Monday Update: Economic Recovery Continued in Fourth Quarter
Posted by Sam Millette, Feb 1, 2021
In his Monday Update, Commonwealth’s Sam Millette looks at fourth-quarter GDP growth, January’s business confidence and employment reports, and more.Last week saw a number of important economic updates, with the first look at fourth-quarter GDP growth serving as a highlight. The economy grew at an annualized rate of 4 percent during the quarter, which represents a continued economic recovery to end 2020. This week will also be packed with updates, with a focus on January’s business confidence and employment reports.
Last Week’s News
On Tuesday, the Conference Board Consumer Confidence Index for January was released. The index rose by more than expected during the month, moving from a downwardly revised 87.1 in December to 89.3 in January. Following a four-month low for the index in December, this positive result was a step in the right direction. Historically, improving confidence has supported faster consumer spending growth, so this better-than-expected result was certainly a welcome development. With that said, the index remains well below the recent high of 101.4 it hit in October 2020, likely reflecting the negative impact from the worsening public health picture over the last few months. With mass vaccination efforts picking up steam, and signs of slowing localized outbreaks in many states, the public health situation looks likely to show improvement in the upcoming months. This should support further improvements for consumer confidence.
Wednesday saw the preliminary release of the December durable goods orders report. Durable goods orders rose by 0.2 percent during the month, down from 1.2 percent growth in November and below economist expectations for a 1 percent increase. This slowdown was largely due to a slowdown in volatile aircraft orders, as evidenced by strong core durable goods orders growth during the month. Core durable goods orders, which strip out the impact of volatile transportation orders, rose by 0.7 percent in December, above economist expectations for 0.5 percent growth and in line with November’s 0.8 percent increase in core orders. Core durable goods orders are often used as a proxy for business investment. Accordingly, continued growth in core orders in December is further evidence of healthy levels of business spending throughout the fourth quarter of 2020.
Wednesday also saw the release of the FOMC rate decision from the Fed’s January meeting. As expected, there was no change to the federal funds rate, which was lowered to virtually zero last March in order to stimulate the economy through the pandemic. Economists do not anticipate any changes to the federal funds rate until at least 2023, given the continued headwinds for economic growth created by the pandemic. Much of the focus at this meeting was on Fed Chairman Jerome Powell’s post-meeting press conference, during which the head of the central bank emphasized the Fed’s commitment to a supportive monetary policy for the foreseeable future. The press release that accompanied the meeting also showed that the Fed saw the pace of the economic recovery moderate slightly between its December and January meetings. This indicates that further supportive policy from the central bank is expected. Ultimately, this meeting was largely devoid of any major surprises from the Fed.
On Thursday, the advance estimate of fourth-quarter GDP growth was released. The economy grew at an annualized pace of 4 percent during the quarter, down from the 33.4 percent annualized growth rate in the third quarter and below economist estimates for 4.2 percent annualized growth. The slowdown following the third quarter was expected due to the impact of lifted restrictions earlier in the year. Still, the slower-than-expected growth in the fourth quarter is slightly disappointing, although not entirely surprising given the slowdown in consumer spending growth we’ve seen recently. Personal consumption, which accounted for the majority of economic growth in the third quarter, slowed from an annualized growth rate of 41 percent in the third quarter to 2.5 percent in the fourth quarter. Forecasts had been for 3.1 percent annualized growth. Over the next few quarters, low to mid-single-digit economic growth is the most likely path forward given the continued headwinds created by the pandemic. We can hope, however, that an improving public health picture and increased federal stimulus will get us back to more normal economic conditions and steady growth by the end of 2021.
Thursday also saw the release of the initial jobless claims report for the week ending January 23. The number of initial unemployment claims fell during the week, from an upwardly revised 914,000 to 847,000. Forecasts were for a more modest drop to 875,000. While this larger-than-expected decline was welcome, it leaves the number of initial claims at concerningly high levels and indicates continued stress on the job market. At current levels, the number of initial weekly unemployment claims is nearly four times the weekly average of roughly 220,000 initial claims we saw in 2019. This fact highlights the very real risk that the pandemic continues to represent for the economic recovery. There is hope that increased stimulus and the lifting of restrictions at the state and local levels will spur further improvements for the job market. For the time being, however, this report serves as a reminder that the pandemic is still negatively affecting the economy.
The third major data release on Thursday was the release of the December new home sales report. New home sales rose modestly during the month, rising by 1.6 percent in December against forecasts for a 3.5 percent increase. New home sales are a smaller and more volatile portion of the housing market compared with existing home sales. This report brought the pace of new home sales up to its fifth highest monthly level since 2008, highlighting the healthy rebound in sales we’ve seen since initial lockdowns were lifted. On a year-over-year basis, the pace of new home sales rose by 15.2 percent in December. Record low mortgage rates and shifting home buyer preference for more space due to the pandemic helped lead to a resurgence in home sales last year, and this continued strength to end the year is encouraging. Looking forward, significantly faster new home sales growth may be hard to come by due to limited supply and rising prices. Still, sales near current levels would indicate a healthy pace of sales.
