Category Archives: Uncategorized

December Retail Sales, Industrial Production and Producer Prices and Mid-Month Consumer Sentiment

KEY DATA:  Sales: -0.7%; Core Sales: -1.9%/ IP: +1.6%; Manufacturing: +0.9% / PPI: +0.3%; Goods: +1.1%; Services: -0.1%; Sentiment: -1.5 points

IN A NUTSHELL: “The consumer hunkered down, as shutdowns increased and government support faded.”

WHAT IT MEANS:  If the consumer is the heart of the economy, it may be time for to bring out the defibrillators.  Retail sales fell sharply in December after having cratered in November.  The cutbacks were in most categories, but especially those impacted by shutdownsRestaurant demand dropped like a rock, purchases of big-ticket items such as electronics, appliances and furniture were off sharply, department store sales continued to disappear and people even cut back buying food at supermarkets.  Households even slowed their shopping online, which was off significantly.  Gasoline sales rose, but prices drove that increase.  Vehicle demand picked up and households hit the drug stores more heavily.  For some reason that I am not clear about, clothing demand surged.  Maybe it was that winter finally showed up. Excluding automobiles, gasoline, building materials and food services, which most closely mirrors the consumption number in the GDP report, sales fell by nearly two percent after declining by over one percent in November.  Clearly, household hunkered down at the end of last year.

Despite the slowdown in consumer spending, the nation’s manufacturing sector surged in December as output rose sharply.  The expansion was widespread.  Of the eleven durable goods industries, only two (vehicles and computers) posted declines.  Only one of the eight nondurable goods components, paper, contracted. 

Not only is manufacturing output rising, but so is the cost of producer goods on the rise.  The Producer Price Index was up moderately in December led by surging goods prices.  Most of that was in energy, which as we all know, has been soaring.  Excluding energy, producer prices for goods was up minimally.  Good news for consumers came in the form of declining food costs.  While the path from overall producer to consumer prices is hardly direct or clear, that is not the case with food.  Thus, we could see some relief or at least some stability in food prices over the next few months. 

The University of Michigan’s mid-month measure of consumer sentiment eased back, a major surprise given the recent events.  But what is driving the apparent stability in the measure is a vast difference between Democrats and Republicans, with independents stuck smack dab in the middle.  Democrats remain exuberant, Republican are depressed and independents are moderately optimistic.  Will the anger that has been engendered translate into consumer behavior?  That is unclear, but it cannot be a positive.

IMPLICATIONS:  The decline in retails sales is just another indication that government largesse was and needs to continue being the main support for the economy.  As the funding faded in November and December, so did consumption.  With shutdowns and restrictions rising, consumers didn’t do much shopping or eating out or actually buying much at all.  But that could easily turnaround in January as the next round of stimulus checks are going out.  So, if we see a rebound, chalk it up to Uncle Sam opening his wallet and pouring cash into the economy.  And with incoming President Biden proposing a massive new stimulus bill, look for the consumer to resume spending.  The wild card in all this is consumer sentiment.  The myth of a rigged election has been perpetrated on the populace for so long that large numbers of people actually believe it.  That no one has ever explained how a multi-state, multi-million vote fraud was carried out in secret or provided any proof that it actually happened, appears to be irrelevant.  Indeed, fraud was never mentioned in any of the lawsuits objecting to the vote counts.  But if you build it they will come and the big lie about the big steal was built and continues to be built.  How we get over this I don’t know, as large numbers of people, including politicians, are unwilling to admit that the election was fair and Biden won it. As a result, the resentment will fester and that cannot be good for anything, especially the ability to move critical programs through Congress.  And as the data clearly show, that is needed.

December Import and Export Prices and Weekly Jobless Claims

KEY DATA:  Imports: +0.9%; Nonfuel: +0.4%; Exports: +1.1%; Farm: +0.6%/ Claims: +181,000

IN A NUTSHELL: “Prices are filtering upward, but with the labor market no longer improving, inflation is not likely to affect the economy.”

