Last week was relatively quiet in terms of economic updates, with a focus on the November inflation reports, the weekly initial jobless claims report, and the first look at consumer sentiment in December. The consumer sentiment report was the highlight during the week, as consumer confidence unexpectedly rose to start off December. This week, we’ll see more updates. The November retail sales and industrial production reports are set to be released, as are updates on home builder confidence and new home construction.
Last Week’s News
On Thursday, the Consumer Price Index for November was released. Consumer prices rose by 0.2 percent during the month, a slightly higher result than the estimated 0.1 percent growth. On a year-over-year basis, consumer prices grew by 1.2 percent, which matched October’s year-over-year growth rate but was slightly above expectations for a fall to 1.1 percent. Core consumer prices, which strip out the impact of volatile food and energy prices, also rose by 0.2 percent in November, against calls for a more modest 0.1 percent increase. On a year-over-year basis, core consumer inflation came in at 1.6 percent, in line with October results but slightly above estimates for 1.5 percent growth. November saw an uptick in prices for various goods and services that notably suffered from deflationary forces due to the pandemic, including airline fares, auto insurance, and clothing prices. Still, these categories remain well below pre-pandemic levels, so further modest price increases have room to run in the upcoming months. With that being said, on the whole, consumer inflation remains well contained for the time being and is not a pressing concern.
Thursday also saw the release of the initial jobless claims report for the week ending December 5. This report showed a surge in initial unemployment claims. Initial claims rose from 716,000 for the week ending November 28 to 853,000 for the week ending December 5. This result was notably higher than economist estimates for 725,000 initial claims. The data for the past two weeks has likely been affected by Thanksgiving, however. The holiday appears to have led to an undercount of initial claims for the final week of November and a rebound in reported claims for the first week on December. We saw a similar pattern in reporting for COVID-19 cases over the same period. Given the impact of the holiday, it is unclear exactly how many initial claims were filed in each week. Nonetheless, the average between the two weeks is high on a historical basis. Continuing unemployment claims, which are reported with a one-week lag to initial claims, increased modestly. Again, however, the impact of the holiday could be distorting the data. Ultimately, this report showed that the lull in claims in the last week of November was likely not the start of a downwards trend in layoffs. Rising case counts continued to put stress on the labor market through the start of the month.
On Friday, the Producer Price Index for November was released. In line with expectations, producer prices rose by 0.1 percent during the month. On a year-over-year basis, producer prices rose by 0.8 percent, against calls for 0.7 percent growth. Core producer inflation, which strips out the impact of volatile food and energy prices, rose by 0.1 percent during the month and 1.4 percent on a year-over-year basis. Those figures are slightly below the 0.2 percent and 1.5 percent inflation rates that were expected for the month and year, respectively. The slower-than-anticipated increase in core producer prices is a sign that the moderate inflationary pressure producers experienced over the summer has largely subsided. Driven in large part by the continued deflationary pressure created by the pandemic, both consumer and producer inflation remain well below the Fed’s stated 2 percent inflation target.
Friday also saw the release of the preliminary estimate of the University of Michigan consumer sentiment survey for December. Surprisingly, this widely followed measure of consumer confidence rose to start the month. The index went up from 76.9 in November to 81.4 in December, against forecasts for a decline to 76. This result brought the index to its second-highest level since initial lockdowns were lifted back in May, trailing only the 81.8 high-water mark it hit in October. This result was driven by more positive consumer views on present economic conditions, as well as improved expectations for future conditions. The report showed a large partisan split in responses. Democrats expressed a surge in optimism for both current conditions and future expectations, while Republicans expressed a sharp drop in future expectations since the election in November. We saw a similar pattern emerge in the opposite direction back at the end of 2016, when President Trump was elected. Overall, this report was encouraging, as improving consumer confidence has historically supported faster consumer spending growth. Still, given the partisan split in responses, this tailwind may be more muted than normal.
