is right, they will reduce their balance sheet by letting their existing holdings mature.The update from the central bank also outlined expectations of faster gross domestic product (GDP) growth for the rest of 2021, an optimistic tone, especially given the August 31streport from Statistics Canada. According to the release, there was a 0.3% economic contraction during the second quarter, equating to 1.1% annualized. Stats Canada also paved the way for disappointing numbers from July, with preliminary data suggesting the economy declined by a further 0.4% during the first month of Q3. With finalized numbers not expected until October, we will have to wait and see if Canada’s economy can, in fact, begin to rebound.
Source: Financial Post
In the Micro
Two prominent American banks slash GDP forecasts
Speaking of GDP, both Morgan Stanley and Goldman dropped expectations for economic growth in the United States. Morgan Stanley economists originally projected Q3 GDP to track at 6.5% annualized but now, they are expecting just 2.9%. Goldman Sachs, on the other hand, reduced their 2021 GDP forecast by 50 basis points, from 6.2% to 5.7%
So, what happened?
Since the peak of the pandemic, American consumption has increased by 16%. However, we have now left the period of widespread government stimulus behind and no longer see the economic boost from reopening. As we move into a new normal, consumer spending has come down, thanks in part to elevated inflation, not to mention the impact supply chain interruptions are having on inventory levels and prices.
Other factors affecting the forecast revisions were the most recent jobs report, along with the renewed wave of Covid-19 cases. As we all know, it is still too soon to determine the extent that the Delta variant will disrupt our lives, and in turn, the economy.
Regardless of headwinds, Morgan Stanley confirmed they still see expansion later in the year and made no revisions to their Q4 projection of 6.7% annualized GDP growth. They are not the only ones who are bullish about the future either. Goldman Sachs released similar guidance, suggesting any weakness seen in the economy this year will drive growth next year when they anticipate an increase in GDP by 4.6%.
Overall, the United States is positioned for an economic rebound, though this year’s rebound may be less significant than initially projected.
Source: Federal Reserve Bank of St. Louis
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