Last week’s economic highlights included important releases on business confidence, international trade, and the employment market. This week will be relatively quiet due to the holiday, with releases scheduled on inflation and the weekly initial jobless claims.
Last week’s news
We started the week with Tuesday’s release of the ISM Manufacturing index for August. This measure of manufacturer confidence increased by more than expected during the month, rising from 54.2 in July to 56 in August, against forecasts for a more modest increase to 54.8. This result brought the index to its highest level since the end of 2018, highlighting an impressive rebound in manufacturer sentiment once reopening efforts kicked off in May. This is a diffusion index, where values above 50 indicate expansion, so its continued improvement in August is a good sign for increased business spending in the third quarter. This report also signaled that manufacturing output has yet to catch up with increased demand, which could serve as a tailwind for further improvements for manufacturing confidence and output.
On Thursday, the initial jobless claims report for the week ending August 29 was released. This measure of new unemployment claims beat expectations, falling from just more than 1 million claims to 881,000, against forecasts for 950,000 new filers. This result represents the lowest week of initial unemployment claims since March, although the level of weekly initial claims remains significantly higher than normal. The continuing unemployment claims report, which is reported with a one-week lag to initial claims, was also encouraging. Continuing claims fell from roughly 14.5 million to 13.25 million, against forecasts for a more modest decline to 14 million. While the improvements revealed by this report are certainly welcome, the high overall level of initial and continuing claims highlights the continued headwinds for the labor market.
Thursday also saw the release of July’s international trade report. The trade deficit widened by much more than expected during the month, from $53.5 billion in June to $63.6 billion in July. This result brought the deficit to its widest level in more than 12 years. Exports rose by 8.1 percent during the month; however, this increase was not sufficient to offset a 10.9 percent rise in imports. On the whole, the value of U.S. imports and exports remains well below pre-pandemic levels. Goods-related trade was strong in July, driven by increased motor vehicle trade. Service-based trade was weak, however, as the service trade surplus declined for the first time in three months. Service trade has been negatively affected by a plunge in foreign travel to the U.S., which is down roughly 75 percent compared with February. Looking forward, the volatile trade picture points to a bumpy economic recovery that will likely face setbacks.
The third major data release on Thursday was the release of the ISM Services index for August. Service sector confidence dropped by a little more than expected during the month, falling from 58.1 in July to 56.9 in August against calls for a result of 57. As was the case with manufacturing confidence, service sector confidence has experienced a strong rebound since reopening efforts began, so this moderate decline in August is nothing to worry about for the time being. Service sector confidence hit a pre-pandemic high of 57.3 in February, so even with August’s slightly disappointing result, the index remains in line with pre-pandemic levels. This is another diffusion index, where values above 50 indicate expansion, so the strong rebound in service sector confidence we’ve seen since May has been encouraging and should support higher spending.
Finally, we finished the week with Friday’s release of the August employment report. During the month, 1.371 million jobs were added, slightly above economist estimates for 1.35 million new jobs. This result follows a downwardly revised report of 1.734 million jobs added in July. The unemployment rate declined by more than expected, falling from 10.2 percent in July to 8.4 percent in August, against forecasts for 9.8 percent result. While the August report was certainly welcome, it’s important to view the numbers in context, given our loss of more than 22 million jobs between March and April alone. Despite the progress made in getting people back to work, only about 10.6 million jobs were added between May and August, which leaves a notable gap in total employment compared with pre-pandemic levels. Ultimately, a full economic recovery will require significant improvements on the employment front, so these monthly releases will continue to be closely monitored.
What to look forward to
On Thursday, the Producer Price Index for August is set to be released. Economists expect to see producer inflation rise by 0.2 percent during the month, following a stronger-than-expected 0.6 percent increase in July. Core consumer inflation, which strips out the impact of volatile food and energy prices, is also expected to rise by 0.2 percent during the month. Despite the anticipated increase, producer prices should show a 0.4 percent decline on a year-over-year basis, and core producer inflation will likely increase by a modest 0.3 percent annually. These results would highlight the headwinds to faster inflation and the subsequent hit to demand caused by the pandemic.
Thursday will also see the release of the initial jobless claims report for the week ending September 5. Economists expect to see 830,000 initial claims filed during the week, which would be an improvement from the 881,000 initial claims made the week before. Throughout most of August, initial claims bounced around the level of 1 million per week, before setting a new pandemic low during the last week of the month. Accordingly, continued improvement in the first week in September would be an encouraging sign. Continuing claims are also expected to show modest improvement but will remain elevated on a historical basis. We’ll continue to monitor these weekly reports until we see initial and continuing claims return to more normal levels.
Friday will see the release of the Consumer Price Index for August. Consumer inflation is expected to moderate in August, with headline inflation set to rise by 0.3 percent following a 0.6 percent increase in July. Core consumer inflation, which excludes energy and food prices, is expected to show a more moderate 0.2 percent increase during August. On a year-over-year basis, headline consumer inflation is set to rise by 1.2 percent, while core consumer inflation should show a 1.6 percent increase. The modest increase in consumer prices is expected to be widespread, with prices rebounding for categories severely affected by the pandemic, such as clothing and car insurance. If estimates hold, consumer inflation would remain well below the Fed’s stated 2 percent target. Given the continued weakness in the labor market, the Fed is not expected to react to modestly higher prices by tightening monetary policy any time soon.
That’s it for this week—thanks for reading and stay safe!