We received a number of important economic data releases last week, with a focus on business confidence, the international trade report, and the December jobs report. Fewer jobs than expected were added in December, although improvements to the household survey and participation rate caused the unemployment rate to fall notably to end the year. This week will be packed with updates, with reports to come on December inflation, retail sales, and industrial production, as well as consumer sentiment to start January.
Last Week’s News
On Tuesday, the ISM Manufacturing index for December was released. This widely monitored gauge of manufacturer confidence declined by more than expected. The index fell from 61.1 in November to 58.7 in December, against calls for a more modest drop to 60. This is a diffusion index, where values above 50 indicate expansion, so this result signals growth in manufacturing despite the miss against expectations. Manufacturer confidence was well supported throughout 2021. Reduced restrictions on business activity and the overall economic recovery allowed for increased factory production throughout the year. Lean business inventories and high consumer demand also supported manufacturer confidence in 2021. Historically, high levels of business confidence have supported business spending growth, so December’s result is a good sign for business spending as we kick off the new year.
Wednesday saw the release of the December FOMC meeting minutes. These minutes were widely anticipated due to the central bank’s announcement at the meeting regarding cutting its monthly asset purchases by more than initially expected in the months ahead. This decision signals that the Fed is committed to normalizing monetary policy sooner than originally anticipated. Economists and investors were looking forward to the release of the minutes to gain insights into which factors caused the Fed to increase the pace of asset-purchase tapering. The minutes showed that Fed board members were concerned about the persistently high inflation experienced throughout much of 2021. The attempt to normalize monetary policy more quickly was due in part to fears about continued inflationary pressure in 2022. The minutes also contained some preliminary discussions about the Fed’s balance sheet and potential steps to decrease the Fed’s Treasury bond holdings in the years ahead. It’s too early for any firm commitment for balance sheet reduction from the central bank, but the preliminary discussions indicated that some Fed members view the end of 2022 or beginning of 2023 as a potential starting date. Balance sheet reductions would be another step toward normalizing monetary policy sooner rather than later.
On Thursday, the November international trade balance report was released. The trade deficit increased by less than expected, with the gap rising from an upwardly revised $67.2 billion in October to $80.2 billion in November. The calls were for a further expansion to $81 billion in November. The report brought the monthly trade deficit to its second-largest level on record, trailing only the $81.4 billion deficit in September 2021. The deficit’s rise was driven by a surge in imports, as retailers tried to stock up for the important holiday season. Imports increased by 4.6 percent in November, which was more than enough to offset the 0.2 percent rise in exports. Trade was a net drag on economic growth in the third quarter of 2021. The expansion of the deficit in November indicates this headwind may continue into the fourth quarter. With that said, the global economic recovery is expected to help lead to a more normal trading environment in 2022.
Thursday also saw the release of the ISM Services index for December. Service sector confidence dropped by more than expected during the month. The index fell from 69.1 in November to 62 in December, against calls for a decline to 67. This result left the index in healthy expansionary territory, as this is another diffusion index, where values above 50 indicate growth. It should also be noted that November 2021’s result of 69.1 was the highest reading for the index on record. Furthermore, December 2021’s result left service sector confidence well above pre-pandemic levels. With that said, service sector business owners noted a slowdown in new orders during the month, likely due in large part to the uncertainty caused by the Omicron variant. Still, despite the decline in confidence, the employment component of the report showed that service sector businesses continued to hire in December. This was an encouraging sign for future service sector growth.
We finished the week with Friday’s release of the December employment report. The report showed that 199,000 jobs were added during the month. This result was down from the upwardly revised 249,000 jobs added in November and below economist estimates for 450,000 new jobs. While the miss against expectations was slightly disappointing, the monthly job figures have been subject to relatively high levels of revisions over the past few months. Notably, the October 2021 and November 2021 job reports were revised up by a combined 141,000 jobs. Additionally, the underlying data showed further signs of improvement. The unemployment rate fell from 4.2 percent in November to 3.9 percent in December, against calls for a more modest drop to 4.1 percent. This news highlights the impressive improvement we saw for the unemployment rate in 2021, which fell from 6.7 percent in December 2020 to 3.9 percent in December 2021. Given the relatively low unemployment rate and the continued wage growth recorded in December 2021, the report is expected to support the Fed’s decision to increase the pace of its asset-purchase tapering in the months ahead.
