Last week was relatively quiet on the economic update front, with reports on service sector confidence, the international trade balance, and initial jobless claims serving as highlights. This week will be busier, with updates focusing on September’s inflation, retail spending, and industrial production.
Last Week’s News
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 saw the release of the international trade report for August. The trade deficit widened by more than expected during the month, from $63.4 billion in July to $67.1 billion in August, against forecasts for a more modest widening to $66.2 billion. This result brought the deficit to its largest level since 2006. A 2.2 percent rise in exports during the month was not enough to offset a 3.2 percent rise in imports driven by U.S. businesses looking to replenish depleted inventories ahead of the holiday season. Despite the increase in trade activity, the overall value of U.S. imports and exports is still down by roughly 12 percent compared with pre-pandemic highs. This figure indicates there is still a long way to go to get back to pre-pandemic trade levels. For exports, the gap is even wider at roughly 18 percent, highlighting the damage caused by the pandemic to U.S. exporters.
On Wednesday, the FOMC minutes from the Fed’s September meeting were released. As expected, the minutes showed the Fed’s commitment to keeping monetary policy supportive until full employment returns and inflation reaches 2 percent on a sustainable basis. Fed members remained concerned about the risks to the economy presented by the pandemic and cited the possibility of future outbreaks as a risk to the ongoing recovery. The minutes were short on additional information on the pace of future asset purchases, but some participants did note that reassessing the program would be appropriate at future meetings. For the time being, these minutes largely confirmed what we already knew and reinforced the Fed’s commitment to supportive policy.
Finally, we finished the week with Thursday’s release of the initial jobless claims report for the week ending October 3. The report showed 840,000 initial unemployment claims were filed during the week, down slightly from an upwardly revised 849,000 initial claims the week before. This result was worse than economist estimates for a larger decline to 820,000. On the other hand, continuing unemployment claims declined by more than expected, falling from 11.979 million to 10.976 million, against calls for a more modest decline to 11.4 million. Unlike initial claims, the number of continuing unemployment claims has continued to drop over the past few weeks. Part of this decline, however, is due to unemployed workers exhausting their 26 weeks of benefits, as the report covers the 29th week since pandemic-induced layoffs began in mid-March. 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 lockdowns ended.
What to Look Forward To
On Tuesday, the September Consumer Price Index will be released. Consumers prices are expected to rise by 0.2 percent during the month, down from a 0.4 percent increase in August. On a year-over-year basis, consumer inflation is slated to increase by 1.4 percent, up modestly from the 1.3 percent annual inflation rate we saw in August. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to rise by 0.2 percent during the month and 1.7 percent on a year-over-year basis. Inflationary pressure picked up during the summer, as low inventories and rising demand led to modest increases in consumer prices. Nonetheless, the deflationary pressures created by the lockdown measures are expected to keep inflation constrained for the time being.
Speaking of inflation, Wednesday will see the release of the Producer Price Index for September. This measure of producer inflation is expected to show a modest 0.2 percent gain in producer prices during the month, down from a 0.3 percent increase in August. On a year-over-year basis, producer prices are expected to rise by 0.2 percent. Core consumer prices, which strip out volatile food and energy prices, are expected to go up by 0.2 percent during the month. On an annual basis, core producer inflation is expected to rise by 0.9 percent, compared with a 0.6 percent increase in August. As was the case with consumer inflation, the deflationary pressure created by anti-coronavirus measures earlier in the year is expected to keep producer inflation moderate for the time being. Despite the pickup in inflation we’ve seen since reopening efforts kicked off, inflation remains well below the Fed’s stated 2 percent target. Accordingly, the central bank is not expected to react to rising inflation by raising rates until the job market improves considerably.
On Thursday, the initial jobless claims report for the week ending October 10 will be released. Economists expect to see an additional 823,000 initial claims filed during the week. If estimates hold, initial claims will have plateaued around 850,000 per week over the past six weeks, a pace roughly four times the average for weekly initial claims in 2019. The continued high number of layoffs is a concerning sign that the labor market still faces significant headwinds well after lockdowns ended. Given the current stress on the job market, this important weekly release will continue to be monitored as a gauge of the health of the labor market.
Friday will see the release of September’s retail sales report. Sales are expected to rise by 0.8 percent during the month, taking a step up from August’s 0.6 percent increase. Part of this anticipated increase is due to the more than 7 percent rise in car sales in September. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to show a more modest 0.5 percent increase during the month, down from a 0.7 percent gain in August. The pace of retail sales growth has slowed notably since the summer, when reopening efforts and heightened government stimulus supported faster growth. Still, the overall level of sales has rebounded above pre-pandemic levels. Looking forward, we are unlikely to see large double-digit gains in sales. Nonetheless, continued growth at the forecasted level would be a positive sign that consumers remain willing and able to spend despite expired government stimulus payments.
Friday will also see the release of September’s industrial production report. Production is expected to increase by 0.6 percent during the month, up from a 0.4 percent gain in August. Manufacturing production is expected to rise by 0.7 percent during the month, marking a slight decline from August’s 1 percent growth. The pace of industrial production growth has slowed since the summer, when reopening efforts provided a tailwind for producers. Despite the anticipated increase during the month, industrial production remains well below pre-pandemic levels, highlighting the divergent pace of the economy recovery for domestic production compared with consumption since lockdowns ended.
We’ll finish the week with Friday’s release of the preliminary estimate for the University of Michigan consumer sentiment survey. The index is expected to show a modest rise from 80.4 in September to 80.5 in October. Consumer confidence rebounded in September to its highest level since the pandemic began, and any further improvement in October would be another step in the right direction. Increased consumer confidence typically leads to faster consumer spending growth, so this report has been widely followed throughout the pandemic. Despite the increase in confidence in September and the anticipated rise in October, the index sits well below the high of 101 it set in February. A lot of work must still be done to get consumer confidence back to pre-pandemic levels.
That’s it for this week—thanks for reading and stay safe!