The Independent Market Observer

Monday Update (on Tuesday): Pandemic Slows Economic Recovery

Posted by Sam Millette

This entry was posted on Jan 19, 2021 12:13:50 PM

and tagged In the News

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In his Monday Update, Commonwealth’s Sam Millette analyzes last week’s mixed economic news and looks ahead to housing data and the weekly jobs report.Last week was packed with economic updates, with the reports showing mixed results. Disappointing initial unemployment claims and retail sales reports contrasted with a better-than-expected industrial production release. This week will be another busy one for updates, with a focus on housing data and the weekly initial jobless claims report.

Last Week’s News

On Wednesday, the December Consumer Price Index was released. Consumer prices rose by 0.4 percent during the month, up from 0.2 percent growth in November but in line with economist expectations. On a year-over-year basis, consumer inflation rose by 1.4 percent, slightly above the forecasts for 1.3 percent growth. Core consumer prices, which strip out the impact of volatile food and energy prices, showed a more subdued 0.1 percent increase during the month, which translated to a 1.6 percent rise on a year-over-year basis. Despite the monthly increase in inflationary pressure, headline consumer inflation on a year-over-year basis remains below the Fed’s 2 percent target. It is also well below 2020’s high of 2.5 percent, which we saw last January. Looking forward, continued rising gas prices and a potential return to normalcy as vaccination programs take effect are expected to serve as tailwinds for moderately faster price growth. For the time being, however, inflation remains well constrained.

On Thursday, the initial jobless claims report for the week ending January 9 was released. The report showed a surprising increase in claims, with the number of weekly initial unemployment filers rising from 784,000 to 965,000, against calls for a more modest increase to 789,000. This disappointing result brought the pace of weekly initial claims to its highest level since August. It is possible, however, that the data is catching up to reality following reporting disruptions caused by the holidays at year-end. Continuing unemployment claims, which are reported with a one-week lag to initial claims, also rose by more than expected, increasing from 5.072 million to 5.271 million. Calls were for a decline to 5 million. Ultimately, this report was concerning. It highlights the continued negative impact that case growth and new restrictions at the state and local levels have had on the economic recovery to start the year. Hopefully, the stimulus passed at the end of December will support economic growth until mass vaccinations occur. For the time being, however, the negative impact from the pandemic should be closely monitored.

Friday saw the release of the December Producer Price Index. Headline producer prices rose by 0.3 percent during the month, up from 0.1 percent growth in November but below economist estimates for 0.4 percent growth. On a year-over-year basis, headline producer prices rose by 0.8 percent, in line with November’s annual inflation rate and economist forecasts. Core producer prices, which strip out energy and food prices, rose by 0.1 percent during the month and 1.2 percent on a year-over-year basis, against calls for 0.2 and 1.3 percent growth, respectively. As was the case with consumer inflation, producer inflation remains well constrained and below the Fed’s stated 2 percent target. It is quite possible that we will continue to see modest increases in inflationary pressure during the year. But, given the continued weakness of the job market and the risks presented by the pandemic, the Fed is not expected to react to modest rising inflationary pressure by raising rates for the foreseeable future.

On Friday, December’s retail sales report was released. Retail sales came in below expectations, falling by 0.7 percent during the month against forecasts for no change. This report marks three straight months with declining retail sales—the first three-month stretch showing a drop since the period of February through April 2020. Core retail sales, which strip out the impact of volatile auto and gas sales, fell even further, with a 2.1 percent decline against forecasts for a modest 0.3 percent drop. The weakness in sales, which was widespread, highlights the negative impact that rising case counts and restrictions at the state and local levels had on consumer spending in the fourth quarter. This report is concerning, as it indicates that consumer spending in the fourth quarter was weaker than expected. This trend is a bad sign for overall economic growth, given that consumer spending accounts for the majority of economic activity in the country. We can hope that the round of federal stimulus announced at the end of December will help spur faster sales growth. Nonetheless, the decline in retail sales in the fourth quarter is a sign that the economic recovery slowed to end the year.

