Last week saw the release of a number of important economic updates, with most pointing toward faster growth to start the new year. Highlights included better-than-expected consumer confidence reports, a strong durable goods orders report, and a return to personal spending growth in January. This will be another busy week for updates, with a focus on business confidence and the February employment report.
Last Week’s News
On Tuesday, the Conference Board Consumer Confidence Index for February was released. This widely followed measure of consumer confidence increased by more than expected, rising from 88.9 in January to 91.3 in February against forecasts for an increase to 90. Marking two consecutive months with improving consumer confidence, this result is a good sign for consumer spending growth looking forward. It brought the index well above the pandemic-induced low of 85.7 recorded in April of last year. Much of the improvement in February was driven by improving consumer views on current economic conditions, as the present situation index rose to its highest level since November 2020. This improvement likely reflects the positive impact from the improved public health situation during the month and the tailwind from the stimulus passed at the end of December. Looking forward, there’s hope that another round of federal stimulus spending and continued improvements on the public health front will lead to a swift rebound in confidence. The positive results to start the year are a good sign we are heading in the right direction.
On Wednesday, the January new home sales report was released. New home sales beat expectations for the month, rising by 4.3 percent against calls for a more modest 1.7 percent increase. December’s report, which initially showed 1.6 percent growth, was revised up to mark 5.5 percent growth to end 2020. These results brought the pace of new home sales to its highest level in three months, signaling continued strong levels of demand in the housing market. New home sales, which are up by 19.3 percent on a year-over-year basis, have rebounded well past pre-pandemic levels. Much of their growth over the past year has been driven by the record low mortgage rates helping to bring additional prospective home buyers into the market. Looking forward, rising mortgage rates and low levels of supply could serve as headwinds for significantly faster levels of new home sales growth. If sales remain near current levels, however, they would signal a strong level of home buyer demand and a healthy housing market.
Thursday saw the release of the preliminary estimate of the January durable goods orders report. Durable goods orders rose by more than expected, increasing by 3.4 percent during the month against calls for a 1.1 percent rise. This result was especially encouraging because it brought the overall level of durable goods orders above pre-pandemic levels. Business confidence has remained resilient throughout the third wave of the pandemic, and January’s report continues to show the positive impact that high levels of confidence can have on spending. Core durable goods orders, which strip out the impact of volatile transportation orders, increased by 1.4 percent in January, above economist estimates for 0.7 percent growth. Core durable goods orders are often viewed as a proxy for business investment, so this strong result is a good sign for business spending in the first quarter. Overall, this report was an encouraging demonstration of continued business resilience to start the year.
Thursday also saw the release of the initial jobless claims report for the week ending February 20. The number of initial claims fell sharply during the week, with claims dropping from 841,000 the week before to 730,000. This result was much better than economist estimates for 825,000 initial claims, and it represents the fewest unemployment claims in a week since the end of November 2020. One of the likely drivers of the drop is the easing of state and local restrictions due to the improved public health picture, but the inclement weather in large areas of the country may have also led to lowered levels of reporting. Overall, despite the potential impact of the weather, this encouraging result could mean the job market is in line for a faster recovery than anticipated. Given the volatility we’ve seen on a week-to-week basis for initial claims, it’s too early to say the labor market recovery is out of the woods. Nonetheless, the continued improvement of initial claims data would be seen as a positive development.
On Friday, the January personal income and personal spending reports were released. Personal spending rose by 2.4 percent to start the year, slightly below economist estimates for 2.5 percent growth. Despite the modest miss, this result was very strong, as it marks the highest monthly spending gain since last June. The personal spending growth was largely driven by the improved public health situation in January, as well as the federal stimulus passed at the end of December. Last year, in May and June, we saw similar increases in spending when initial lockdowns were lifted. Personal income rose by 10 percent during the month, beating economist estimates for 9.5 percent growth. Income has been very volatile on a month-to-month basis throughout the pandemic, driven in large part by shifting federal stimulus and unemployment payments. The surge in January reflects the impact from the one-time $600 payments included in the December stimulus bill. It also echoes the 12.4 increase in income we saw last April when the initial round of stimulus checks was released.