WHAT IT MEANS:  Yesterday we saw that consumer costs rose solidly, at least when you factor in energy expenses.  Today’s import price numbers point to continued increases in prices, but again, it should largely be in the energy component.  Prices of imported goods surged in December, led by huge gains in crude oil and petroleum-based products.  Meanwhile, food was down, capital goods prices were flat and consumer and vehicle costs rose minimally.  So, don’t get too worked up about the import price increase.  On the export side, farmers must be smiling.  Agricultural export prices jumped again and over-the-year they are up by more than five percent. Not surprisingly, petroleum export costs were solidly.  In addition, building product prices also rose at a strong pace.  The robust housing market is affecting prices not just in the U.S. but also around the world.

Jobless claims soared last week to the highest level since the end of last August.  A number of factors may have been at work.  The holiday season, coupled with the virus, may have limited the number of people filing, or the filings taking longer to process.  In addition, the new stimulus bill may have drawn unemployed workers who exhausted the benefits back into the system.  However, the four-week moving average, which smooths out the ups and down, bottomed in mid-November and has been above 800,000 for the last month.  That is way too high. With the latest stimulus bill extending benefits, look for this number to rise in the near future.    IMPLICATIONS:If you are wondering why longer-term rates have doubled since early August, one place to start looking is inflation.  No, it is not out of control or even high.  But you can only argue that a 52-basis point 10-year Treasury note is rational if the outlook for inflation is for no inflation. In addition, the economy is coming back and we did see the largest growth rate in history in the third quarter.  The historically low 10-year rate simply made no sense and a movement back toward a level more consistent with a realistic economic outlook had to come.  And it has.  Will we see further increases in rates?  The expectation that the Biden administration will propose a massive new stimulus package could put more pressure on rates.  However, it is not clear when that bill would be passed, or what it will ultimately look like.  In the interim, it is hard to argue that the economy will continue growing strongly.  Yes, new stimulus checks are going to stabilize things, but there continues to be weakness in segments of the household and business sectors.  That argues for more moderate growth, at least until any new monies are available.  As for the Fed, it will continue to churn out data and members will continue to give speeches, but don’t expect anything to happen on the rate side for a very long time. 

December Consumer Prices and Real Earnings

KEY DATA:  CPI: +04%; Ex-Food and Energy: +0.1%; Energy: +4%/ Real Hourly Earnings: +0.4%; Over-Year: +3.7%

IN A NUTSHELL: “Inflation is moving up, but it is hard to see that it will become a problem anytime soon.”

WHAT IT MEANS:  When an economy crashes and burns, as happened in the spring, prices have a tendency to crater.  And they did.  When growth rebounds, prices tend to firm and that appears as an increase in inflation.  So, it should surprise no one that inflation has been picking back up lately.  Prices jumped in December – well not really.  The headline number was up pretty sharply but if you just exclude energy, consumer costs barely budged.  The oil market has turned up sharply over the past two months, but that is likely to stabilize.  The previous jump in vehicle prices is unwinding, and medical costs are no longer on the rise.  One place where the pressure remains is food, both at supermarkets and in restaurants.  Over-the-year both categories have increased by nearly four percent.  Also, cookie costs are out of control.  I have had to switch to cakes and cupcakes, where prices are down since December 2019.

The higher inflation and growth have pushed up mortgage rates.  That is causing a surge in refinancings.  The increase in rates is not likely to slow the housing market, though.  The rates remain extremely low and changing job and housing locational decisions remain strong incentives to buy.   