What to Look Forward To
Wednesday will see the release of the Consumer Price Index for December. Consumer prices are expected to increase by 0.4 percent during the month, down from the 0.8 percent jump in November. On a year-over-year basis, the estimates are for 7.1 percent growth, up from the 6.8 percent rise in November. Core consumer prices, which strip out volatile food and energy prices, are expected to go up by 0.5 percent during the month and 5.4 percent year-over-year. Tangled supply chains, lean business inventories, and high levels of pent-up consumer demand led to higher-than-anticipated consumer inflation throughout much of 2021. These inflationary pressures are expected to remain in play toward the end of the year. Given the recent actions and commentary from the Fed, many economists believe the central bank will move more swiftly to combat inflation in 2022. We may see a more hawkish Fed than currently expected.
On Thursday, the Producer Price Index for December is set to be released. Producer prices are also expected to increase by 0.4 percent during the month, following a 0.8 percent rise in November. As for headline year-over-year producer inflation, the calls are for a rise of 9.8 percent in December, slightly higher than November’s 9.6 percent year-over-year gain. Core producer prices, which strip out food and energy prices, are expected to go up by 0.4 percent during the month and 8 percent year-over-year. As was the case with consumer prices, producer prices were pressured throughout 2021 due to supply chain constraints. Additionally, rising material and labor costs contributed to rising inflationary pressure felt by producers throughout 2021. If estimates prove accurate, this report would support the Fed’s anticipated plans for more hawkish policy in 2022.
Friday will see the release of the December retail sales report. Retail sales are expected to decline by 0.1 percent during the month, following a 0.3 percent increase in November. If estimates hold, this report would mark the first drop for sales since July 2021. It would be a sign that rising medical risks in December weighed on consumer spending. Throughout most of last year, consumer spending growth was positive, supported by improvements on the public health front that allowed the easing of state and local restrictions. Although widespread shutdowns are not anticipated at this time, it’s possible the recent rise in case growth will negatively affect consumer spending in the short term. Given the importance of consumer spending to economic growth, this release will be widely monitored. Economists will use it to gauge the impact of the recent case growth on spending and the overall economic recovery.
Friday will also see the release of the December industrial production report. Industrial production is expected to increase by 0.3 percent during the month, following a 0.5 percent gain in November. If estimates hold, this report would mark three consecutive months with improved production. November’s solid result was supported by an increase in factory production and manufacturing output. Manufacturing production rose by 0.7 percent in November, and economists expect that result to be followed by a 0.4 percent uptick in December. Capacity utilization in November reached the highest level since December 2018, and further improvements are expected in December’s report. Throughout the pandemic, producers have been slower to recover compared with consumers. Still, we’ve seen steady progress in getting production back to pre-pandemic levels. Overall, if estimates prove accurate, this report would mark a solid result. It would show that production continued to recover to end the year, supported by high levels of consumer and business demand.
We’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for January. Consumer sentiment is expected to decline slightly from 70.6 in December to 70 to start the new year. If estimates hold, this report would bring the index close to the recent low of 67.4 recorded in November 2021. Consumer sentiment dropped toward the end of last summer and remained well below pre-pandemic levels throughout the year. Consumers cited rising inflationary pressure as the major driver of the collapse in sentiment. The survey has, however, taken on a notable partisan split. Republican respondents expect significantly higher levels of inflation in the short and intermediate term compared with Democrats. These disparate inflation expectations have caused overall confidence levels to diverge. Republican consumers had an overall sentiment level of 45.6 in December 2021, while Democrats registered 90.8, marking one of the largest gaps on record. Looking forward, further progress in getting inflation under control will likely be needed before we see a notable improvement in overall consumer sentiment.
That’s it for this week—thanks for reading!