Friday also saw the release of the December industrial production report. Industrial production increased by 1.6 percent during the month, against economist estimates for 0.5 percent growth. This better-than-expected result was partially driven by faster growth in manufacturing output, which increased by 0.9 percent in December against calls for 0.5 percent growth. Utilities output also increased notably during the month, as a return to more normal winter temperatures drove up utility spending following an unseasonably warm November. These results were encouraging for the production side of the economy, which has been slower to recover than the consumer economy. Previously released business confidence data showed that manufacturer confidence remained resilient in the fourth quarter despite the worsening public health situation. This fact indicates that businesses learned to adapt to the pandemic and have been able to deal with the third wave of the coronavirus more successfully than with earlier waves. This strong result is especially encouraging given the recent weakness we’ve seen in consumer spending data. Increased business production and spending may help to offset some of the slowing consumer spending growth during the quarter.

We finished the week with the release of the preliminary estimate of the University of Michigan consumer sentiment survey for January. This widely followed measure of consumer confidence fell by more than expected during the month. It declined from 80.7 in December to 79.2 in January, against calls for a more modest decline to 79.5. While this larger-than-expected decline was slightly disappointing, the index remains well above the pandemic-induced low of 71.8 it hit in April. This indicates that consumers are reacting to the third wave of infections with more resiliency compared with earlier waves. With that being said, the index sits well below the pre-pandemic high of 101 it hit in February 2020, highlighting the work that needs to be done to get confidence back to pre-pandemic levels. As improving consumer confidence has historically been linked with faster consumer spending growth, this report will continue to be widely monitored.

What to Look Forward To

On Wednesday, the National Association of Home Builders Housing Market Index for January will be released. This measure of home builder confidence is expected to remain unchanged at 86. If estimates hold, this result would be strong, tying December for the second-highest reading for the index on record and trailing only November’s all-time high of 90. Home builder confidence has rebounded notably since hitting a pandemic-induced low of 30 in April. In large part, this trend has been driven by low mortgage rates that have spurred an increase in buyer demand. In addition, home builder confidence has been bolstered by the low level of homes available for sale, which gives builders confidence that newly built homes will be quickly purchased. High home builder confidence supports faster new home construction, so continued strength for this index would be a good sign for the health of the overall housing market.

Speaking of new home construction, Thursday will see the release of the December building permits and housing starts reports. Permits are expected to fall by 2.1 percent during the month, following a 6.2 percent increase in November. Starts are expected to increase by 1 percent, following a 1.2 percent increase in the prior month. If estimates prove accurate, this report would mark the second-highest monthly level of permits since 2006. Starts would set a new post-lockdown high, remaining well above levels seen throughout most of 2019 and 2020. As was the case with home builder confidence, permits and starts have increased notably since initial lockdowns were lifted last year. Given the low levels of houses available for sale and their rising prices, the pace of new home construction is expected to remain high for the immediate future, especially if home builder confidence remains near record levels.

Thursday will also see the release of the initial jobless claims report for the week ending January 16. Economists expect to see 830,000 initial unemployment claims filed during the week, marking a solid decline from the 965,000 initial claims the week before. Still, despite the anticipated drop, this weekly report would represent a concerningly high level of initial claims on a historical basis. Although initial claims have declined notably since last March and April, the current claims signal that the labor market is still facing significant stress due to the pandemic and increasing restrictions at the state and local levels. Ultimately, a full economic recovery will depend on further improvements for labor market conditions. Accordingly, this weekly release, which gives economists a timely look at the health of the labor market, will continue to be widely followed.

We’ll finish the week with Friday’s release of the December existing home sales report. Existing home sales are expected to fall by 2.2 percent during the month, following a 2.5 percent decline in November. October saw the pace of existing home sales hit its highest level since 2005, so the anticipated decline would leave sales at healthy levels. Since initial lockdowns ended, existing home sales have increased notably. If the December estimates prove accurate, sales would be up 18.4 percent on a year-over-year basis, despite the monthly drop. Looking forward, significantly faster sales growth is unlikely given the supply constraints and rising prices. If sales remain near current levels, however, they would represent a healthy level of home-buying activity and continued strength for the housing sector, which has been a bright spot in the recent economic recovery.

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

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