One number I like to watch is inflation-adjusted wages.  But these days, the data are largely worthless.  On the surface, it looks like wages are soaringBut alas, it’s the math, not the income.  The hourly wage number is a weighted average and with large numbers of low paid jobs eliminated in December, the weighted average rose sharply.  So, even adjusting for the large headline inflation increase, wages gains remained high.  They are coming down on a year-over-year comparison and once restaurants start reopening, the gains should continue to decline.    IMPLICATIONS:With eyes focused on Washington, it is hard to see how any single economic number could make a major difference.  Inflation is just not something that drives the thinking of a lot of people these days, so I don’t expect the report to make a dent in the thinking about the markets.  Instead, it’s the policy direction of the Biden administration that is being watched carefully.  It is likely they will come out with the biggest stimulus bill they can.  The Democrats argued that the last one was just a down payment and now they have the chance to do something big.  The reality is the economy is not ready to try to stand on its own.  There are too many zombie businesses that are being propped up by the stimulus welfare payments and taking those away now could lead to a major surge in bankruptcies.  There will be a period of reckoning when the stimulus funds finally end, but there is little interest on the part of the incoming administration to face that day anytime soon. While there is little doubt that Republicans will rediscover their fiscal responsibility religion, the Democrats can simply answer by saying that they will pay for their programs the same way the Republicans paid for their tax cuts and spending on businesses loans.  You notice I didn’t say how, which makes sense since no one in Washington pays for anything.  Well, someone might pay, but that has nothing to do with the budget.  And even that is not clear.  Regardless, if there is one thing we have learned over the past decade it is that when the government and the Fed spend like crazy, the biggest winners are the markets.  There is little reason to think that would be different if another major stimulus package passes.

December Employment Report

KEY DATA:  Payrolls: -140,000; Revisions: +135,000; Retail: +121,000; Leisure and Hospitality: -498,000; State and Local Government: -51,000; Unemployment Rate: 6.7% (Unchanged); Wages: +0.9%

IN A NUTSHELL: “When you shut things down, jobs disappear, it’s that simple.”

WHAT IT MEANS: The out-of-control virus continues to play havoc with the labor markets.  Payrolls declined in December, but most of that was due to shutdowns in the leisure and hospitality sector, which lost nearly half a million workers.  Three-quarters of that came from the closing of restaurants.  Educational facilities were also down sharply.  Budgetary issues led to significant cuts in state and local governments.  But there were also a number of outsized increases in other industries.  Retail soared, led by warehouse clubs and supercenters.  There was a surge in temporary workers and delivery services, which was hardly a surprise.  Improving sales led vehicle dealers to add a lot more workers.  While the large increase in construction was somewhat greater than expected, the jump in manufacturing payrolls was not.  Those two sectors combined added nearly 90,000 workers, much more than projected.  October and November payrolls were revised upward enormously. 

As for the unemployment data, they were remarkably tame.  The rate remained at 6.7% as both the labor force and number of people unemployed increased minimally.  The number of people unemployed remained near eleven million, but the number of workers who were unemployed for between 5 and 26 weeks dropped sharply.  That was offset by new workers coming on to the rolls. The one concern was that long-term unemployment continued to increase, though only moderately.  Nearly four million people have been unemployed for twenty-seven weeks or longer.  That could weigh heavily on the recovery.

Finally, wages skyrocketed.  Actually, they didn’t.  As I have pointed out before, the hourly wage number is a weighted average and in December, most of the workers losing jobs were in low-paying positions.  Thus, their weight dropped sharply, increasing the average.  When they come back after the holiday shutdowns, that should reverse. 

