Stocks are experiencing volatility, with the latest concerns centered on China’s real estate market.
The recent Delta surge is also causing weaker-than-anticipated economic readings while we are in a seasonably weak period for stocks. However, we remain confident in the economic recovery and last week’s labor market surveys and leading indicators continue to point to a sustainable global economic recovery. In addition, inflationary pressures are showing (see below*) signs of easing, which is important for future Federal Reserve monetary policy flexibility.
Given that stocks have doubled since bottoming on March 23, 2020, without a decline in excess of 10%, some consolidation of gains would not be unusual. While the potential bankruptcy of a large developer has heightened concerns around China’s real estate market, we expect government intervention to ensure orderly resolutions and contain systemic risks. We also expect China to stimulate its economy to sustain future economic growth.
Labor Market Indicators Remain Healthy: A healthy labor market is important for a sustainable economic recovery that ultimately supports stock prices. Two surveys from last week remained consistent with a strong outlook for future job growth.
The NFIB Small Business Optimism Index rose slightly in August, indicating mixed-to-stable attitudes among small business owners. Labor market indicators, however, stood out decisively. The net share of firms with open positions rose to a record high of 50%. Hiring plans for the next three months also hit a record high, consistent with a continued downward pressure on the unemployment rate in the months ahead. But more firms hit a wall when it came to actually finding workers with the right skills or at the offered compensation. The share of firms reporting recruiting difficulties surged to a record high of 60%.
The Manpower Employment Outlook Survey showed a record surge in hiring intentions for the fourth quarter. The net employment outlook was the strongest ever, implying a "booming labor market" in the final months of this year. Hiring plans were at record levels across all 12 industries and all four regions. The top three industries with the most optimistic hiring outlooks were information, financial activities, and transportation & utilities.
Similar to the NFIB Survey, Manpower reported a widespread talent shortage, with 70% of firms (a 15-year high for the second consecutive quarter) unable to find the skills they need. The NFIB survey also showed stronger inventory accumulation plans while capital expenditure plans recovered to the best level since November 2019. These are positive indicators for future economic growth.
Inflationary Pressures are Starting to Abate: *Last week’s CPI report for August showed an absolute decline in prices in pandemic-related categories such as airfares, hotels, admissions, and vehicles. Things are improving on the semiconductor front, with memory chip prices in a clear downtrend. Agricultural prices have also stabilized.
Leading Indicators Suggest Moderating Above-Trend Global Economic Growth: The OECD Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, indicate that growth remains at above-trend levels but is moderating in the OECD area as a whole.
Among the major OECD economies, the signs of moderating growth at above-trend levels, flagged in last month’s assessment, have been confirmed in Canada, the euro area as a whole, including Germany and Italy, and in the United Kingdom. In France, the CLI points to a moderation in the pace of growth and remains below trend levels. In contrast, the CLIs for the United States and Japan now point to stable growth above trend levels.
Among the major emerging-market economies, the CLIs for Russia and China point to a steady increase in growth above trend levels. The CLI for India remains below trend but continues to signal stable growth, whereas in Brazil the CLI continues to anticipate slowing growth from above trend level.
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