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.   

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. 

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. 

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.     

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.    

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 2019.  IMPLICATIONS: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.

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. 

KEY DATA:  Sentiment: -4.9 points/ Consumption: +0.5%; Disposable Income: -0.8%; Prices: 0%/ New Home Sales: -0.3%; Prices (Over-Year): +2.5%/ Orders: +1.3%; Capital Spending: +0.7%/ Claims: +30,000

IN A NUTSHELL: “Rising unemployment claims and falling consumer sentiment may be the first signs that the virus surge is having a real impact on the economy.”

WHAT IT MEANS: Welcome to the day before Thanksgiving when the economic data tend to get dumped on us by the boatload.  And today was no exception.  Let’s start with the consumer related numbers.  The University of Michigan’s Consumer Sentiment Index fell moderately in November, led by a sharp decline in expectations.  I am not sure how to read the consumer optimism/expectations numbers at this time.  The election and its bizarre aftermath, where one group is convinced there was massive voter fraud and the other group is convinced that those who believe those claims are massively insane, makes it likely we are seeing political reactions that in the past rarely led to any real economic follow through.  Indeed, the report noted that: “For the first time since Trump entered office, Democrats rather than Republicans held a more optimistic economic outlook”.  But people also did indicate they are being affected by COVID, so there are some real concerns out there – and there should be.

Indeed, the second consecutive weekly jobless claims increase is something that needs to be watched closely.  There is every reason to think that the rise will continue, even if it does not do so on a consistent basis.  With virus cases at record highs, with Thanksgiving likely to worsen things and with hospitalizations and deaths surging, mass vaccinations of the population cannot come too soon.  But it will be months before that happens and in the interim, restrictions are likely to accelerate, even in states that were unwilling to do anything in the past.  Those restrictions may not happen until their hospitals run out of room and deaths jump, but that, unfortunately, looks like it is coming. Don’t be surprised to see not only rising new claims, but also increasing continuing and total claims for the next few months.

And then there is there is the consumer.  Consumption rose solidly in October, but again, the data are hard to read.  Amazon Days were in October not July and seasonally adjusting that change is, of course, impossible.  But given the timing, households may have done their holiday shopping that week, so don’t assume spending will be great this year.  One reason for concern was the sharp drop in disposable (after-tax) income.  The big decline was in government assistance and there is no reason to think another stimulus bill will be coming anytime soon.  Worse, it is unclear how much additional spending can pass the Senate, so we could have a either gridlock or a disappointing new round of stimulus.  Consequently, the income just may not be there to spend a lot this holiday season. 

Still, the fundamental economy remained in really good shape in October.  Not only did consumption jump, but so did durable goods orders.  There was a decline in vehicle and machinery demand, but Boeing is back in business and that helped.  Most importantly, the measure that tracks private sector capital spending posted another big gain, indicating that businesses remain optimistic about the future.

Finally, the sector that has been leading the way, housing, continues to be strong.  Yes, new home sales eased back in October, but given it was 41.5% above the October 2019 pace, I think developers will take it. 

IMPLICATIONS:  The question is no longer whether the recovery will slow, it will.  The real issue is by how much will it decelerate.  The longer the virus naysayers keep refusing to take even the basic step of requiring masks, the longer and deeper will be the resurgence.  The numbers are staggering but people still don’t believe them.  It isn’t “fake news”, a term that is likely to cause chaos in this country for years to come.  Maybe the best news is that few are using that term to describe the vaccines that have been announced.  Large numbers of people indicated they would not get vaccinated, but it appears that science may actually be winning the day.  That would be refreshing as it has been quite a while since the data were believed by many people and politicians alike.  That said, we don’t really know how the long it will take before a large enough segment of the population is inoculated so that the virus risk is greatly limited.  It does not look like that would happen before the spring, at the very earliest, so growth going forward is likely to be disappointing.  On that uplifting note, let me conclude by saying:

Have a safe, healthy and happy Thanksgiving!