What to Look Forward To
We’ll start the week with Tuesday’s release of the November industrial production report. Economists expect to see production increase by 0.3 percent during the month, down from a 1.1 percent gain in October. Some of this projected growth can be attributed to an anticipated increase in mining production, which in turn was likely supported by rising oil prices. Manufacturing output is also expected to show growth during the month. Economists are forecasting a 0.2 percent increase in output, down from the 1 percent rise in October. If estimates hold, this report would mark seven straight months with increased manufacturing output. The recovery for manufacturing activity has been slower than the recovery for consumers, however, and total output would remain below pre-pandemic levels. Ultimately, this report is expected to show continued modest improvement for industrial production and manufacturing in November. This would be a positive sign that the producer recovery continued during the month, albeit at a slower pace than in October.
On Wednesday, the November retail sales report is set to be released. Economists expect to see sales fall by 0.2 percent during the month, following a 0.3 percent increase in October. If estimates hold, this report would mark the first month with declining sales since April. Core retail sales, which strip out the impact of volatile auto and gas sales, are set to show solid 0.3 percent growth in November. This result would be a step up from the 0.2 percent core sales growth we saw in October. Going forward, steady core retail sales growth at these levels would be a positive development, as retail sales have already rebounded past pre-pandemic levels. With that being said, high-frequency consumer spending data signals there may be a slowdown in spending on the horizon, driven by newly imposed lockdowns and changing consumer habits due to the worsening public health situation. Given the importance of consumer spending for the overall economy, this release will be widely monitored. It will give us an idea of just how resilient consumer spending was in November.
Wednesday will also see the release of the National Association of Home Builders Housing Market Index for December. This measure of home builder confidence is expected to fall from a record high of 90 in November to 88 in December. If estimates hold, this reading would represent the second-highest mark for the index since its inception in 1985, so a modest decline would be nothing to worry about. Home builder confidence has shown a very impressive rebound since hitting a lockdown-induced low of 30 in April. This rebound has been largely driven by record low mortgage rates that have drawn prospective home buyers into the market in droves since initial lockdowns ended. Additionally, the supply of homes available for sale remains near historic lows. This fact has driven prices up and given home builders confidence that newly built units will sell quickly.
The third major release on Wednesday will be the release of the FOMC rate decision from the Fed’s December meeting. Economists do not expect the Fed to make any changes to the federal funds rate, which was lowered to virtually zero in March to combat the pandemic’s economic impact. Economists will be closely monitoring this meeting. It’s possible that the Fed will announce forward guidance for future asset purchases, which would be seen as a supportive move for markets and the economy. Given the rising COVID-19 case counts since the Fed met at the start of November, the press release from the meeting will be widely monitored, as will Fed Chair Jerome Powell’s press conference.
On Thursday, the initial jobless claims report for the week ending December 12 is set to be released. Economists expect to see 820,000 initial unemployment claims filed during the week. This figure would be an improvement from the 853,000 initial claims filed the week before, but an increase from the post-lockdown low of 711,000 initial claims set the week ending November 6. If estimates hold, the result would signal that rising case counts and the associated measures taken by states to combat the spread of the coronavirus have increased pressure on the labor market in December. If we continue to see initial claims at these levels during the month, a net loss of jobs in December could result. That would highlight the threat that the worsening public health picture represents for the economic recovery in the short to medium term. Given the high level of initial unemployment claims, this report will continue to be closely monitored. It should be noted, however, that jobless claims have a high level of week-to-week volatility. As such, it’s important not to read too much into large swings on a weekly basis.
We’ll finish the week with Thursday’s release of the November building permits and housing starts reports. Economists expect mixed results from these two measures of new home construction. Permits are set to rise by 0.7 percent, and starts are expected to fall by 0.3 percent. Despite the anticipated decline for starts, the pace of new home construction has rebounded swiftly since lockdowns ended. It now sits well above levels seen throughout most of 2019. Construction of single-family homes has been a highlight, given that the pace of single-family housing starts hit a 13-year high in October, driven by changing consumer preferences due to the pandemic and a lack of supply. The signs of this strong pace of construction could carry over into 2021. The number of projects permitted but not yet started remains near its highest level since October 2008. If estimates hold, these reports would showcase the continued strength of the housing market. This sector has been one of the bright spots in the overall economic recovery since initial lockdowns were lifted earlier in the year.
That’s it for this week—thanks for reading and stay safe!