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Last week saw a number of important economic data releases, with December’s business confidence and employment reports garnering the most attention. Business confidence unexpectedly improved during the month, although the economy suffered from a net loss of jobs for the first time since April. This week will be packed with updates, with a focus on December’s inflation and retail sales reports, as well as the first look at consumer confidence in January.
Last Week’s News
On Tuesday, the ISM Manufacturing Index for December was released. This gauge of manufacturer confidence came in above expectations, rising from 57.5 in November to 60.7 in December, against calls for a drop to 56.8. This is a diffusion index, where values above 50 indicate expansion. Accordingly, this result signals continued growth for the manufacturing sector despite the worsening public health situation. The index now sits at its highest level since 2018, highlighting the impressive recovery for manufacturers we’ve seen since initial lockdowns were lifted in April, when the index hit a pandemic-induced low of 41.5. This report was encouraging, as it shows the continued strength of the manufacturing recovery and points toward continued healthy levels of manufacturing output and business investment.
Wednesday saw the release of the FOMC meeting minutes from the Fed’s December meeting. There were no major surprises in the minutes, as was expected following a meeting that saw rates remain unchanged at virtually zero. Much of the discussion was focused on the Fed’s ongoing asset purchase program. Fed members unanimously agreed to continue the current pace of $120 billion in monthly asset purchases until “substantial further progress” is made on the Fed’s employment and inflation goals. Encouragingly, Fed members noted that the economic recovery has largely been stronger than anticipated. Looking forward, however, they did express some concerns over the potential for a slowing recovery in the short term due to a softening in some recent economic data. Fed members also noted that the recovery for the labor market has been lagging the overall economic recovery. This fact is likely to keep the central bank’s policy supportive until the job market makes significant strides toward improvement. All in all, this release largely reiterated what we already knew and did not point to any major changes in policy.
On Thursday, the initial jobless claims report for the week ending January 2 was released. The report showed that 787,000 initial unemployment claims were filed during the week, slightly below the downwardly revised 790,000 initial claims we saw the week before. Economist forecasted 800,000 initial claims. Continuing unemployment claims, which are reported with a one-week lag to initial claims, fell by more than expected, dropping from 5.198 million to 5.072 million against calls for a modest increase to 5.2 million. Although the Christmas and New Year holidays may be distorting the claims data, on a four-week rolling basis the average number of weekly initial claims fell from 838,000 to 819,000, which is a positive sign. That said, however, initial and continuing unemployment claims remain elevated on a historical basis, highlighting the continued stress on the labor market at the end of 2020.
Thursday also saw the release of the November international trade report. The trade deficit widened by more than expected, expanding from $63.1 billion in October to $68.1 billion in November, against forecasts for a move to $67.3 billion. This result brought the deficit to its second-widest level on record, trailing only the $68.3 billion gap we saw in August 2006. Imports during the month rose by 2.9 percent, which was more than enough to offset a 1.2 percent increase in exports. The trade deficit for the trade of goods reached a record high of $86.4 billion in November, while the surplus in service-related trade hit its lowest level since August 2012. Given the widening deficit in November, trade will likely be a net drag on overall economic growth in the fourth quarter. Nonetheless, the tailwind from rising business inventories should help offset the headwind created by the widening trade gap. Although trading volume has increased notably since initial lockdowns were lifted, exports remain below pre-pandemic levels, primarily due to softening demand for aircraft-related exports.
The third major release on Thursday was the ISM Services Index for December. This measure of service sector confidence came in above expectations, rising from 55.9 in November to 57.2 in December against forecasts for a decline to 54.5. This strong result broke a two-month streak of declining service sector confidence and brought the index to its highest level since September 2020. This is another diffusion index, where values above 50 indicate expansion. Accordingly, the December result was a positive development for the service sector, which accounts for the lion’s share of economic activity across the country. As was the case with manufacturing confidence, service sector confidence has rebounded notably since hitting a pandemic-induced low of 41.8 in April 2020. Overall, this report marked another positive economic note, demonstrating the service sector’s resilience despite the worsening public health situation and increased restrictions at the state and local levels.
We finished the week with Friday’s release of the December employment report. It showed a loss of 140,000 jobs during the month, a result below the estimates for a modest increase of 50,000 jobs. This report marks the first month since April in which the economy has experienced a net loss in jobs. This loss was driven primarily by increased restrictions at the state and local levels, which caused a sharp decline in leisure and hospitality jobs in December. Despite this weakness, other sectors, such as professional and business services and retail sales, showed strong levels of hiring during the month. This fact indicates that the headline job loss may be overstating the overall damage caused in December. The unemployment rate remained unchanged at 6.7 percent, a result slightly better than the anticipated rise to 6.8 percent. Average hourly wages increased by more than expected, rising by 0.8 percent during the month against calls for a 0.2 percent increase. Although, at first glance, the headline increase in wages appears positive, this gain was largely due to losses of lower-wage leisure and hospitality jobs. Consequently, the average wage was increased artificially rather than as a result of a widespread rise in wages. Overall, the December report was concerning. It highlights the very real risks that the current third wave of infections presents for the economic recovery. Nonetheless, if we can make progress on the public health front, the reduction and elimination of the new state and local restrictions may serve as a tailwind for faster hiring growth.
