Monday Update: Consumer and Manufacturer Confidence Fall

Posted by Sam Millette

This entry was posted on Jan 6, 2020 12:17:10 PM

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In his Monday Update, Commonwealth’s Sam Millette focuses on international trade, service sector confidence, and the new jobs report. Last week, we saw both consumer and manufacturer confidence fall unexpectedly in December, despite minutes from the Fed’s December meeting showing central bankers are satisfied with the current economic expansion. This week marks a return to normal for economic updates following two holiday-shortened weeks. We’ll be focusing on international trade, service sector confidence, and the December jobs report.

Last week’s news

On Tuesday, the final reading of the Conference Board Consumer Confidence Index for 2019 was released. The index fell to 126.5 in December, against expectations for a rise to 128.5. Although disappointing, this result is an improvement from November’s initial result of 125.5 (noting that this reading was later revised up to 126.8). Consumer confidence remained virtually flat during the fourth quarter, despite the improving employment situation and strong equity market performance. Confidence growth typically supports faster consumer spending growth, so the flat quarter is discouraging. Still, confidence is high on an absolute basis, so there is no immediate cause for concern. But this indicator bears watching as we kick off the new year.

On Friday, the ISM Manufacturing index for December was released. Manufacturer confidence fell to 47.2, against expectations for a rise to 49. This is a diffusion index, where values below 50 indicate contraction, so this continued weakness is disappointing. Apparently, the announcement of a “phase one” trade agreement between the U.S. and China was not enough to boost manufacturer confidence. This index declined sharply for most of 2019, falling from a post-recession high of 60.8 last August. It now sits at its lowest level since June 2009. Weakening global demand for manufactured goods and a slowdown in domestic business investment have been the major drivers for this decline. There’s some hope for optimism if further U.S.-China trade talks go well. As we saw last month, however, continued progress toward a resolution might not be enough to boost manufacturer confidence quickly.

We finished the week with Friday’s release of the minutes from the December FOMC meeting. The Fed kept rates unchanged, ending a streak of three straight meetings with a 25 bps rate cut. The minutes showed that Fed members were comfortable with the current pace of the economic expansion and do not anticipate easing rates in the immediate future, unless significant risks materialize. Potential major risks being monitored by Fed members include the protests in Hong Kong and the civil unrest in Latin America. These situations have the potential to heighten uncertainty and rattle international markets. The minutes also provided an overview on the Fed’s action in the overnight repurchase market, which has been ongoing since September. The FOMC voted to continue, as necessary, to provide liquidity to this market until further notice is given. Overall, the FOMC minutes contained no major revelations, but their release reinforced the Fed’s commitment to its current course, unless risks increase markedly.

What to look forward to

We’ll start the week with Tuesday’s release of November’s international trade report. The trade deficit is expected to narrow, from $47.2 billion in October to $44.5 billion in November. The combination of rising exports and declining imports is set to shrink the trade deficit to a 16-month low. Previously reported data shows that the end of the General Motors (GM) strike led to a rise in motor vehicle exports in November, which accounts for roughly half of the anticipated increase in exports. Imports are forecasted to fall, based on declining purchases of consumer goods due to the tariffs imposed in September. The phase one trade agreement between the U.S. and China is set to roll back these tariffs, so the slowdown in imports may be temporary. If the estimates hold, trade would likely become a driver of faster economic growth for the fourth quarter, following two quarters as a headwind.

On Tuesday, we’ll receive the ISM Nonmanufacturing index for December. This gauge of confidence for the service sector is expected to increase from 53.9 in November to 54.5 in December. As the service sector makes up the lion’s share of the economy, such an increase would be quite welcome, helping to offset concerns about a slowdown in manufacturing. If the index does rise as predicted, the ISM Composite index (which combines manufacturer and nonmanufacturer confidence) would sit at a level that has historically indicated GDP growth below 2 percent. Although sub-2 percent growth may not be eye-catching, slow growth is still growth and certainly better than the alternative.

Finally, on Friday, the December employment report is set to be released. The forecast is for 158,000 new jobs, following November’s better-than-expected 266,000 new jobs. November’s figure was boosted by roughly 40,000 GM employees returning to work after being on strike for most of September and October. Even accounting for that onetime boost, the pace of new job creation appears to be picking up toward year-end. This would be a positive development given the slowdown we saw at the start of 2019. In addition, the underlying data is expected to show a healthy jobs market, with unemployment remaining at 3.5 percent to tie a 51-year low. Wage growth is set to increase by 0.3 percent for December, which would translate to year-over-year growth of 3.1 percent. If these estimates are accurate, this report would be a solid way to finish out 2019, positioning the economy for further job growth in 2020.

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

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