We finished the week with Friday’s second and final estimate of the University of Michigan consumer sentiment survey for February. It showed that sentiment improved throughout the month, as the preliminary reading of 76.2 was revised up to 76.8 at month-end. Economist estimates had been for a more modest increase to 76.5. The report showed that consumer expectations for future economic conditions improved throughout the month, as the expectations subindex increased from 69.8 to 70.7. As was the case with the Conference Board Consumer Confidence Index, the University of Michigan survey now sits well above the pandemic-induced low of 65.9 it hit last year, indicating consumer confidence remains more resilient compared with last year. The lowered case counts and increased vaccinations throughout the month likely played a part in the improving confidence, as did the positive impact from the December stimulus payments. Overall, this encouraging release signaled that consumer confidence has now likely stabilized following the third wave. It could be set to accelerate as we see further improvements on the public health front.
What to Look Forward To
Monday saw the release of the ISM Manufacturing index for February. This widely followed gauge of manufacturer confidence improved by more than expected during the month, rising from 58.7 in January to 60.8 in February. Forecasts were for a more modest increase to 58.9. Manufacturer confidence rose to a three-year high, as factory orders, production, and employment all saw faster growth during the month. This is a diffusion index, where values above 50 indicate expansion, so this result signals healthy levels of growth for the manufacturing industry. Manufacturer confidence has rebounded well since initial lockdowns were lifted last year, as the index sits well above the pre-pandemic high of 51.1 it hit in January 2020. Business confidence and spending have remained resilient throughout the third wave of the pandemic, and this strong result bodes well for continued strong levels of manufacturing output and spending.
On Wednesday, the ISM Services index for February is set to be released. Service sector confidence is expected to remain unchanged at 58.7 during the month, following a surprise increase in January that brought the index close to a two-year high. As was the case with manufacturer confidence, service sector confidence has rebounded well since initial lockdowns were lifted last year. The index remains well above the pre-pandemic high of 56.7 it set in February 2020. The lowered case counts throughout February 2021 caused many state and local governments to lift restrictions, which should support continued high levels of service sector confidence. This trend should be especially beneficial for leisure and hospitality businesses, as higher-frequency data showed an uptick in business activity once restrictions were eased. Looking forward, additional improvements on the public health front and another round of federal stimulus should continue to support strong levels of busines confidence and spending.
Thursday will see the release of the initial jobless claims report for the week ending February 27. Economists expect to see the number of initial claims rise from 730,000 to 793,000 during the week, likely reflecting the impact of weather-delayed claims the week before. Initial claims have been volatile on a week-to-week basis throughout the pandemic. If estimates hold, however, the four-week average of initial claims would reach its lowest level since the first week of December 2020. The improvement from the week before, as well as the general improvement in February compared with much of December and January, indicates that the pressure on the labor market may be starting to ease. This is likely due in large part to the lifting of state and local restrictions driven by the improving public health situation. Overall, however, the number of weekly initial claims remains high compared with historically normal levels. Accordingly, this weekly report will continue to be widely monitored until we see significant progress for the ongoing labor market recovery.
Speaking of the labor market, Friday will see the release of the February employment report. Economists expect to see 145,000 new jobs added during the month, in an improvement from the 49,000 jobs added in January. The pace of the labor recovery slowed during the third wave of the pandemic, but, if estimates hold, this release would mark two consecutive months with positive job growth. Following a net decline in jobs in December, this outcome would be a step in the right direction. Given the improved public health situation and the easing of local restrictions, the leisure and hospitality jobs that were most pressured during the third wave are expected to show signs of improvement in February. This would signal that the labor market recovery is poised to accelerate. Meeting the estimate would be an encouraging sign that the worst impact from the third wave is behind us and the economic recovery picked up steam in February.
Finally, we’ll finish the week with Friday’s release of the January international trade report. The trade deficit is forecasted to widen during the month, with economist estimates calling for a $67.5 billion deficit in January compared with $66.6 billion in December. The advance report on the trade of goods showed that the goods deficit widened from $83.2 billion in December to $83.7 billion in January. This result was driven by a 1.1 percent increase in imports that offset a rise in exports during the month. If estimates hold, they would bring the overall trade deficit to its second widest level since the financial crisis, trailing only the $69.0 billion monthly deficit recorded in November 2020. Despite the anticipated widening of the deficit, we have seen a notable rise in exports since initial lockdowns were lifted. Accordingly, trade is not expected to serve as a major headwind for GDP growth in the first quarter.
That’s it for this week—thanks for reading and stay safe!