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Economic Update: Oct. 25, 2021

Posted October 25, 2021 at 12:00 pm
Dr. David Kelly
J.P. Morgan Asset Management


Revised 2Q21 real GDP grew at a 6.7% q/q seasonally adjusted annual rate. Increases were broad based and were partly offset by decreases in inventories, residential fixed investment and government spending. Real output has now surpassed its previous peak in 4Q19. Weaker inventories weighed heavily on growth, and as businesses restock in upcoming quarters, inventories could be a significant contributor to GDP growth. The October Markit flash PMIs overall shaped up better than expected on a composite basis. Manufacturing fell more than expected to 59.2, but services bounced sharply to 48.2 from 54.9. However, the PMIs reflect continued effects from supply chains disruptions as the price measures increased to record highs.


The September jobs report was both weaker and hotter than expected. Nonfarm payrolls increased by a meager +194,000, well below expectations. However, this miss was mitigated by a 169,000 upward revision in payroll gains for the prior two months, a decline in the unemployment rate from 5.2% to 4.8% and a modest increase in the average workweek. Further, the miss in jobs was concentrated in the government education sector, while the important COVID-19-sensitive sectors added jobs. Importantly, wages continue to climb, rising by 0.5% m/m and 5.5% y/y.


The 3Q21 earnings season has kicked off, with 109 companies reporting (23.9% of market cap). 84% of companies have beat on earnings expectations and 75% have beat on revenue expectations. Our current estimate for 3Q21 earnings is $49.84, representing y/y EPS growth of 31.4%. On a quarter-over-quarter basis, we expect an earnings contraction of ~7.3%, which can be attributed to macro headwinds such as renewed COVID-19 fears, slower economic growth, continued supply bottlenecks and rising wages. Despite these headwinds, oil (+73.4%) and the U.S. dollar (-1.4%) should act as decent tailwinds to earnings.


Inflation has now well surpassed the FOMC’s 2% target, as the headline PCE price index rose +0.4% m/m and +4.3% y/y in August. The core PCE deflator also rose to +0.3% m/m and +3.6% y/y, with the latter slightly above market expectations. The September CPI report showed consumer prices have resumed a faster pace of growth as more sustainable sources of inflation are now picking up. Headline CPI for September rose +0.4% m/m and +5.4% y/y, primarily driven by increases in the prices of food and shelter. Further increases in shelter costs, which make up a third of the overall index, could provide a more durable tailwind to inflation in the coming months.


At its September meeting, the FOMC delivered a slightly hawkish message to markets on its policy outlook, recognizing slower economic progress due to the delta variant, but also robust improvement in the labor market recovery and somewhat stickier inflation than it previously assumed. In the FOMC’s Summary of Economic Projections, growth estimates were downgraded from 7.0% to 5.9% for 2021, but increased for 2022 and 2023. The FOMC also increased its unemployment estimate to 4.8% for 2021 and PCE inflation to 4.2% for 2021 and 2.2% for 2022. Notably, the Fed signaled that tapering could “soon be warranted,” raising the likelihood of a November announcement.


  • The delta variant and global vaccine delays could slow the economic reopening.
  • Inflation could spike in the medium term.
  • Extremely accommodative monetary and fiscal policies could lead to a boom-bust recession.

Investment Themes

  • U.S. equity investors may use earnings as a guide in a rising rate environment.
  • Fixed income investors may underweight bonds and maintain short duration in a rising rate environment.
  • Long-term growth prospects, a falling dollar and cyclicality support international equities.

This weekly update provides a snapshot of changes in the economy and markets and their implications for investors.

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