IMPLICATIONS:  On the surface, this looks like a really disturbing report.  But the details tell a more complex story.  Most of the decline came from holiday shutdowns of restaurants, hotels and entertainment facilities that are already being reversed.  But the retail boom may have been temporary as people rushed to superstores rather than malls as the virus surged.  One stop shopping seemed to be in big-time.  That may change going forward.  The construction boom seems to be slowing and the large manufacturing jobs increase was weird.  Many colleges were shut down after Thanksgiving, but that decline will turnaround soon as they reopen for the spring semester.  And as public schools slowly get back to full-time basis, education payrolls should rebound.  Finally, while health care employment was up solidly, as the vaccination process ramps up, hiring should follow.  So, where is the labor market going?  It doesn’t look like we will be getting many, if any, additional negative numbers going forward.  And once the latest virus surge eases, sometime in the future, and the restrictions start being lifted, we could see some months of very strong job gains.  But that could be a head fake.  Underlying economic growth is slowing and there is little reason to expect that once the economy moves back toward trend growth during the first half of the year, future strong job gains can be sustained.  As always happens, the data will be revised in January, so it may take us to the fall before we get a really good picture of what the longer-run trend in payrolls looks like.  The flatlined but excessively high unemployment claims numbers point to continued pressure on the unemployment rate and the growing number of long-term unemployment is worrisome.  We could be stuck with an unemployment rate above six percent for an extended period.   

November Income and Spending, New Home Sales and Durable Goods Orders, December Consumer Sentiment and Weekly Jobless Claims

KEY DATA:  Disposable Income: -1.2%; Consumption: -0.4%; Prices: 0%/ Home Sales: -11%/ Durables: +0.9%; Ex-Aircraft: +0.8%; Capital Spending: +0.4%/ Sentiment: +3.8 points/ Claims: -89,000

IN A NUTSHELL: “Reality is setting in and that means more moderate growth.”

WHAT IT MEANS:Tis the day before the day before the day before Christmas and all through the federal government, the numbers are flowing.  That is largely due to the president shutting things down on Christmas eve.  That works for me as I don’t have to write anything up tomorrow.  Of course, it means today is a data dump day and the numbers were not nearly as great as hoped for.  Take the consumer, who has been spending like crazy.  Well, not so much anymore.  Consumption fell in November, which really wasn’t a surprise given that Amazon Days occurred in October and that change in pattern wasn’t easily accounted for in the seasonally adjusted data.  That said, spending declined not just for nondurables goods, but for big-ticket items and services as well.  But the more troubling was the sharp drop in income.  That was driven by a fall in government support programs spending.  While the unemployment compensation drop was good news, it is clear that people are not replacing their government welfare payments with private sector income.  The wage and salary increase were the smallest since April, when layoffs were still exploding.  Thankfully, inflation is going nowhere so households don’t have to deal with both softening incomes increases and rising prices.

The housing market may be coming back down to earth.  New home sales fell sharply in November. While the declines were across the nation, huge drops in the Midwest and West created the national double-digit fall off.  Still, the sales pace is still strong and the 19.1% rise for the first eleven months of the year compared to 2019 means there are few builders singing the blues.  Residential investment helped power GDP growth but that is not likely to be the case going forward.  As for prices, the rise tailed off as well, but let’s see where they go in the future.   

Durable goods orders were pretty good in November.  The only major sector that posted a decline was civilian aircraft.  Boeing’s orders are starting to rebound now that the Max is back in service, so watch for that to change.  Business capital spending also rose solidly, an indicator that firms are confident about the future.

The University of Michigan’s Consumer Sentiment Index increased in December, though there was a strange development in the data: Despite the start of vaccinations, the late December numbers were weaker than the early December ones.  The report noted that “The pandemic has had a much greater relative impact on assessments of the overall economy than on assessments of consumers’ current personal financial situations.”  It appears that most households don’t think the economy is very good.

Finally, unemployment claims cratered last week.  If you can explain why that happened, tell me so we both know.  With shutdowns and stay at home orders increasing, you would think that layoffs would be rising as well.  But they didn’t, at least in the latest report.  Still, the raging virus and the unwillingness to take the necessary protective steps will uncertainly lead to an increase in unemployment over the next few months, so don’t be surprised if the claims numbers spike soon.

