There were a number of important economic data releases last week, with a focus on consumer and business confidence and the August employment report. The employment report showed that the pace of hiring slowed during the month, as rising medical risks served as a headwind for faster job growth. This week will be relatively quiet, with only two reports due to the holiday-shortened schedule.
Last Week’s News
Tuesday saw the release of the Conference Board Consumer Confidence Index for August. This widely followed measure of consumer sentiment fell by more than expected, dropping from a downwardly revised 125.1 in July to 113.8 in August. The forecasts were for a more modest decline to 123. This result, which echoes a similar decline in the University of Michigan consumer sentiment survey for August, brought the index to a six-month low. Increasing consumer concern about the rising public health risks due to the Delta variant weighed heavily on sentiment, as the present situation subindex fell to its lowest point since April. Historically, higher levels of consumer confidence have supported faster consumer spending growth, so the sharp drop in confidence in August is a warning that we may see lower levels of spending during the month, especially for the hard-hit service sector. Consumer spending accounts for the majority of economic activity in the country, so it will be important to monitor this sector in the months ahead.
On Wednesday, the ISM Manufacturing index for August was released. This measure of manufacturer confidence increased by more than expected, rising from 59.5 in July to 59.9 in August. The economist calls were for a decline to 58.5. This is a diffusion index, where values above 50 indicate expansion, so this report showed an acceleration in manufacturing growth despite the headwinds for the industry. Survey respondents noted that tangled global supply chains and material shortages held the manufacturing industry back from even faster growth. During the month, the measure of order backlogs for manufactures rose to the second-highest level ever recorded, highlighting the challenges that manufacturers face due to the uneven nature of the global economic recovery. Still, despite the headwinds for the industry, this report marks the fourteenth consecutive month in expansionary territory. High levels of demand and low business inventories have supported a steady rebound for manufacturers following the expiration of initial lockdowns last year.
Thursday saw the release of the initial jobless claims report for the week ending August 28. The number of initial unemployment claims filed during the week fell from 354,000 to 340,000, against forecasts for a decline to 345,000. This larger-than-expected drop brought the number of initial claims to a new pandemic-era low, providing a positive signal for the ongoing labor market recovery. The nationwide reopening efforts throughout the year have supported notable progress in getting weekly initial claims down from this year’s peak of just more than 900,000, which was recorded in early January. With that said, real work must be done to get the pace of layoffs back to pre-pandemic levels. Given the importance of the labor market recovery to the overall economic recovery, this weekly report will continue to be widely monitored.
Thursday also saw the release of the July international trade balance report. The trade deficit narrowed by more than expected, dropping from a downwardly revised $73.2 billion in June to $70.1 billion in July. The forecasts were for a more modest decline to $70.9 billion. This narrowing was driven by a 0.2 percent decline in imports and a 1.3 percent rise in exports during the month. Import growth slowed due in large part to shifting consumer demand for services over goods, while exports were supported by increased shipments of capital equity, consumer goods, and cars. Accordingly, this was an encouraging report. It suggests that net trade could be a tailwind for overall economic growth in the third quarter, after serving as a modest headwind in the second quarter. With that said, the deficit remains much wider than historically normal. There is much work to be done to get trade back to pre-pandemic levels.
On Friday, the August employment report was released. During the month, 235,000 jobs were added, a result down from the upwardly revised 1,053,000 jobs added in July and below economist expectations for an additional 733,000 jobs. This disappointing result marks the fewest number of jobs added in a month since January, highlighting the negative economic impact from the rising medical risks during the month. Reopening efforts throughout much of the country in the spring and early summer helped boost a surge in hiring as businesses scrambled to meet excess demand. Nonetheless, August’s job report indicates this tailwind may be fading, as rising case counts have led to some increased restrictions at the state and local levels. Despite the miss against expectations for headline jobs growth, the report contained a few silver linings. The unemployment rate fell from 5.4 percent to 5.2 percent during the month, setting a new pandemic-era low. Additionally, wage growth increased by more than expected. Average hourly earnings increased by 4.3 percent on a year-over-year basis, against forecasts for a 3.9 percent increase. Overall, while the headline jobs number missed against expectations, the continued job growth during the month and improving underlying conditions were a positive sign.
We finished the week with Friday’s release of the ISM Services index for August. This gauge of service sector confidence declined from 64.1 in July to 61.7 in August, against forecasts for a slightly larger drop to 61.6. This is another diffusion index, where values above 50 indicate growth, so this result signals continued expansion for the service sector despite the decline for the index. July’s result marked a record high for the index, so the pullback in August is understandable, especially when rising medical risks are taken into account. Service sector confidence remains well above pre-pandemic levels and should support continued spending growth during the month. Service sector businesses continue to face many of the same headwinds as manufacturers, namely, rising prices and labor shortages. But the report contained signs that these headwinds are starting to fade. The measure of prices paid by service sector businesses fell to its lowest point since March 2021, due to declining supplier delivery times. Ultimately, this report was encouraging, indicating that service sector confidence remained robust despite rising medical risks.
What to Look Forward To
On Thursday, the initial jobless claims report for the week ending September 4 is set to be released. Economists expect to see 343,000 initial unemployment claims filed during the week, in a modest increase from the 340,000 initial claims filed the week before. If estimates prove accurate, this report would bring the four-week moving average for initial claims to 346,000, marking the first drop below 350,000 claims since the start of the pandemic. Although August’s employment report showed a slowdown in hiring, we have continued to make steady progress in decreasing the number of layoffs. This is an encouraging signal that employers have not responded to the recent rising medical risks with mass layoffs, as was the case at the start of the pandemic last year.
Friday will see the release of the August Producer Price Index. Economists expect to see consumer inflation moderate during the month but increase on a year-over-year basis. Prices are expected to increase by 0.6 percent in August, following a 1 percent increase in July. Year-over-year, producer price growth is expected to increase from 7.8 percent in July to 8.3 percent in August. If estimates prove accurate, this report would mark the highest level of year-over-year producer inflation since records began in 2010, breaking the record just set in July 2021. Core producer prices, which strip out the impact of volatile food and energy prices, are expected to increase by 0.5 percent during the month and 6.6 percent year-over-year. Producers have had to contend with tangled global supply chains, material shortages, and labor shortages that have driven up costs throughout the course of the year. Given the uneven nature of the global economic recovery and the rising medical risks, these headwinds are expected to remain in the short term.
That’s it for this week—thanks for reading!