Monday Update: Business Confidence and Employment Beat Expectations

Posted by Sam Millette

This entry was posted on Feb 10, 2020 2:07:04 PM

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In his Monday Update, Commonwealth’s Sam Millette looks ahead to reports on consumer prices, consumer confidence, retail sales, and industrial production. Last week, two major measures of business confidence and January’s jobs report came in better than anticipated, as did most of the other economic updates. This week will be another busy one for reports, with the focus on consumer prices, spending, and confidence.

Last week’s news

We started the week with Monday’s release of the ISM Manufacturing index. This measure of manufacturer confidence rose sharply from 47.2 in December up to 50.9 in January, well above the expected increase to 48.4. This is a diffusion index, where values below 50 indicate contraction. As such, this result takes manufacturing back to expansion and is an encouraging result. Manufacturer confidence fell sharply in 2019, so this rebound may be a sign that the phase one trade deal between the U.S. and China is starting to bolster manufacturer confidence.

On Wednesday, December’s international trade report was released. The trade gap widened in December by more than expected, moving from $43.7 billion in November to $48.9 billion in December. The result was caused by a 2.7 percent increase in imports, which more than offset a 0.8 percent rise in exports. Imports were held back in November due to U.S. businesses preparing for the new tariffs on Chinese goods set to go into effect in December, as well as a temporary shutdown of an oil pipeline from Canada to the U.S. The results in December represent a return to normalcy. Trade was a positive contributor to GDP growth in the fourth quarter. Looking forward, however, trade data will likely be volatile given the ongoing trade negotiations between the U.S. and China.

On Wednesday, the ISM Nonmanufacturing index was released. This measure of service sector confidence beat expectations, rising from 54.9 in December to 55.5 in January, against an anticipated move to 55.1. This is diffusion index, where values above or below 50 indicate expansion or contraction, respectively. As such, this result was very welcome, especially when combined with the better-than-expected results for manufacturer confidence. The ISM Composite index (which combines manufacturer and service sector confidence) rose to its highest level in five months, providing a solid signal for the economy given the weakness in business sentiment we saw at the start of the fourth quarter of 2019. Business spending was weak last year, so January’s improvements bode well for future growth, with higher confidence likely to support faster spending.

Finally, we finished the week with the release of January’s employment report. The 225,000 new jobs added during the month beat expectations for 165,000 and marked a solid jump from the 147,000 reported in December. The underlying data was solid as well, with average hourly earnings growing at 3.1 percent year-over-year against predictions for 3 percent growth. Unemployment ticked up from 3.5 percent in December to 3.6 percent in January. This result was due to an increase in people looking for jobs, as the labor force participation rate rose from 63.2 percent to 63.4 percent. All in all, this employment report was a very strong start to the year and a solid jumping-off point for further growth. Consumers had cited the strength of the jobs market as a primary factor for increased confidence in January, so this result should help support further confidence and, ultimately, spending.

What to look forward to

On Thursday, the Consumer Price Index for January is set to be released. Consumer prices should rise by 0.2 percent during the month, which would translate to year-over-year growth of 2.4 percent. If this estimate holds, it would represent a slight increase in consumer inflation on a year-over-year basis, up from the 2.3 percent inflation rate we saw in December. Core inflation, which strips out volatile food and energy prices, is expected to slow on a year-over-year basis. In January, core inflation should increase by 0.2 percent, but that would translate to only 2.2 percent year-over-year, down from 2.3 percent in December. Inflation, which remains well contained despite three interest rate cuts by the Fed last year, does not appear to be a major concern at this time.

Friday will see the release of January’s retail sales report. Both headline and core sales are expected to show a solid 0.3 percent increase, supported by increased consumer confidence and mild weather in January. This result would mark the fourth straight month of sales growth, following a surprise decline in September. Consumer spending was the major driver of GDP growth last year, so a strong start to the year would bode well for economic growth.

Friday will also see the release of December’s industrial production report. Economists expect to see production fall by 0.2 percent during the month, driven by a slowdown in utilities output caused by the mild weather. This was the fifth warmest January on record, and warmer weather typically leads to less energy consumption during the winter. Manufacturing output is set to remain flat during the month. Given last week’s better-than-expected manufacturer confidence report, however, output may provide a surprise to the upside. If estimates are accurate, this report would be relatively toothless, given the temporary impact of the warm January.

Finally, we’ll finish the week with the first reading of the University of Michigan consumer confidence survey for February. Confidence is set to decline slightly from 99.8 in January to 98.9 in February. Traditional drivers for confidence remain healthy, with markets near all-time highs and January’s employment report coming in better than expected. But it remains to be seen how the emergence of the coronavirus from China will affect consumer sentiment. Confidence increased in January despite the initial reports of the virus during the month. The continued spread of the virus adds uncertainty that could negatively affect consumer confidence in the U.S. Consumer confidence sits at an eight-month high, however, which is an impressive turnaround after hitting a three-year low in August. Accordingly, this modest anticipated decline is nothing to worry about for the time being.

That’s it for this week—thanks for reading!

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

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