On Tuesday, the ISM Manufacturing index for January was released. This measure of manufacturer confidence declined by less than expected during the month. The index fell from an upwardly revised 58.8 in December to 57.6 in January, against calls for a further decline to 57.5. This is a diffusion index, where values above 50 indicate growth, so the report demonstrates continued manufacturing expansion despite the decline for the index. The spread of the Omicron variant contributed to the drop in confidence in January, but the lack of widespread factory shutdowns meant that sentiment was supporting healthy levels of growth. Manufacturing confidence and output were strong throughout 2021, and the industry’s growth to start the new year is an encouraging sign. Looking forward, high demand are expected to support further growth, especially now that medical risks from Omicron appear to be declining.
Thursday saw the release of the ISM Services index for January. Service sector confidence also declined by less than expected during the month. The index fell from an upwardly revised 62.3 in December to 59.9 in January, against calls for a further decline to 59.5. This is another diffusion index, where values above 50 indicate growth. Accordingly, the report showed continued service sector expansion. This is a good sign for overall economic growth given that the service sector accounts for the majority of economic activity in the country. While we’ve understandably seen business confidence decline throughout the Omicron wave, sentiment has remained well above the pandemic-era lows recorded during initial lockdowns in 2020. These ISM reports illustrate how businesses have continued to successfully adapt to operating during a pandemic, supported by strong consumer demand driven by the economic recovery.
We finished the week with Friday’s release of the January employment report, which showed that 467,000 jobs were added during the month. This result was well above economist estimates for 125,000 additional jobs. The November and December jobs reports were also revised up by a combined 709,000 jobs. The much-better-than-expected numbers highlight the strength of the economic recovery and help calm concerns about the potential for an Omicron-induced slowdown for the labor market recovery. The January report was especially impressive given the continued case growth during the month, indicating that the economy has become more resilient to increased medical risks. The unemployment rate increased from 3.9 percent in December to 4 percent in January, against calls for no change. This increase was largely due to an increase in labor force participation, which is a good signal that folks are rejoining the job market. All in all, this report was very encouraging. It showed that the economic momentum from last year was able to drive job growth throughout the worst of the Omicron wave.
On Tuesday, the December international trade balance report is set to be released. The trade deficit is expected to increase from $80.2 billion in November to $83 billion in December. If estimates hold, the monthly trade deficit would be the largest on record, surpassing the previous high point, a $81.3 billion deficit in September 2021. Throughout the pandemic, the trade deficit has increased notably, driven by high consumer demand in the U.S. and continued issues in the global supply chain. The advanced report on the monthly trade of goods showed imports increasing by 2 percent in December, an amount that more than offset a 1.4 percent increase in exports. Looking forward, declining medical risks and the global economic recovery should support a return to more historically normal trade levels. Still, it may be some time before we see a meaningful decline in the monthly deficit.
Thursday will see the release of the Consumer Price Index report for January. Headline consumer prices are expected to increase by 0.5 percent during the month, in line with December’s 0.5 percent rise. On a year-over-year basis, consumer prices are set to rise by 7.3 percent in January, up from the 7 percent annual increase in December. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to go up by 0.5 percent during the month and 5.9 percent year-over-year. Throughout 2021, we saw a notable increase in inflationary pressure, primarily driven by rising costs for goods, services, and energy. While the Fed spent much of last year downplaying inflation risks, it began addressing rising prices at year-end. Looking forward, the Fed is expected to focus on combatting inflation in 2022, looking to support its dual mandate of maximum employment and stable prices.
On Friday, we’ll finish the week with the release of the preliminary estimate for the University of Michigan consumer sentiment survey for February. This widely monitored measure of consumer confidence is expected to improve modestly, increasing from 67.2 in January to 67.5 to start February. While declining medical risks and better-than-expected hiring in January should support improved sentiment in February, volatile equity markets and continued inflationary pressure will likely serve as headwinds. Historically, higher confidence has supported faster spending growth, so any improvement for the index would be a positive development. Nonetheless, a notable decline in inflationary pressure will likely be needed before the index can return to pandemic-era highs recorded in the first half of 2021.
That’s it for this week—thanks for reading!