The Independent Market Observer

Monday Update: September Employment Report Disappoints

Posted by Sam Millette

This entry was posted on Oct 5, 2020 12:23:36 PM

and tagged In the News

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In his Monday Update, Commonwealth’s Sam Millette analyzes economic updates touching on broad swaths of the economy as the fourth quarter of 2020 kicks off.Last week was filled with economic updates touching on broad swaths of the economy as we prepared to kick off the fourth quarter of 2020. Reports were mixed, with better-than-expected consumer confidence and spending data contrasting with a disappointing September jobs report. This will be a quiet week for economic updates, with reports scheduled to cover service sector confidence, the international trade balance, and the weekly initial jobless claims report.

Last Week’s News

On Tuesday, the Conference Board Consumer Confidence Index for September was released. Confidence increased by more than expected during the month, with the index rising from 86.3 in August to 101.8 in September, against economist estimates for a move to 90. Marking the largest single-month increase for the index in more than 17 years, this report brought confidence to its highest level since the pandemic hit. The index peaked at 132.6 in February, however, so a lot of work remains to be done to get back to pre-pandemic confidence levels. Still, it’s good to see a step in the right direction following disappointing reports for July and August that revealed faltering confidence. Historically, improving consumer confidence levels support faster spending growth, so this result was a good sign for September’s consumer spending reports.

Thursday saw the release of the weekly initial jobless claims report for the week ending September 26. A total of 837,000 Americans filed initial unemployment claims during the week, marking a slightly better result than the 850,000 initial claims expected by economists. Continuing unemployment claims, which are reported with a one-week lag to initial claims, also beat expectations, dropping from 12.747 million claims to 11.767 million against calls for 12.2 million. Despite the week’s stronger-than-anticipated results, the level of initial and continuing unemployment claims remains very high on a historical basis, highlighting the continued stress on the labor market months after the lockdowns ended. We’ll need to see significant improvements on the employment front in order to achieve a full economic recovery, so this weekly report will continue to be widely followed.

Also on Thursday, August’s personal income and personal spending reports were released. Spending exceeded estimates, growing by 1 percent against calls for a 0.8 percent increase. This result follows a downwardly revised 1.5 percent rise in spending in July. As we can see, although personal spending has increased since reopening efforts began, the pace of improvement has started to cool. Personal income for August disappointed, falling by 2.7 percent against calls for a 2.5 percent decline. Incomes have been volatile during the pandemic, as large-scale layoffs and shifting government stimulus measures have led to substantial swings in monthly averages. For example, the larger-than-expected decline in August was driven by the expiration of the supplemental unemployment benefits at the end of July. These reports serve as another indication that the pace of the economic recovery has slowed.

The ISM Manufacturing index for September was also released on Thursday. This gauge of manufacturer confidence declined slightly during the month, from 56 in August to 55.4 in September, against calls for an increase to 56.5. Despite the modest decline, the index sits at its second-highest level in more than a year. This is a diffusion index, where values above 50 indicate expansion, so this report represents a strong result for the manufacturing industry. Manufacturing confidence and output have rebounded well since reopening efforts began, and this report is another sign that the manufacturing industry continued to recover at the end of the third quarter, driven by a rebound in demand for manufactured goods.

On Friday, September’s employment report was released. It was a disappointing update, as 661,000 jobs were added during the month, a number well below economist estimates for 859,000 new jobs. In addition, this result is down considerably from the more than 1.3 million jobs added in August and marks the fewest number of jobs added in a month since reopening efforts began in May. The unemployment rate fell from 8.4 percent to 7.9 percent, against forecasts for a more modest decline to 8.2. Even though the unemployment rate dropped by more than expected, the result was due primarily to people dropping out of the work force, as the labor force participation rate unexpectedly declined during the month. This indication that the pace of the economic recovery has slowed is concerning, given the large amount of work needed to get employment back to pre-pandemic levels. Ultimately, a full economic recovery will require significant improvements for the labor market, so these monthly releases will continue to be closely monitored.

We finished the week with Friday’s release of the second and final reading of the University of Michigan consumer sentiment survey for September. This measure of consumer confidence during the month beat expectations, rising from an initial mid-month estimate of 78.9 to 80.4 at month-end. Representing a strong improvement after the index hit 74.1 in August, this result brought the index to its highest level since the start of the pandemic. Nonetheless, there is still a long way to go to reach the pre-pandemic high of 101 the index set in February. As was the case with the Conference Board consumer confidence report, this strong result is a good sign for September’s yet-to-be released spending data.

What to Look Forward To

On Monday, the ISM Services index for September was released. This measure of service sector confidence came in above estimates, rising from 56.9 in August to 57.8 in September against calls for a decline to 56.2. This result brought the index near its post-pandemic high of 58.1 from July and helped calm concerns about wavering business confidence after the index fell by more than expected in August. Service sector confidence now sits above the pre-pandemic high of 57.3 set in February, highlighting the impressive rebound in business confidence we’ve seen since reopening efforts began. This is another diffusion index, where values above 50 indicate expansion. Accordingly, this strong September reading is a positive sign for service sector confidence and spending during the month, which is welcome given that the service sector accounts for the majority of economic activity.

Tuesday will see the release of the international trade report for August. The trade deficit is expected to widen from $63.6 billion in July to $66.3 billion in August. The deficit grew to its widest level in more than 12 years in July, and, if the estimates hold, the deficit would move close to the modern low of $67 billion recorded in July 2008. Previously announced data on the trade of goods during August showed the trade deficit for goods widened to its largest level on record, as a 2.8 percent rise in exports could not offset a 3.1 percent increase in imports of foreign goods. Despite the increased trade in goods during the month, overall trade volume is about 15 percent below pre-pandemic levels, indicating a long road ahead to restore pre-pandemic global trade.

On Wednesday, the FOMC minutes from the Fed’s September meeting will be released. This release will be interesting, due to the recent Fed policy changes that will allow inflation to rise above 2 percent for an extended period of time if the job market remains weak. Economists expect these minutes to give us a better idea of how committed the Fed is to keeping rates low to support a job market recovery if inflation rises before the return of full employment. Interestingly, two voters dissented at this meeting, with one arguing that the Fed’s new policy was too supportive and the other indicating that more support should have been committed. These minutes will give us a chance to learn more about the debate surrounding the Fed’s new inflation target and get an idea of what kind of overshoot the central bank would be comfortable with going forward. Other than the inflation target change, economists will be looking for mentions of future asset purchases and hints about potential changes to purchase plans.

Finally, we’ll finish the week with Thursday’s release of the initial jobless claims report for the week ending October 3. Economists expect to see an additional 820,000 initial filings during the week, which would be a modest improvement from the 837,000 initial claims the week before. Despite the anticipated decline, initial claims would remain significantly higher than historical norms if estimates prove to be accurate. Over the past five weeks, initial claims have largely plateaued around 850,000 per week, which is nearly four times the average from 2019. We’ll continue to monitor this important weekly update until initial and continuing unemployment claims return closer to historically normal levels.

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

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