Political posturing led to a showdown among parties on the need to extend government funding, which was due to expire at midnight on Sept. 30. A continuing resolution to restore funding through early December reached President Biden’s desk for signature mere hours before deadline, averting a government shutdown. While lawmakers were able to manage that temporary fix, a larger disagreement remains on raising the government’s borrowing authority, which is projected to constrain payments on obligations sometime in October. With Congress members engaged in negotiating — or in avoiding negotiating — two broad fiscal measures, the next few weeks present a rocky start to the fourth quarter, with significant implications for the already stumbling economic recovery.
Forecasts Show a Slower Economic Recovery
After a strong and optimistic second quarter, the unexpected surge in COVID cases due to the spread of the delta variant in the third quarter restrained activity and delayed reopening plans for many businesses. Persistent supply chain bottlenecks and rising prices and costs added more drag to the headwinds already faced by the economy, leading many analysts to downgrade their forecasts for the year. The forecasting firm Oxford Economics released its latest projections last week, along with four scenarios that foresee employment on a slower path to full recovery than was expected earlier in the year.
Given the disappointing August jobs report, Oxford Economics moved back the date by which 2020 job losses will be fully returned to pre-pandemic levels in their baseline scenario from the second quarter of 2022 to the third quarter of that year. The most notable difference comes from the underperformance this past quarter, when hiring was expected to net 3.4 million jobs but instead totaled closer to 2.3 million jobs. The company notes that while inflation has been sticky, it likely peaked in July with the core personal consumption expenditures price index expected to moderate over the next 12 months as supply chains start to untangle and demand is more easily filled.
Oxford Economics’ moderate upside scenario also shows a slightly slower path to employment recovery in its September forecast compared to its June forecast, but the more upbeat outlook simply pushes back what was expected to be a robust third quarter of 2021 to now a strong fourth quarter. Indeed, payrolls would grow by 3 million jobs in the fourth quarter. A possible driver of this forecast, the company offers, is even stronger spending as more consumers deplete their savings that they have accumulated over the past 18 months while most services were constrained. In the moderate upside scenario, stronger spending would drive greater inflationary pressures.
Employment falls through the end of the year in Oxford Economics’ moderate downside scenario and will not fully recover last year’s losses before the end of 2022. This scenario depicts as an example another resurgence of COVID cases or, alternatively, continuing or worsening supply chain issues which drive input costs higher leading to businesses postponing expansion plans and investments.
The most notable change in Oxford Economics’ projections for this year are seen in the severe downside scenario, partly because the first three quarters of the year have outpaced this downbeat outlook by a wide margin. Oxford Economics' new severe downside scenario projects a loss of 934,000 jobs in the fourth quarter of this year. The company suggests that the severe downside scenario could be possible if risk tolerance in global financial markets turns sour layered over conditions depicted in the moderate downside scenario, leading to plunging asset prices, sharply widening spreads, contraction in consumption and investment, and disarray in the financial markets.
Income, Consumption, Savings and Inflation
Personal income grew by 0.2% in August, according to the Bureau of Economic Analysis, down from 1.1% growth in July, due to a drag in proprietors’ income and transfer payments. Income from wages and salaries grew by 0.5% over the month, while personal current transfers such as unemployment benefits rose by 0.3%. Within transfers, unemployment insurance payments shrunk 3.7% as many states abandoned enhanced unemployment benefits. Personal income overall is now 9% higher than in February of 2020.
Personal consumption expenditures grew by 0.8% in August, after a revised 0.1% decline in July. As consumption growth outpaced income, the savings rate fell to 9.4% in August, still high by historical standards.
Consumer continued to shift away from goods and into services, except for several home goods categories in both durable and nondurable categories. Spending on transportation services grew by 7.1% in August as more people felt comfortable riding public transportation and boarding airplanes. Spending at personal care establishments also fueled spending in August as people felt more comfortable venturing out.
Inflation remained high in August, as the personal consumption expenditures price index grew 0.4% over the month and 4.3% over the year — the largest year-over-year increase in 30 years. Prices for the core index, which exclude food and energy, grew by 0.3% over the month and 3.6% over the year.
Supply Chains Disrupt Manufacturing Activity
The manufacturing sector continues to expand, according to the latest resultsof the Institute of Supply Management Survey of Manufacturers. The ISM index rose to 61.1 in September, its fastest pace since May and better than expected.
However, firms continued to face severe supply chain constraints, with wait times for supplier deliveries lengthening and prices paid rising. The production sub-index fell to 59.4, but a significant backlog of orders should support factory activity well into 2022, while transportation bottlenecks — including severe port congestion — shortage of inputs and materials and labor constraints may put a cap on potential expansion in the sector.
More News on Housing
Continuing with last week’s theme, where a plateauing housing market was showing hints of resurgence, pending home sales surprised to the upside, rising by 8.1% in August from the previous month, as reportedby the National Association of Realtors. Pending home sales grew in all regions of the nation, but more so in the Midwest and South, where home prices tend to be more affordable. As pending sales are based on contracts signed to begin the buying process, they are a leading indicator of closed sales for the following four to six weeks. This increase, along with recent rising mortgage applications, points to a rise in existing home sales next month, somewhat in contrast to our expectations for moderating home sales given sky-high prices and low inventories.
Developers remain active, although many forecasts called for a modest increase in construction spending for the month of August. Total construction spending was flat overall, as reported by the Census Bureau, while the private sector figure fell by 0.1%. Yet over the year, private construction spending has grown by 13%. Rising costs in materials and labor have been a contributing factor to increased construction spending.
Spending on both new single-family and multifamily buildings pulled back slightly but was offset by increased spending on home improvement projects, as remote work boosted demand for more — and upgraded — space and as lean housing inventories dampened the ability of many to find a new place to live and work. Spending on residential projects is up by 24.3% over the year. Construction spending on new office buildings grew by 0.2%, while commercial buildings experienced a 0.8% decline.
The Week Ahead …
Few economic data releases are scheduled this week. The September jobs report, coming on Friday, should be closely read for any evidence of rising wages and higher levels of labor participation, as extended and expanded unemployment benefits have expired. Seasonality adjustments, particularly in the government sector, could artificially depress job numbers and make for misleading headlines.
The more interesting news will likely be of any progress towards resolving the several fiscal measures under consideration in Congress. Failure to pass either the bipartisan infrastructure bill or the reconciliation bill could have analysts further downgrading their economic forecasts.
CoStar Economy is produced weekly by Christine Cooper, managing director and chief U.S. economist, and Rafael De Anda, associate director of CoStar Market Analytics in Los Angeles.