- Housing starts surprised to the upside in August (rising 3.9%), powered by gains in the multifamily segment.
- Solid data out of the housing sector and reassuring words from the FOMC confirm that the economic recovery is well under way. However, notable risks remain, primarily the ongoing standoff over the debt ceiling.
- This week was all about the Federal election. The Liberals maintained their minority government status, winning 159 seats (projected), an increase of two from the 2019 election.
- The Liberal campaign platform promised net new spending of around $80 billion over the next five years. Shared commitments with other major parties suggest the minority government will find support to enact much of its agenda.
- The stand-off in Washington continues, with two issues becoming evermore pressing. The government’s spending power needs to be renewed and the debt ceiling needs to be raised to avoid a default on U.S. Treasury debt.
- The deadlines are approaching quickly. Though a deal should get done, the closer we get to the dropdead date, the greater the risk that this gridlock turns into financial market stress.
U.S. – Recovery Continues, But Debt Ceiling Looms
The week kicked off with market jitters over the prospects of contagion from the ongoing deleveraging in the Chinese property sector. Yet, positive data from the U.S. housing market and a reassuring message from the FOMC reinforced the notion that, with each passing week, the American economy is leaving the pandemic recession in the rearview mirror. As of the time of writing the S&P 500 is back up 2.1% over last Monday’s close.
After declining in July, housing starts recovered on the month – rising 3.9% and outstripping the 1.9% gain the analyst consensus was expecting. Smoothing out some of the near-term volatility, the six-month moving average of housing starts now stands at 1.61 million units (annualized), well above the pre-pandemic high of 1.45 million units (Chart 1). The strong reading was entirely supported by strength in the multifamily segment, which was up over 20% month-on-month. Single family starts pulled back modestly on the month, though remain at a very healthy level of 1.08 million – slightly above their pre-pandemic level of 1.06 million units. With permitting also up in August, it appears that residential construction will continue to be a net positive for economic growth over the coming months.
On the demand side of the equation, a small contraction in existing home sales (-2.0%) fell right in line with consensus expectations. After the frenzy in the market between the summer of 2020 and early 2021 some give-back in sales was expected. The ongoing reversion to pre-pandemic trends reflects a return to a more sustainable pace of activity (Chart 2). In fact, the 5.88 million (annualized) sales in August were still 8.5% higher than in the same month in 2019. Over two years that amounts to an average growth rate of roughly 4.2%, still well above trend.
Further evidence that the economic recovery remains on track came from the Fed on Wednesday. In its statement, FOMC members strengthened the language around the economic recovery and hinted that some “moderation” in its asset purchase program “may soon be warranted”.
In the accompanying projections, FOMC members shaved their growth forecast for 2021 (now expecting 5.9% for the year, from 7.0% in June), but lifted it for 2022 and 2023. Risks to the inflation forecast continue to be described as “transitory” with PCE inflation expected to moderate from 4.2% this year to 2.2% in 2022. A more stable inflation path and the steady return to full employment have officials now projecting rate hikes to commence in 2022, with three more coming in 2023.
Altogether, we’ve received a reassuring message of an economy on the mend. There are certainly risks to the outlook – the standoff over the debt ceiling (discussed in the financial section below) being top of mind – but the broader picture is one of healthy domestic demand and gradually receding supply side stresses. The pandemic isn’t over yet, but the light at the end of the tunnel is getting brighter.
Canada – More Fiscal Stimulus On The Way
This week was all about the Federal election. On Monday, Canadians took to the polls to elect the 44th Parliament. The Liberal party once again came out on top, winning 159 seats (projected), an increase of two since the 2019 election (Table 1). This once again secured the party a minority government. As for the others, the Conservatives won 119 seats, two fewer than the 2019 result, the NDP went up one to 25 seats, and the Bloc Quebecois won 34 seats, a loss of two from two years ago. So, on the whole, the pandemic election didn’t bring a massive shift in Canada’s political landscape.
That said, the election did offer a chance for parties to lay out their fiscal plans for Canada. The Liberal platform envisioned around $80 billion in net new spending ove