IMPLICATIONS:  Let’s see now: Consumption, income and housing sales faltered, consumer confidence disappointed and the president has thrown a monkey wrench into the passage of a needed new stimulus bill.  So, how did the equity markets react?  You guessed it, they soared (at least as of my writing this piece).  That is why I keep saying the markets are just not in touch with the economic fundamentals.  And that is not necessarily the wrong approach to investing, especially if given that most firms that are listed are medium to large companies while the companies that are being battered are smaller ones.  Since we all know that the small business sector has little to do with economic growth – really?  No, that is hardly the case.  What the equity markets are pricing in is the massive concentration of economic power into the hands of larger business (and fewer people) and that is what needs to be followed if you want to understand what is happening.  Until we see a reversal of that trend, something that is not likely to occur until the virus is held at bay, there is little reason to think that investors will not remain optimistic. 

November Housing Starts, December Philadelphia Fed Manufacturing Index and Weekly Jobless Claims

KEY DATA: Starts: +1.2%; 1-Family: +0.4%; Permits: +6.2%; 1-Family: +1.3%/ Phila. Fed (Man.): -15.2 points; Orders: -35.6 points; Expectations: -4.1 points/ Claims: +23,000

IN A NUTSHELL: “It’s nice that housing remains robust, but we need a lot more than one strong sector to keep the economy from stalling.”

WHAT IT MEANS:  Sometimes, fear can be a good thing.  Take the situation in housing.  New construction activity continues to soar as people are looking to get out of cities and into lower density locations.  The historically low mortgage rates are providing the support to make that happen.  So, it was not a shock to see housing starts move up again in November.  Over the last few months, starts have rivalled the level levels we saw in the final portion of 2006 – when the bubble was in the process of bursting.  Then we were going down.  Now we are seeing building accelerate.  Are we headed toward a new bubble?  Not necessarily.  Yes, the surge in permits points to even a greater level of starts in the months to come. But this is not a situation where all you had to do was fog a mirror to get a mortgage.  This is, at least in no small part, the result of households changing location preferences and that doesn’t mean there is overbuilding.  However, it could and likely does mean a restructuring of prices as demand falls in the suddenly less-desirable locations but rises in the now more preferred places.

The manufacturing sector, which rebounded with the reopening of the economy, may be slowing down, or at least not expanding nearly as quickly.  The Philadelphia Fed’s Manufacturing index cratered in early December, led by a massive slowdown in new order growth.  Backlogs are barely increasing and hiring is softening.  Looking outward, firms are still pretty optimistic.  While they may have moderated their current additions to payrolls, they are still expecting to hire at a pretty solid pace in the months to come.

With shutdowns come layoffs and that means unemployment claims should rise.  And they did last week.  The level is back to early September and don’t be surprised, given the surge in virus cases, hospitalizations and deaths and the resulting the new restrictions being put into place, if we don’t see new claims surge back above one million.  It bottomed at just over seven hundred thousand in early November but has been on the rise since.   

IMPLICATIONS:  As I have argued for many months, the fourth quarter is likely to be the transition quarter that moves us from shutdown/reopening to trend growth.  The only question is how slow will be go?  While GDP should be pretty solid this quarter, it’s more the math than the reality.  The huge rise over the summer put the economy on decent footing, but except for housing, there hasn’t been much of an increase over the September numbers.  And with the major closings in cities and California’s stay home orders, things could look a lot worse with the December data.  That doesn’t set us up for a very good first quarter, especially if people continue to ignore basic practices that would limit the spread.  Holiday gatherings could lead to an even further uptick in cases and restrictions in early 2021.  But it does look like Congress will pass a “skinny” stimulus package that will have to be revisited once Biden takes over.  Whether there is more help, or the economy is largely left to its own, as some want to do, will likely be decided by the Georgia elections.  In the interim, we can only guess about the medium-term damage done by the pandemic.  The Fed seems to think it was significant as the FOMC signaled yesterday it would likely not raise rates for the next three years and would aggressively buy securities “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals”.  It wants everyone to know that that they are in it no matter how much money it takes to win it.  That means investors now can be comfortable that the Fed has their backs for a long time. 

