The Independent Market Observer

Monday Update: Employment Recovery Slowing

Posted by Sam Millette

This entry was posted on Dec 7, 2020 10:46:06 AM

and tagged In the News

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In his Monday Update, Commonwealth’s Sam Millette analyzes business confidence, the latest jobs report, international trade, inflation, and more.Last week saw a number of economic updates, with a focus on business confidence, the November jobs report, and October’s international trade report. This week will be relatively quiet, with November’s inflation reports and a first look at consumer sentiment in December serving as highlights.

Last Week’s News

On Tuesday, the ISM Manufacturing index for November was released. This measure of manufacturer confidence declined by more than expected, falling from 59.3 in October to 57.5 in November, against forecasts for a more modest decline to 58. This is a diffusion index, where values above 50 indicate expansion, so manufacturing remains in expansionary territory. Notably, despite the monthly drop, manufacturer confidence sits at its second-highest level since December 2018. Manufacturing confidence has rebounded sharply since hitting a lockdown-induced low of 41.5 in April. The continued strength in November despite rising case counts is a sign of resilience from the manufacturing industry.

On Thursday, the initial jobless claims report for the week ending November 28 was released. Initial unemployment claims totaling 712,000 were filed during the week, a notably better result than the 775,000 initial claims forecasted by economists. This report breaks a streak of two straight weeks with increasing initial claims. Furthermore, the drop from the 787,000 initial claims filed the week before is the largest single-week decline in initial claims in nearly two months. Continuing unemployment claims, which are reported with a one-week lag to initial claims, also declined. They dropped from 6.089 million to 5.52 million, against calls for a more modest decline to 5.8 million. But the news was a bit more mixed here, as the improvement we’ve seen in continuing claims may be partially due to folks exhausting their benefits rather than returning to work. Despite the drop in both initial and continuing claims, both measures of unemployment remain well above historically normal levels, signaling continued stress on the labor market.

Thursday also saw the release of the ISM Services index for November. Service sector confidence fell during the month, but by less than expected, dropping from 56.6 in October to 55.9 in November. Calls had been for a slightly larger decline to 55.8. This is another diffusion index, where values above 50 indicate growth, so this result kept the service sector in expansionary territory. Service sector confidence remains well above the pandemic-induced low of 41.8 the index hit in April. Nonetheless, this report marks two straight months with declining confidence, highlighting the risks that the worsening pandemic presents to service sector businesses. For the time being, confidence remains healthy. Still, as the service sector accounts for the majority of overall economic activity, this index will continue to be monitored.  

On Friday, the November employment report was released. The report showed that 245,000 jobs were added during the month. This result was lower than both the 460,000 additional jobs forecasted and the downwardly revised 610,000 jobs added in October. As expected, the unemployment rate fell from 6.9 percent in October to 6.7 percent in November, but some of this drop can be attributed to an unexpected decline in the labor force participation rate during the month. This disappointing report highlighted the negative economic impact from rising COVID-19 case growth in November. Newly implemented restrictions at the state and local level likely served as a headwind to faster hiring. This report marks the fewest number of new jobs added in a month since lockdowns ended. It is concerning, given that the overall employment level remains roughly 10 million jobs below pre-pandemic levels. With case growth continuing in December, it is quite possible we will see the pace of improvement stall even further to end the year. Still, hope exists that vaccines will accelerate the pace of improvement once they are widely available in 2021.

We finished the week with Friday’s release of the October international trade report. The trade deficit widened during the month, from an upwardly revised $62.1 billion in September to $63.1 billion in October. Forecasts were for a larger deficit of $64.8 billion. This result brought the monthly trade deficit to its second-widest point since 2008, trailing only the $64.9 billion gap we saw in August. Imports and exports both increased during the month, rising by 2.1 percent and 2.2 percent, respectively. This report marks five straight months with rising exports. Exports remain well below pre-pandemic levels, however, driven in part by a decline in service exports related to a slowdown in global travel. Looking forward, economists do not expect to see large shifts in the trade deficit in the short term. The slowdown in consumer demand is expected to weigh on import growth, while exports will likely remain muted compared with earlier in the year. 

What to Look Forward To

On Thursday, the initial jobless claims report for the week ending December 5 will be released. Economists expect to see an additional 720,000 initial claims filed during the week, which would be a modest increase from the 712,000 initial claims recorded the week before. If estimates prove accurate, this report would mark the third-lowest level of weekly initial claims since the pandemic started. Nonetheless, on a historical basis, claims would still be high. The pace of improvement for initial claims has slowed notably over the past two months. This fact highlights the headwind for further improvements for the labor market created by rising COVID-19 case counts over this time period.   

Thursday will also see the release of the Consumer Price Index for November. Consumer prices are expected to grow by 0.1 percent during the month, after remaining flat in October. On a year-over-year basis, consumer inflation is forecasted to grow by 1.1 percent, down from the 1.2 percent annual inflation rate gain in October. Core consumer inflation, which strips out the impact of volatile food and energy prices, is also expected to show 0.1 percent growth during the month. That result would bring the pace of year-over-year core consumer inflation to 1.5 percent in November, down from 1.6 percent in October. We saw a moderate pickup in inflationary pressure when lockdowns were lifted earlier in the year. Nonetheless, consumer inflation has remained largely constrained throughout the year, due primarily to the deflationary pressures created by anti-coronavirus measures.

On Friday, the Producer Price Index report for November will be released. Economists expect to see a modest 0.1 percent increase in producer prices during the month and a 0.6 percent gain year-over-year. Core producer inflation, which strips out the impact of volatile food and energy prices, is expected to show 0.2 percent growth during the month and 1.5 percent growth year-over-year. If estimates prove accurate, this report would be another sign that the moderate inflationary pressure we saw during the summer has largely subsided. Inflation remains well below the Fed’s stated 2 percent target. As we head into the end of the year, economists expect to see modest price pressure for the time being, due to the worsening public health picture.

Friday will also see the release of the preliminary estimate of the University of Michigan consumer sentiment survey for December. Economists expect to see sentiment fall, with forecasts calling for a drop from 76.9 in November to 76 to start off December. This result would be the lowest level for the index since August, highlighting the negative impact of the worsening public health picture. Hope exists that the positive vaccine news released in November will bolster consumer confidence. In November, however, the second and final monthly report for this index was released after the vaccine news came out. It showed a decline in confidence throughout the month, indicating that rising case counts likely outweighed the positive vaccine news. The index bottomed at 71.8 in April, which means the forecasted result would leave consumer sentiment above that pandemic-induced low-water mark. We have, however, a long way to go to get back to the pre-pandemic high of 101 set in February. Historically, improving consumer confidence has supported faster consumer spending growth, so this release will continue to be widely monitored.

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

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