On Friday, December’s personal income and personal spending reports were released. Personal spending fell by 0.2 percent during the month following a downwardly revised 0.7 percent decline in November. This result, which was slightly better than economist estimates for a 0.4 percent decline, marks the first two consecutive months of spending declines since March and April of last year. This fact highlights the negative impact of the worsening public health situation and rising restrictions at the state and local levels. With that said, the recent declines pale in comparison to the 12.7 percent drop in spending we saw in April 2020. Accordingly, the indication is that consumers have adapted and are handling the current wave of the pandemic with more resiliency compared with the first wave. Personal income has been quite volatile on a month-to-month basis due to shifting levels of federal income support and stimulus. The report showed that personal income rose by 0.6 percent in December, which was a solid rebound from the 1.3 percent drop recorded in November and well past economist estimates for 0.1 percent growth. This increase is the first for personal income since September 2020. Looking forward, the stimulus passed at the end of the year is expected to help spur further income growth to start the new year.
We finished the week with Friday’s release of the second and final reading of the University of Michigan consumer sentiment survey for January. The initial estimate for this index showed confidence falling to start the month, from 80.7 in December to 79.2 in January. This final report showed a further decline down to 79 at month-end, against forecasts for a modest increase to 79.4. This intramonth decline was driven by a modest drop in consumer views on current economic conditions, as demonstrated by a fall to a three-month low for the current condition subindex for January. Consumers appeared to be a bit more optimistic about the future, however. The future expectations subindex improved modestly throughout the month. As was the case with the Conference Board measure of confidence, this index remains above previous lows caused by initial lockdowns in March and April 2020. Still, there is a lot of work to be done to get confidence back to pre-pandemic levels.
What to Look Forward To
We started the week with Monday’s release of the ISM Manufacturing index for January. This measure of manufacturer confidence dropped by more than expected to start the year. It fell from an upwardly revised 60.7 in December to 58.7 in January, against calls for a more modest decline to 60. Despite the drop, the January result represents a healthy level of manufacturer confidence, as the index sits well above the pre-pandemic high of 51.1 it hit in January 2020. This is a diffusion index, where values above 50 indicate expansion, so this report indicates continued growth for manufacturing in January. The index has shown an impressive rebound since hitting a lockdown-induced low of 41.7 in April of last year. The January result marks eight straight months with the index in expansionary territory, which is a good sign for manufacturing output and business spending to start 2021.
Wednesday will see the release of the ISM Services index for January. As was the case with manufacturer confidence, service sector confidence is expected to moderate slightly during the month. Economists expect to see the index fall from a post-lockdown high of 57.7 in December to 56.7 in January. This is another diffusion index, where values above 50 indicate expansion, so the anticipated result would be in expansionary territory. It would also be in line with the 56.7 reading we saw in February 2020, before the pandemic was a major concern. Business confidence has remained impressively resilient throughout the third wave of infections, demonstrating the successful adaptation of businesses to the post-pandemic environment. Looking forward, the continued lifting of state and local restrictions as the public health situation improves should support stronger business confidence and spending figures.
On Thursday, the initial jobless claims report for the week ending January 30 is set to be released. Economists expect to see the number of initial unemployment claims fall from 847,000 to 840,000 during the week. While a decline would certainly be welcome, it would leave the number of initial weekly claims at a very high level compared with historical norms. For reference, the highest level of initial weekly claims during the great financial crisis was 665,000. The numbers for this report have remained above this record high every week since initial lockdowns were enacted in March 2020. Progress has been made, however, in getting initial claims down from the one-week high of more than 6.8 million we saw at the end of last March. Still, the continued high level of weekly claims indicates we must do quite a bit of work to get the labor market back to more normal levels.
Speaking of the labor market, on Friday, January’s employment report is set to be released. Economists expect to see 55,000 jobs added during the month, following a loss of 140,000 jobs in December. December’s decline, which marked the first month with net job losses since April 2020, was driven in large part by a sharp drop in leisure and hospitality jobs. With restrictions starting to loosen at the state and local levels, these jobs may be poised for a relatively swift recovery over the next few months. Outside of leisure and hospitality, December’s employment report showed surprising strength for hiring in the professional and business services and retail sales sectors of the economy. This strength is expected to continue. Looking forward, the improving public health situation and a boost from additional federal stimulus are expected to support faster job growth. Nonetheless, we have quite a way to go to return to pre-pandemic employment levels. The 6.7 percent unemployment rate, which remains elevated, is not expected to change to start the year.
We’ll finish the week with Friday’s release of the December international trade report. Economists expect to see the trade deficit narrow from $68.1 billion in November to $65.8 billion in December. November’s result marked the second-widest monthly trade deficit on record. The anticipated narrowing in December would bring the deficit closer to the levels seen in September and October of last year. The widening in the overall trade deficit in November was largely caused by an increase in the deficit for the trade of goods, which hit a record high during the month. In December, a surge in goods exports in December caused the deficit for the trade of goods to narrow, which is expected to be reflected in the overall trade balance numbers. Exports have been slower to recover from initial lockdowns than imports. Still, with domestic consumption slowing to end the year and high levels of producer confidence, exports have a chance to make up some ground in December.
That’s it for this week—thanks for reading and stay safe!
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