November Consumer Prices, Real Earnings and Weekly Jobless Claims

KEY DATA:  CPI: +0.2%; Ex-Food and Energy: +0.2%/ Real Hourly Earnings: +0.1%; Over-Year: +3.2%/ Claims: +137,000

IN A NUTSHELL: “With the labor market cooling, there is little reason to think that inflation will remain anything but tame.”

WHAT IT MEANS:  Is the economy starting to falter as the virus surges?  The data are not clear on that yet, but the latest news on the unemployment front was not what we wanted to see.  New claims for unemployment insurance surged last week, after having dropped moderately the week before.  These data are volatile, and we have seen a number of instances where they have either plummeted or surged, only to see the large change wiped out the next week.  So, don’t jump to conclusions on this acceleration in unemployment claims.  Nevertheless, the weekly number hit its highest level since mid-September and the four-week moving average, which smooths out the volatility, has been largely flat for the past six weeks.  That is at least an indication that labor market conditions are no longer improving. 

Consumer prices rose moderately in November.  That was also true when you exclude the more volatile food and energy components.  There was some pressure on energy costs, despite a fall in gasoline prices, and airlines took advantage of the Thanksgiving holiday to jack up their prices. Otherwise, there weren’t many sources of inflation that you could find.  On the positive side, the surge in used car prices may be over.  They are still up double-digits from a year ago, though. 

Real, or inflation-adjusted earnings edged up in November. Hourly wage gains were decent, but the moderate inflation ate into the increase.  Over-the-year, real weekly earnings rose a strong 4.7%, but that was due more from a jump in hours worked than from a surge in hourly wages.   

IMPLICATIONS:  A stimulus bill is needed to keep the economy from stalling.  Without one, a number of emergency programs will expire and tens of million people could lose their income support.  As the data show, the government ran the largest welfare program in history this year and over nineteen million people continue to draw unemployment compensation payments. And those numbers don’t include any workers still being paid through the PPP program, which is an indirect form of unemployment compensation.  With so many on the dole, the ending of the income support could greatly damage consumer spending.  It was those funds which allowed consumption to rebound and be strong starting in the spring. But fun in Washington comes from seeing how much pain can be inflicted before compromises are made, so we will have to suffer for a little while longer.  Meanwhile, while investors may be a little wary of the political machinations, they don’t seem to be so concerned that they are selling stocks at any great pace.  It would be surprising if the markets go on an extended downturn, despite the terrible reality that the virus is killing people at an incredible, horrible pace.  Another sign that Wall Street and Main Street exist in separate universes.     

November Employment Report and October Trade Deficit

KEY DATA:  Payrolls: +245,000; Private: +344,000; Retail: -34,700; Unemployment Rate: 6.7% (-0.2 percentage point); Wages: +0.3%/ Deficit: +$1bil.; Exports: +2.2%; Imports: +2.1%

IN A NUTSHELL: “Job growth is slowing and we have yet to see the full impact of the virus surge and restrictions.”

WHAT IT MEANS:  Could it be? Yes, it could.  Something’s coming, something (not) good.  (Apologies to West Side Story and Stephen Sondheim.) It looks like the economic slowdown is beginning to show in the economic data.  Total payroll increases for November were disappointing.  As usual, the headline number was somewhat misleading.  There were 93,000 temporary decennial Census workers let go and you cannot seasonally adjust for something that happens once a decade.  Private sector job gains were not nearly as soft, which is good news, at least for now.  As for the details, they reflect the changes going on in the economy.  Retail employment was down sharply due to a slowing in holiday hiring.  You don’t need people if they aren’t coming into the stores.  Restaurants cut back, in part due to the colder weather as well as the beginnings of new restrictions.  And local government continue to contract as their financial situation deteriorate.  On the other side of the coin, what malls lost, the delivery system gained.  Transportation and warehousing payrolls soared.  The virus surge created massive demand for health care workers and the housing boom led to a jump in construction and realtor positions.  Manufacturing gains were decent, but largely because vehicle makers ramped up.  Sales are not likely to support much further increases in this sector. Temporary help jobs were up solidly.  Wage gains, though, remain strong. 

