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Monday Update (on Tuesday): Economy Adds More Jobs Than Expected

March 09, 2021

Last week saw a number of important economic data releases, with the better-than-expected February employment report serving as a highlight. This will be another busy week for updates, with a focus on consumer and producer inflation, as well as a first look at consumer sentiment in March.

Last Week’s News

Monday saw the release of the ISM Manufacturing index for February. This widely followed gauge of manufacturer confidence improved by more than expected during the month, rising from 58.7 in January to 60.8 in February. Forecasts were for a more modest increase to 58.9. Manufacturer confidence rose to a three-year high, as factory orders, production, and employment all saw faster growth during the month. This is a diffusion index, where values above 50 indicate expansion, so this result signals healthy levels of growth for the manufacturing industry. Manufacturer confidence has rebounded well since initial lockdowns were lifted last year, as the index sits well above the pre-pandemic high of 51.1 it hit in January 2020. Business confidence and spending have remained resilient throughout the third wave of the pandemic, and this strong result bodes well for continued strong levels of manufacturing output and spending.

On Wednesday, the ISM Services index for February was released. Service sector confidence fell by more than expected during the month, dropping from 58.7 in January down to 55.3 in February against forecasts for no change. The decline was partially due to inclement weather throughout much of the country, which disrupted supply chains and caused shipping delays. Still, this is another diffusion index, where values above 50 indicate expansion, so this result signals healthy levels of service sector confidence. Confidence in this sector has rebounded well since the initial lockdowns were lifted. The backlog of orders for service sector businesses hit a six-month high in February, pointing toward potential faster growth in the future. Ultimately, while the decline for the index in February was slightly disappointing, service sector confidence remains in healthy territory. It may be poised for further improvements in the upcoming months.

Thursday saw the release of the initial jobless claims report for the week ending February 27. The number of initial unemployment claims increased from 736,000 to 745,000. This result was slightly better than economist estimates for an increase to 750,000. Claims have been volatile on a week-to-week basis, driven by reporting issues from some states. Nonetheless, this report showed that the four-week moving average for initial claims hit its lowest level since early December. This relatively solid report is a positive sign that the improvements on the public health front and the lifting of state and local restrictions have spurred a faster recovery for the labor market. Despite this improvement, the recent high number of initial unemployment claims continues to be a sign of economic stress for the labor market. Accordingly, this weekly report will continue to be widely followed.

On Friday, the release of the February employment report showed that the economy added 379,000 jobs during the month. This number was an improvement from the upwardly revised 166,000 jobs added in January and above economist estimates for a more modest gain of 200,000 jobs. This result was largely due to the easing of state and local restrictions, which allowed businesses to reopen. Leisure and hospitality jobs accounted for the bulk of the jobs added, as this hard-hit industry gained 355,000 new jobs in February. The underlying data was also positive, as the unemployment rate dropped from 6.3 percent to 6.2 percent against forecasts for no change. Overall, this encouraging report demonstrated that the labor market recovery has picked up steam to start the new year. There is still work to be done in getting employment back to pre-pandemic levels. But February’s positive news could signal faster job growth ahead, especially if we continue to see improvements on the public health front.

We finished the week with Friday’s release of the January international trade report. The trade deficit widened by more than expected during the month. It increased from $67 billion in December to $68.2 billion in January, against forecasts for a more modest increase to $67.5 billion. The trade deficit sits at the third-largest level on record, narrowly trailing the record $69 billion deficit set in November 2020. Imports rose during the month, and the 1.2 percent increase in imports was more than enough to offset the 1 percent rise in exports in January. This report brought total imports to the highest level recorded since mid-2019, highlighting increased consumer demand in the new year. Looking forward, work remains to be done to get exports back to pre-pandemic levels. But if given continued strength in business confidence and an improving global health picture, further export growth is expected.

What to Look Forward To

On Wednesday, the February Consumer Price Index is set to be released. Economists expect to see consumer prices increase by 0.4 percent during the month, following a 0.3 percent increase in January. On a year-over-year basis, consumer inflation will likely rise to 1.7 percent, up from 1.4 percent in January. Part of the anticipated uptick is due to rising gas prices, which went up by 6.6 percent in February. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to show a more modest 0.2 percent monthly increase and a 1.4 percent gain year-over-year. Throughout the pandemic, consumer inflation has largely remained constrained. So, even with an increase in February, it is expected to remain below the 2.5 percent year-over-year growth rate recorded in January 2020. With that said, rising demand and supply constraints may lead to faster price growth in the upcoming months.

On Thursday, the initial jobless claims report for the week ending March 6 will be released. Economists expect to see the number of initial unemployment claims fall from 745,000 to 725,000. If estimates hold, the report for the first week of March would represent the lowest number of weekly initial claims since November 2020. Throughout December 2020 and January 2021, claims increased notably, but this was largely due to increased state and local restrictions. Accordingly, the improvement in February and March is a good sign that the easing of the restrictions has supported the labor market recovery. Still, despite the anticipated decline in initial claims and recent progress in lowering claims, the overall number of initial filers remains high on a historical basis. This weekly report will continue to be widely monitored until we see substantial progress in reducing the number of weekly initial unemployment claims.

Friday will see the release of the February Producer Price Index. Producer prices are expected to show 0.4 percent growth during the month, down from the 1.3 percent increase in January. On a year-over-year basis, producer prices should rise by 2.7 percent, up from the 1.7 percent gain in January. Core producer inflation, which strips out food and energy prices, is forecasted to show a 0.2 percent and 2.6 percent increase, respectively, on a monthly and year-over-year basis. If estimates prove accurate, this report would bring the pace of producer inflation to its highest level since 2018. Producer prices have seen widespread upwards pressure recently, driven by increasing demand and continued supply chain constraints. Although this trend has led to faster inflation to start the year, the Fed remains committed to keeping monetary policy supportive.

We’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for March. This widely followed gauge of consumer sentiment is expected to increase from 76.8 in February to 78 in March. If estimates hold, this release would leave the index well above the pandemic-induced low of 71.8 we saw last April, signaling continued consumer resilience throughout the third wave of COVID-19. The index would approach the post-lockdown high of 81.8 it hit in October, signaling an improvement in sentiment due in large part to better news on the public health front. Historically, higher levels of consumer confidence have translated into faster consumer spending growth. