Stocks sold off last week with concerns centered on Washington politics and the standoff over raising the debt ceiling.
The last major fights over the debt ceiling occurred in 2011 and 2013 and the eventual result was an increase in the ceiling both times. Treasury Secretary Yellen has designated October 18 as the date that her department runs out of ability to meet its obligations—effectively the deadline for Congress to act. We expect Congress to address the debt ceiling on time, either raising it or suspending it, given the potentially severe consequences on the financial markets of not doing so. Ultimately, the market will return its focus to the economic fundamentals.
Meanwhile, the economic fundamentals remain solid with healthy consumer balance sheets, pent-up demand, and growth-oriented fiscal and monetary policy. We are also seeing a declining trend of COVID around the world, which should support the reopening beneficiaries, help ease supply-chain issues, ease inflationary pressures, and lead to improving global growth. Last week’s data supports our positive view.
State Coincident Indexes Show Widespread Growth: The Philly Fed State Coincident Indexes increased in 46 states in August and were stable in four states. This produced a one-month diffusion index of 96, a five-month high, indicating that despite a slew of economic data pointing to slower economic growth momentum in the second half of 2021, the breadth of the expansion remains wide. The U.S. Coincident Index rose 0.3%, the least in four months, but better than the historical average of 0.2%. It also gained 5.8% year/year, decelerating since April, but still to a higher rate than in any other expansion since 1979. These state indexes are consistent with minimal odds of recession at this time.
CEO’s See Favorable Conditions: The Business Roundtable CEO Economic Outlook Index dipped 2.4 points in the third quarter, its first decline in five quarters, to 114.0, indicating a slight deterioration in the CEOs’ expectations for growth over the near term. Nevertheless, the index remains well above its average of 82.8 since its inception in 2002, as executives continue to expect business conditions to remain very favorable. Their projection for economic growth in 2021 was revised down modestly to 4.8% from 5.0% in the previous quarter.
CEOs expect sales growth to moderate in the next six months. But their capital expenditure and hiring plans increased at faster clips, suggesting that they are positioning for a continued strong expansion into 2022. In terms of risks to their companies’ growth prospects over the next year, executives identified continuing recruiting difficulties, potentially higher corporate tax rates, and slow global vaccinations as their main concerns.
Manufacturing Remains Robust: The ISM Manufacturing PMI (a timely business survey) rose 1.2 points in September to 61.1, a four-month high, and above the consensus of 59.5. Although off its peak earlier this year, the index is close to its highest level since May 2004, and consistent with above-trend growth in both manufacturing output and the broader economy. The ISM estimates that the current level of the PMI corresponds to 5.1% annualized economic growth. Of the 18 ISM manufacturing industries, 17 (except wood products) reported growth last month. Such strong breadth is also consistent with above-trend growth, and bodes well for the sustainability of the recovery.
The global manufacturing PMI also sent a positive signal in September but manufacturing remains constrained by supply chain disruptions and input shortages. Manufacturing production and new orders both rose for the fifteenth successive month in September. New export business also continued to expand. However, efforts to raise production further were stymied by severe supply-chain and logistic disruptions. The past six months have seen supplier lead times lengthen to the greatest extents in the survey history.
European manufacturing dominated the top of the growth rankings, with nine out of the 10 best readings (Austria, the Netherlands, Ireland, Italy, Germany, Greece, Spain, Czech Republic, and the UK). U.S. manufacturing also performed strongly (third place overall).
Looking Ahead: We get the September Payrolls report this week and investors will also be watching progress in Washington DC on extending the debt limit and passing a fresh infrastructure spending bill.
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