As for unemployment, the rate ticked down, but not for the right reasons.  The labor force declined and there are five million fewer people in the labor market than a year ago. As a consequence, the participation rate dropped again.     

The trade deficit widened in October, but not to the level that had been expected.  Both exports and imports were up strongly, a hopeful sign that not only the U.S. but other world economies are starting to improve.  Shipments of all types of products, including capital and consumer goods, vehicles and industrial supplies all rose solidly.  However, soybean farmers took a big hit.  On the import side, the only category that didn’t show a rise was foods, and that decline was modest.  It looks like trade may not play a major role in fourth quarter growth as the October deficit was only modestly higher than the third quarter average.    

IMPLICATIONS:  The ADP report warned that we could see a disappointing job gain and that was indeed the case.  But what is disconcerting is that we have yet to see the full impact of the growing number of restrictions caused by the failure to take steps to keep the virus from getting totally out of control.  there could be a lot of more cutbacks in the December report.  It should be kept in mind that even with the massive monthly increases we have seen starting in May, we are still down by ten million jobs from the February peak.  The number of unemployed is still almost five million higher. That number is reduced by the four million drop in the labor force.  Those who are out of the market are not considered to be unemployed.  Even the good news on the wage front has to be tempered.  The hourly wage number is a weighted average and many of the jobs lost were in lower paying positions.  That would raise the average wage.  It points out that the recovery is indeed looking like the so-called K-shaped one, where better paid workers are doing well (the upward part of the K) while lower paid workers are losing out (the downward sloping portion of the K).   It also reinforces the view that Wall Street and Main Street are again going in very different directions and we shouldn’t use the equity markets as an indicator of the economy.  Indeed, I wouldn’t be surprised if investors actually like this disappointing number.  They could argue that it puts more pressure on the government to sustain the business and household welfare programs by passing a new stimulus plan.  So, investors cheered good economic numbers as they indicated the economy was coming back and may cheer disappointing ones by arguing that a stimulus plan would work just fine for companies.  The markets go up on both good and soft numbers.  That is, the markets go up.    

November NonManufacturing Activity and Layoff Announcements and Weekly Jobless Claims

KEY DATA:  ISM (NonManufacturing): -0.7 points, Orders: -1.6 point; Employment: +1.4 points/ Layoffs: 64,797/ Claims: -75,000

IN A NUTSHELL: “The bad news on the COVID-19 front has yet to show up in the economic numbers.”

WHAT IT MEANS: The virus may be here, there and everywhere, but whatever negative impact that may have on the economy has yet to show up in the economic data.  The Institute for Supply Management’s NonManufacturing Index edged downward during November, but the decline was modest and the level remains quite solid.  The service segment of the economy has expanded for six consecutive months now.  Order demand was strong, even if it didn’t increase as fast as it been. Maybe most importantly, firms added workers at a greater pace.  That contrasted with the ISM manufacturing report, which had payrolls contracting. 

The better than expected news on hiring was supported by a very good initial jobless claims report.  The number of people filing for unemployment compensation fell sharply last week.  These data are volatile and large increases and decreases are not unusual, so let’s not go overboard on the decline.  Indeed, with the virus surging, it is unclear if that created issues for those wanting to file for unemployment checks.  Businesses are running out of stimulus money and our political leaders are fiddling around while firms and households burn and that points to rising layoffs and claims in the weeks to come.

