Monday Update: Business Confidence Remains Strong

February 08, 2021

Last week was packed with updates, with a focus on January’s business confidence and employment reports. Confidence held up well to start the year, and we saw an encouraging return to job growth in January. This week will be relatively quiet, with only a few major reports set to be released. The highlights will be the January consumer inflation report and the first look consumer sentiment in February.

Last Week’s News

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, falling from 60.5 in December to 58.7 in January. Calls were for a more modest decline to 60. Nonetheless, this 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 signal expansion, so the January report indicates continued growth for the manufacturing industry. The index has shown an impressive rebound since hitting a lockdown-induced low of 41.7 in April 2020. January 2021 marks eight straight months with the index remaining in expansionary territory. This is a good sign for manufacturing output and business spending to start the year.

Wednesday saw the release of the ISM Services index for January. Service sector confidence increased by more than expected, rising from 57.7 in December to 58.7 in January, against calls for a decline to 56.7. This is another diffusion index, where values above 50 indicate expansion. Accordingly, this strong result demonstrates that service sector businesses have continued to successfully adapt to operating during the pandemic. The January report brought the index to its highest level since February 2019, highlighting the impressive rebound in service sector confidence we’ve seen since initial lockdowns were lifted last April. The improvement for service sector confidence likely reflected the positive impact from increased federal stimulus spending and loosened state and local restrictions in January. Looking forward, additional federal stimulus and the continued lifting of restrictions as the public health situation improves should continue to support healthy levels of business confidence.

On Thursday, the initial jobless claims report for the week ending January 30 was released. The number of initial unemployment claims fell by more than expected, declining from 812,000 to 779,000. Forecasts were for an increase to 830,000. This result marks three straight weeks with declining levels of initial unemployment claims and the lowest level of weekly initial claims since the end of November 2020. Continuing unemployment claims, which are reported with a one-week lag to initial claims, also declined by more than expected. They fell from 4.785 million to 4.592 million, against calls for a decline to 4.7 million. While the overall level of initial and continuing unemployment claims remains high historically, the continued improvement demonstrates the positive impact of the additional federal stimulus and the lifting of some state and local restrictions during the month. Looking forward, these tailwinds are expected to support continued improvements for the job market.

Speaking of the job market, January’s employment report was released on Friday. It showed that 49,000 jobs were added during the month, which was below economist estimates for 105,000 new jobs. Despite missing the forecast, this result is a step in the right direction after December’s downwardly revised loss of 227,000 jobs. The return to job growth in January is a positive sign. It shows that the federal stimulus spending and the diminishing state and local restrictions are starting to spur faster recovery for the job market. The underlying data also showed signs of improvement. The unemployment rate fell by more than expected, declining from 6.7 percent in December to 6.3 percent in January, against forecasts for no change. Given the improving public health situation and the prospect for additional federal stimulus spending in the near future, it’s quite possible we will see job growth continue to rebound. Mass vaccination efforts should allow for a return to more normal economic conditions later in the year. A full economic recovery will rely on further improvements for the job market, so this report will continue to be widely monitored.

We finished the week with Friday’s release of the December international trade report. The trade deficit narrowed from $69 billion in November to $66.6 billion in December. Forecasts were for a $65.7 billion deficit during the month. Exports increased by 3.4 percent in December, which was more than enough to offset a 1.5 percent increase in imports. The faster export growth led to the narrowing of the overall trade deficit to end the year. On an annual basis, 2020’s deficit of $678.7 billion, driven by a sharp decline in exports during the year, was the largest annual trade deficit since 2008. Exports have been slower to recover from initial lockdowns compared with imports. As we saw in December, however, export growth accelerated at a faster rate than imports toward the end of the year. Currently, producer confidence remains high and global demand is starting to recover alongside the improving public health picture. Further improvements for exports this year are quite possible, and they would likely lead to a further narrowing in the overall trade deficit.

What to Look Forward To

On Wednesday, the January Consumer Price Index report is set to be released. Headline consumer prices are expected to increase by 0.3 percent during the month, recording a modest decline from December’s 0.4 percent increase. Core consumer inflation, which strips out the impact of volatile food and energy prices, is expected to show 0.2 percent growth in January, up from a 0.1 percent increase in December. On a year-over-year basis, both headline and core consumer prices are expected to rise by 1.5 percent. The annual consumer inflation rate has picked up since hitting a pandemic-induced low of 0.1 percent in May 2020. If estimates hold, however, the pace of consumer inflation would remain well below the 2.5 percent year-over-year growth rate we saw in January 2020. Despite the anticipated increases in headline and core consumer prices, consumer inflation remains well constrained below the Fed’s stated 2 percent target. This fact indicates modest overall inflationary pressure.

Thursday will see the release of the initial jobless claims report for the week ending January 6. Economists expect to see 773,000 initial unemployment claims filed during the week, in a modest improvement from the 779,000 initial claims filed the prior week. If the estimate holds, this report would mark four straight weeks with declining initial unemployment claims, following their rise throughout parts of December and early January. Continuing unemployment claims, which are reported with a one-week lag to initial claims, are also expected to show further declines during the week. Overall, however, claims remain at a high level. Continued improvement to start February would be a sign that the stimulus and improving health situation are supporting faster economic growth. Given the continued high level of initial and continuing unemployment claims, this weekly report will continue to be closely monitored. It gives economists a relatively up-to-date look at the health of the labor market.

On Friday, the preliminary estimate of the University of Michigan consumer sentiment survey for February will be released. The index is forecasted to rise from 79 in January to 80.9 to start February. If the estimate holds, the index would show consumer sentiment at its highest level in four months, near the post-lockdown peak of 81.8 marked in October 2020. Given the positive tailwinds from the improving public health picture and the prospect for increased federal stimulus spending in the near term, we may see notable improvements to consumer confidence over the next few months. This would be a positive sign for consumer spending growth, as improving confidence has historically been linked to increased spending. Ultimately, if the index does improve to start February, it would be another positive signal that the economic recovery is heading in the right direction, spurred on by increased stimulus and progress in combatting the third wave of the pandemic.

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