Supply and Demand Tug of War Is at the Forefront After a Mixed Week of Data

Data from this week consisted of a series of highs and lows, as the mixture of lingering supply chain issues, rising prices and still-strong consumer demand continues to make its way into economic data. The week began on a positive note, as new home sales increased 14% to a 800K-unit pace last month following existing home sales, which rose 7% last week. Home buying’s second wind combats the notion that growth in the housing market is slowing after over a year of bustling activity. In recent months, much of the pessimism surrounding the housing sector was a result of builders’ inability to get the materials and labor needed to complete homes, much less afford them, as well as the pricing out of many first-time or lower-income home buyers. Some of these concerns should subside as builders are creatively navigating supply constraints. Completed homes rose to a six-month-high, reaching a 207K-unit pace, and price growth subsided to a still-elevated 18.7% year-over-year increase in September, down from 23.3% the prior month. However, with the number of homes put up for sale but not yet started rising to its highest since 2006, supply chain issues still appear to be having an impact on the sector.

The first gain in consumer confidence in three months was another early-week upside surprise. After months of confidence missing expectations, a recharged consumer is welcome news. The increase was due to renewed optimism around both consumers’ present situations and expectations for the future, which bumped the headline four points to 113.8. Consumers’ positive views on the labor market contributed to the rise in confidence, as did the recent decline in COVID cases.

Encouragingly, consumers also expressed a willingness to pack their bags for vacation and hit the stores during the holiday season. Nearly half of consumers (47.6%) responded they were planning to go on vacation in the next six months, the highest proportion since the start of the pandemic. Buying plans for large appliances, vehicles and homes in the next six months all rose as well, signaling that consumers may intend to spend more in the near-future. Until these plans are realized, we know there is an element of hearsay to these estimates, but personal spending data this week also showed signsof robust consumer demand. Spending rose 0.6%in September, despite a 1.0%decline in personal income, and was driven mostly by continued strength in the service sector. In particular, recreation services and food services and accommodations led the gains in September, rising 1.7% and 1.3% over the month, respectively. Although September’s headline growth falls below the 1.4%averaged in the first two quarters, personal spending is already 3% above its pre-pandemic level (see chart). Encouragingly, real spending, which accounts for price increases, also rose for the second consecutive month, its first back-to-back monthly increase since this spring as a result of the acceleration of price growth this summer.

Summarize the sections below

In the second half of the week, we learned that the U.S. economy expanded at a 2.0% annualized rate in the third quarter (see chart), below the consensus expectation for a 2.6% gain. There was evidence of supply chain constraints throughout the underlying data as bottlenecks drove prices higher and made many goods simply unavailable. After two consecutive quarters of inventories being a drag on growth, they added 2.1 points and were the only reason growth did not stagnate. Remarkably, this lift came merely from a slower drawdown in stockpiles. Trade, on the other hand, was a sizable drag on headline GDP growth for the fifth consecutive quarter amid resilient domestic demand, shaving 1.7 points off of top-line growth. This was expected after September’s advance trade data, which showed the deficit widening to -$96.3B. While imports were able to notch a 6.1% gain in Q3, exports fell by 2.5%.

It was broadly expected that real personal consumption expenditures (PCE) would have some fallout while navigating the rocky terrain of the Delta variant and stifled production as labor and material shortages plagued factories’ ability to produce, but the 1.6% increase exceeded expectations. While this would be nothing to scoff at pre-COVID, the 1.6% boost looks tiny compared to the over 12% annualized pace we saw in the two preceding quarters. While services more than pulled its weight in the third quarter, rising at a 7.9% annualized pace, goods spending fell victim to the air pocket that we had been warning about, and sunk 9.2% in Q3. Durables in particular were to blame, as they receded 26.2% in the third quarter. Rising prices also cut into real gains across the board, as the PCE deflator rose at a 5.3% annualized rate in the third quarter. That boosted the year-over-year rate of consumer inflation to 4.4%—the highest in over 30 years. We look for prices to come down over next year, but not fully back to the Fed’s 2% target as expected by policymakers.

Real equipment spending was rather weak during the quarter, with a 3.2% annualized dip due largely to holdups in production. The manufacturing sector has been struggling with rising backlogs and wait times, as there are still bottlenecks at the nation’s largest ports—in recent days, over 70 container ships have been idling in the ports of Los Angeles and Long Beach as they wait to unload their products. In this week’s durable goods release, total unfilled orders rose for the eighth consecutive month in September, while backlogs of core capital goods rose to a record high of $235B. This is consistent with the recent upward march in the ISM supplier deliveries index, as moving product from one place to another has become an expensive and arduous task.