Speaking of layoffs, Challenger, Gray and Christmas reported that workforce reduction announcements fell from October and it was the second lowest number this year.  Of course, that is the good way of looking at it.  When you compare it to last November’s level, it’s a different story: The number was up over forty five percent compared to November 2019IMPLICATIONS:Will the good news on the vaccine front outweigh the bad news on the virus and political front?  That is a good question.  At the rate the virus is spreading, hospitals across the nation could be overwhelmed by the end of the year.  And that will come when many workers on the Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation programs start to lose their benefits.  The first provided benefits for people such as small business owners or gig workers who weren’t normally eligible.  The second provided extended benefits.  It’s estimated that about twelve million workers are at risk.  Would Congress and the president let that happen?  It is Washington and the next election is not for two years, so who knows what will happen?  Clearly, the so-called fiscal conservatives who found in the spring that the balanced budget idea was causing their poll numbers to become unbalanced, have suddenly rediscovered the joys of claiming we cannot afford a welfare system anymore.  Meanwhile, those that want to spend more continue to say no amount is too much.  Well, there is something between nothing and everything, but if you expect our fearless – or maybe feckless is a better term – leaders to do the right thing, you probably just fell off the turnip truck.  Maybe something will happen, but I am not overly hopeful.  But if no bill, or even a modest one is passed before January, don’t be surprised if the economy starts to stall.  But investors will likely assume eventually something will get done and if anything at all passes, they will probably celebrate like crazy.

November Manufacturing Activity and October Construction Spending

KEY DATA:  ISM (Manufacturing): -1.8 points; Orders: -2.8 points; Employment: -4.8 points/ Construction: +1.3%; Private Nonresidential: -0.7%; Private Residential: +2.9%

IN A NUTSHELL: “The feared economic slowdown is starting, but it is pretty slow off the blocks.”

WHAT IT MEANS:  The transition from the recovery boom to the more sustainable growth pattern that we should start seeing in the first half of next year is underway.  It looks like the brakes are being applied somewhat gently.  The Institute for Supply Management’s manufacturing activity index faded in November, but it did not crater.  Indeed, the level of activity, while somewhat slower than we had been seeing, is still pretty solid.  Yes, new order growth did moderate, but there is still a ton of demand out there.  That is true for exports and imports as well.  With order books filling a little faster, there is little reason to expect that production will be cut back significantly anytime soon.  The one concern in the report was in employment.  For the third time in four months, payrolls were reduced.  We get the October payroll data on Friday and it will be interesting to see if manufacturing gains are much more modest than they have been.  I suspect that will be the case.

Construction spending jumped in October, but it was all in the residential portion of the economy.  Excluding housing, private building activity declined.  Over-the-year, private residential construction is up a robust 14.5%, which offset the over eight percent drop in nonresidential activity.  Outside of warehousing, which is likely to build out given the further move toward online spending, I suspect that firms will be hesitant taking on any major expansions until the longer-term pace of economic activity is clearer. 

IMPLICATIONS: Right now, it is all about the vaccine, and the news is all good.  Doses should be reaching the public by the end of the year or early next year and vaccinations should ramp up as we go through the first half of 2021.  What needs to be seen is whether the public accepts the vaccine and doesn’t still think that politics is driving the delivery of the product.  The introduction of politics into the process created negative views on both sides of the political divide, but now that it is here, we could see attitudes change significantly.  But if we believe the scientists, and we should, it could take much of next year before the nation is largely immunized.  That would mean the number of cases and deaths are likely to be high through the first half of 2021 and restrictions will not be easing, let alone disappearing soon.  So, the economic moderation that I and most of my colleagues have been expecting is coming.  That, of course, seems to mean nothing to investors.  The markets went up without any hope of a vaccine, gains were sustained when the possibilities of one coming soon were raised and accelerated when the announcements were made.  When it comes to Wall Street, the pandemic was a nonevent.  For Main Street, it was hardly that.  Indeed, if we don’t get another significant stimulus package soon, with programs ending and restrictions rising, first quarter growth could disappoint.  But again, investors are looking through the first half of the year, so exuberance is likely to be sustained, even if most economists really have no idea what the second half of 2021 will look like.