The Independent Market Observer

Monday Update: Consumer Recovery Falters

Posted by Sam Millette

This entry was posted on Dec 28, 2020 11:34:47 AM

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In his Monday Update, Commonwealth’s Sam Millette sums up the latest news and assesses signals regarding the economic recovery. Last week’s economic updates largely pointed to a slowing economic recovery as we headed into the end of the year. The evidence includes a drop in personal spending in November, falling consumer confidence, and continued high levels of weekly layoffs. There were some signs for optimism, however, as business investment remained resilient and housing sales stayed strong on a year-over-year basis. Due to the holidays, this week will be very quiet, with only the weekly initial jobless claims report set to be released.

Last Week’s News

On Tuesday, the Conference Board Consumer Confidence Index for December was released. Surprisingly, this widely followed gauge of consumer sentiment declined during the month, falling from a downwardly revised 92.9 in November to 88.6 in December, against forecasts for an increase to 97. This disappointing result brought the index to its lowest level in four months, highlighting the headwinds created by the worsening public health picture. The decline was driven by a sharp drop in consumers’ views of the present situation, as the present situation index fell from 105.9 in November to 90.3 in December. Historically, improving consumer confidence has supported faster consumer spending growth, so this report is a concerning sign for December’s consumer spending figures. Looking forward, it is quite possible that an additional round of federal stimulus payments and increased vaccination rates could lead to a swift rebound in confidence in 2021. For the time being, however, this release will continue to be closely monitored.

Tuesday also saw the release of the November existing home sales report. Sales of existing homes fell by more than expected during the month, declining by 2.5 percent against forecasts for a more modest 2.2 percent drop. This result follows a better-than-expected release in October that saw existing home sales hit their highest level since 2005, so this pullback is not a major concern. The pace of existing home sales has rebounded impressively this year, with sales up by 25.7 percent on a year-over-year basis in November. The housing market has been one of the bright spots in the economic recovery, as record low mortgage rates have driven prospective buyers into the market. Looking forward, low supply of available homes for sale and rising prices will likely serve as a headwind for significantly faster growth in existing home sales. Still, continued sales near the current level would be a sign of a strong housing market.

On Wednesday, the preliminary estimate of November’s durable goods orders report was released. Durable goods orders rose by 0.9 percent during the month, beating economist estimates for a 0.6 percent increase. Core durable goods orders, which strip out the impact of volatile transportation orders, rose by 0.4 percent, slightly below estimates for 0.5 percent growth. Core durable goods orders, which are often viewed as a proxy for business investment, have seen a strong rebound since initial lockdowns ended. This continued growth is especially impressive given the fact that core orders have already rebounded beyond pre-pandemic levels. The solid result for November indicates that business investment remained resilient, despite the worsening public health situation and increased restrictions at the state and local levels. Overall, this encouraging report bodes well for fourth-quarter business investment. This signal is all the more important given the slowdown in consumer spending growth expected during the quarter.

The initial jobless claims report for the week ending December 19 was also released on Wednesday. The report showed that the number of initial unemployment claims fell from 892,000 to 803,000, against calls for a more modest decline to 880,000. Continuing unemployment claims, which are reported with a one-week lag to initial claims, also came in under expectations. They fell from 5.507 million to 5.337 million, against calls for an increase to 5.56 million. Despite the better-than-expected results, this release represents a concerning number of weekly layoffs. It marks three straight weeks with more than 800,000 initial claims, a very high number on a historical basis. Given the continued high level of weekly layoffs in December and the slow pace of hiring in November, a net loss of jobs during the month is possible. If that happens, December would mark the first month with net job losses since April. A healthy job market is essential to achieving a full economic recovery, so this weekly release will continue to be widely monitored.

Wednesday also saw the release of the November personal spending and personal income reports. Spending fell by 0.4 percent during the month, which is a worse result than economist estimates for a 0.2 percent drop. Consumer spending accounts for the majority of economic activity, so this decline is a worrying sign for overall growth as we reach the end of the year. Marking the first month with a drop in spending since April, this release highlights the economic risks presented by rising case counts and new restrictions at the state and local levels. Personal income also came in below expectations during the month, falling by 1.1 percent against calls for a more modest 0.3 percent decline. Income has been very volatile on a month-to-month basis due to changes in government stimulus and unemployment programs. This larger-than-expected decline reflected the expiration of a number of federal stimulus programs. We can hope that a second round of federal stimulus payments and an extension of emergency unemployment benefits will shore up income growth, but we will have to wait until 2021 to see the full impact of this support. In the meantime, we may see further declines in income in December given the continued stress on the labor market.

The fourth major data release on Wednesday was the release of the second and final estimate for the University of Michigan consumer sentiment survey for December. The index fell by more than expected during the month. It declined from the initial estimate of 81.4 to 80.7, against forecasts for a more modest drop to 81.1. Despite the intramonth decline, this release represents an improvement from November’s final reading of 76.9. The responses continued to show a partisan split, with Democrat sentiment rising in December and Republican sentiment falling. This result continues a three-month stretch in which Democrat confidence has increased while Republican confidence has dropped. We saw a similar partisan shift following the 2016 election. Despite the rise in sentiment compared with November’s result, the index sits well below the pre-lockdown high of 101 it hit in February. This fact highlights the work needed to get back to pre-pandemic levels.

Finally, we finished the week with Wednesday’s release of the new home sales report for November. Unexpectedly, new home sales fell by 11 percent during the month, coming in below economist estimates for a 0.5 percent decline. The pace of new home sales now sits at its lowest level since June. On a year-over-year basis, however, sales rose by 20.8 percent in November. Compared with existing home sales, new home sales are a smaller and often more volatile component of total sales. New home sales have shown a strong rebound since initial lockdowns were lifted, as evidenced by the high level of year-over-year growth in November. As was the case with existing home sales, low supply and rising prices may serve as a headwind for substantially faster sales growth going forward. Nonetheless, if sales remain near current levels, they would signal a strong housing market.

What to Look Forward To

On Thursday, the initial jobless claims report for the week ending December 26 is set to be released. Economists expect to see the number of initial unemployment claims rise from 803,000 to 826,000. This result would mark four straight weeks with initial claims coming in above 800,000. This expectation is concerning, given the fact that initial claims came in below this level throughout November. The worsening public health situation and the associated restrictions at state and local levels have increased pressure on the labor market. This development is a troubling given the already shaky nature of the labor recovery. The service sector has been hard hit by the new round of anti-coronavirus measures, and continued weakness is therefore expected. While the level of initial and continuing claims has declined notably since March, results at current levels would signal continued high levels of stress on the labor market. This would be a bad sign for overall economic growth. Again, there is hope that vaccinations and increased federal stimulus could support job growth later in 2021. In the near future, however, continued labor market stress is likely.

That’s it for this week—thanks for reading and happy New Year!

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