What to Look Forward To
On Wednesday, the December Consumer Price Index is set to be released. Consumer prices are expected to rise by 0.4 percent during the month, up from a 0.2 percent increase in November. On a year-over-year basis, consumer inflation is expected to come in at 1.3 percent, slightly up from the 1.2 percent annual inflation rate we saw in November. Part of the anticipated increase is due to an 8 percent rise in gas prices in December. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to show a more modest 0.1 percent monthly increase and 1.6 percent annual growth. Even with these price increases, however, year-over-year consumer inflation will remain well below the pre-pandemic high of 2.5 percent recorded in January 2020. This fact highlights the deflationary pressures created by the pandemic and the initial lockdowns in March and April.
On Thursday, the initial jobless claims report for the week ending January 9 will be released. Economists expect to see 785,000 initial unemployment claims filed during the week, marking a modest improvement from the 787,000 initial claims filed the week before. As a result in line with last week’s report, this number would likely be seen as a positive development. It should help calm concerns regarding a potential surge in initial claims due to states catching up on reporting, following holiday-related delays. Continuing claims, which are reported with a one-week lag to initial claims, are also expected to show a modest decline during the week. If estimates hold, this report would be moderately encouraging. Nonetheless, it would indicate that the labor market is facing headwinds created by the pandemic to start the year.
Friday will see the release of the December Producer Price Index. Headline producer prices are expected to rise by 0.4 percent during the month, up from the 0.1 percent increase in November. On a year-over-year basis, headline prices are slated to rise by 0.7 percent, in a small decrease from November’s 0.8 percent annual producer inflation rate. Core producer prices, which strip out energy and food prices, are expected to rise by 0.1 percent in December and 1.3 percent on a year-over-year basis. If estimates prove accurate, this week’s two inflation reports would show that inflation remains well constrained below the Fed’s stated 2 percent long-term target. Given continued weakness in the job market and the risks presented by the pandemic, the Fed is not expected to react to modest rising inflationary pressure in the foreseeable future.
On Friday, we’ll also get December’s retail sales report. Sales are expected to remain flat during the month, which would be an improvement from their 1.1 percent decline in November. Headline retail sales fell in both October and November, so a flat month in December would be a positive sign that the recent declines did not begin a long-term trend. Economists expect to see rising auto sales and gas prices supporting headline retail sales growth during the month. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to fall by 0.6 percent. This result would be a modest improvement from the 0.8 percent decline in November, but would be concerning given the importance of consumer spending to the overall economy. We can hope that the new round of federal stimulus announced at the end of December will spur faster sales growth. But, given the timing of the stimulus, we will have to wait to see any impact from a potential tailwind on spending data.
Friday will also see the release of the December industrial production report. Industrial production is expected to grow by 0.5 percent during the month, marking a slight increase from the 0.4 percent rise in November. Some of this growth is anticipated because of the rebound in utility output in December, following an unseasonably warm November that saw output fall and drag down overall production. Manufacturing output is expected to grow by 0.4 percent in December, down from the 0.8 percent growth in November. As we saw with December’s manufacturing confidence numbers, the manufacturing sector has remained impressively resilient in the face of the third wave of infections. This fact supports the expectations for continued production growth. In addition, most factories have not been subject to the new set of lockdowns at the state and local levels. So, manufacturers should be able to withstand the third wave of infections better than in March and April, when many factories were forced to close. If estimates hold, this report would represent an encouraging highlight on the continued strength of manufacturing the sector.
We’ll finish the week with the preliminary estimate of the University of Michigan consumer sentiment survey for January. This widely followed measure of consumer confidence is expected to decline modestly from 80.7 in December to 80 in January. Given the worsening public health picture and the deteriorating employment situation during the month, a decline is understandable. Following November’s unexpected surge in confidence, the anticipated result would be slightly disappointing. Still, it would leave the index well above the pandemic-induced low of 71.8 it hit in April, indicating that consumers are showing more resiliency during the third wave of infections compared with the first. Nonetheless, even if the index remains well above the pandemic lows, it will be far from the pre-pandemic high of 101 recorded in February 2020. Consumer confidence will continue to be a widely followed economic indicator, as rising confidence typically supports faster consumer spending growth.
That’s it for this week—thanks for reading and stay safe!
