The Independent Market Observer

Monday Update: Economic Recovery Slows

Posted by Sam Millette

This entry was posted on Dec 21, 2020 12:01:16 PM

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In his Monday Update, Commonwealth’s Sam Millette assesses the slowing recovery, the healthy housing sector, manufacturing improvements, and more.Last week’s data releases largely showed a slowing economic recovery, as evidenced by declining retail sales figures for October and November and a disappointing rise in initial jobless claims. With that being said, the housing sector remains healthy and manufacturing continues to show signs of improvement. This will be a busy week for economic updates, with reports scheduled that touch on consumer confidence, home sales, durable goods orders, and personal income and spending.

Last Week’s News

We started the week with Tuesday’s release of the November industrial production report. Production came in above expectations, rising by 0.4 percent during the month against calls for a 0.3 percent increase. This result was a step down from the downwardly revised 0.9 percent rise in production we saw in October. The slowing production growth was largely caused by weather effects, as unseasonably warm weather caused a drop in utilities output. On the other hand, manufacturing output improved by more than expected, rising by 0.8 percent during the month against calls for a 0.4 percent increase. This result was driven in large part by a 5.3 percent increase in auto production that brought the pace of auto manufacturing in line with levels seen a year ago. Despite the continued growth in November, industrial production levels remain down 5.5 percent on a year-over-year basis. This highlights the continued work necessary to get production back to pre-pandemic levels.

On Wednesday, the November retail sales report was released. Headline sales came in below expectations, declining by 1.1 percent during the month against forecasts for a 0.3 percent decline. In addition, October’s report was downwardly revised to show a 0.1 percent decline. These results mark the first time since March and April that retail sales have declined in consecutive months. Core retail sales, which strip out the impact of volatile auto and gas sales, fell by 0.8 percent in November against calls for a 0.1 percent increase. October’s core retail sales report was also downwardly revised to show a decline of 0.1 percent. This release raises concerns regarding retail sales and the overall economic recovery, as consumer spending accounts for the majority of economic activity in the U.S. Unfortunately, it appears that the worsening public health situation, combined with a lack of additional federal stimulus and the imposition of anti-coronavirus restrictions at the state and local levels, has taken an increasing toll on the economic recovery. Looking forward, there is hope that vaccines and other efforts to get the pandemic under control will provide a tailwind for faster sales growth in 2021. For the time being, however, the decline in sales will be closely monitored by economists in order to gauge the overall health of the economic recovery.

Wednesday saw the release of the National Association of Home Builders Housing Market Index for December. This measure of home builder confidence fell by more than expected during the month, declining from 90 in November to 86 in December, against calls for a more modest decline to 88. Despite the decline, the index sits at its second-highest level on record, highlighting the continued strength of the housing market. Home builder confidence has risen notably since hitting a lockdown-induced low of 30 in April, driven by record low mortgage rates that have spurred additional prospective home buyers into the market. The supply of homes available for sale remains near record lows, serving as another tailwind for home builder confidence. Looking forward, home builder confidence is expected to remain elevated. This should continue to support strong levels of new home construction, which is sorely needed given the low levels of homes available for purchase.

The third major release on Wednesday was the release of the FOMC rate decision from the Fed’s December meeting. As expected, the Fed did not make any changes to the federal funds rate, which was lowered to virtually zero in March to support a faster economic recovery. Fed members remain committed to keeping rates low for the foreseeable future, with most members expecting to keep rates unchanged until at least 2023. The major focus from this meeting was a change in the language for the Fed’s current bond buying program. The Fed reemphasized its commitment to the current purchases of at least $120 billion in assets a month until “substantial further progress” is made on the central bank’s employment and inflation goals. This dovish move was meant to support markets and the economy over the short to intermediate term. In his press conference, Fed Chairman Jay Powell doubled down on continued support for ongoing asset purchases. He indicated that the Fed is willing and able to do more to support the economic recovery as needed.

Thursday saw the release of the initial jobless claims report for the week ending December 12. The report showed an unexpected increase in initial unemployment claims, with claims rising from 862,000 the prior week to 885,000, against calls for a decline to 818,000. This result brought the pace of initial claims to its highest level in three months, highlighting the headwinds created by the worsening pandemic and state and local measures implemented to limit the spread. With winter weather here and new restrictions in place, the service industry has been hard hit and further weakness is expected. Continuing unemployment claims, which are reported with a one-week lag to initial claims, declined by more than expected. They went from 5.781 million to 5.508 million, against forecasts for a more modest decline to 5.7 million. Some of this decline can be attributed to people exhausting their benefits rather than returning to the work force. Ultimately, this report showed the fragility of the labor market and the very real risks that the pandemic poses to the overall economic recovery in the short term.

Finally, we finished the week with Thursday’s release of the November building permits and housing starts reports. Both measures of new home construction showed faster growth than expected during the month. Starts rose by 1.2 percent against forecasts for 0.3 percent growth, and permits increased by 6.2 percent against calls for a 1 percent rise. These strong results brought the pace of permits to its highest level since 2006, while starts remain well above levels seen throughout most of 2019. Single-family housing starts showed continued growth. They hit a 13-year high in November, driven by shifting consumer preference due to the pandemic. Given the record level of home builder confidence we saw in November, the continued improvement in the pace of new home construction is not overly surprising. Overall, this release was an encouraging reminder that the housing market remained healthy in November despite the worsening public health picture.

What to Look Forward To

On Tuesday, the Conference Board Consumer Confidence Index for December will be released. This widely monitored gauge of consumer sentiment is expected to increase from 96.1 in November to 97.8 in December. If estimates prove accurate, the release would mark a rebound. The index would, however, sit at a lower level than the post-lockdown high of 101.4 we saw in October. Historically, improving consumer confidence has supported faster spending growth, so any improvement to end the year would certainly be a welcome sign. With that said, the index is expected to remain well below this year’s high-water mark of 132.6 set in February. We have a long way to go to get consumer confidence back to pre-pandemic levels.

Tuesday will also see the release of the November existing home sales report. Sales of existing homes are expected to fall by 2.2 percent during the month, following a surprise 4.3 percent increase in October. October’s result brought the pace of existing home sales to its highest level since 2005, so the anticipated decline in November is not a major concern. Existing home sales account for the majority of home sales and, since initial lockdowns were lifted, the pace of sales has increased notably. On a year-over-year basis, existing home sales are expected to show a 25.9 percent increase. Looking forward, low supply and rising prices may serve as a headwind for faster housing sales growth. Still, record low mortgage rates and high levels of home buyer demand are expected to keep the overall pace of sales high for the time being.

On Wednesday, the preliminary estimate of November’s durable goods orders report is set to be released. Durable goods orders are expected to rise by 0.6 percent during the month, following a 1.3 percent increase in October. Core durable goods orders, which strip out the impact of volatile transportation orders, are expected to rise by 0.5 percent, following a 1.3 percent increase in October. Core durable goods orders are often viewed as a proxy for business investment. Since initial lockdowns ended, we have seen a solid recovery in core orders that surpasses pre-pandemic levels. Business confidence and spending have largely remained resilient through this third wave of infections. A positive result for durable goods orders would be another sign that the business recovery has continued, despite the headwinds created by the pandemic.

The initial jobless claims report for the week ending December 19 will also be released on Wednesday. Economists expect to see a decline in initial claims during the week, with forecasts calling for a drop from 885,000 claims to 863,000. If estimates prove accurate, the result would be a modest improvement from the week before, but the pace of lost jobs would continue at a concerning rate. Given the rise in initial claims this month and the slow pace of hiring in November, it is quite possible we could see a net loss of jobs during December. That result would mark the first net negative month for jobs since initial lockdowns ended in April. Ultimately, in order to achieve a full economic recovery, we will need to do a much better job of getting people back to work. This weekly release gives us a relatively up-to-date look at the health of the job market, so it will continue to be widely monitored.

Wednesday will also see the release of the November personal spending and personal income reports. Spending is expected to decline by 0.1 percent during the month, down from a 0.5 percent increase in October. If estimates hold, the result would mark the first month with declining spending since April. This decline would echo the drop in November’s retail sales report. Personal income is expected to show a 0.3 percent decline during the month, marking two consecutive months with declining income. Income growth has been very volatile on a month-to-month basis, due to shifting government stimulus and unemployment payments. The decline in personal income is expected due in large part to expiring emergency unemployment payments. We can hope that a second round of federal stimulus payments will support income growth, but the next round of payments is likely to come in early 2021. 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 will be the release of the second and final estimate for the University of Michigan consumer sentiment index for December. The initial estimate showed a surprise increase for the index, from 76.9 in November to 81.4 to start December. Nonetheless, economists expect to see the index fall to 80.9 at month-end. While an intramonth decline would be slightly disappointing, it would leave the index near the post-lockdown high of 81.8 set in October. In addition, the index would remain well above the low of 71.8 it hit in April, suggesting that consumers are reacting to the third wave of infections with more resiliency than earlier in the year.

Finally, we will finish the week with Wednesday’s release of the new home sales report for November. New home sales are expected to decline by 0.9 percent during the month, following a 0.3 percent drop in October. Despite the anticipated decline, the pace of new home sales would remain near its highest level since 2006. New home sales are a smaller and often more volatile component of total sales compared with existing home sales, but this segment has rebounded notably since initial lockdowns ended. On a year-over-year basis, new home sales are expected to grow by 42.2 percent in November. As with existing home sales, low supply and high prices may serve as a headwind for faster sales growth going forward. Still, continued sales near current levels would highlight the strength of the housing market and be a positive sign for overall economic growth.

That’s it for this week—thanks for reading and stay safe!

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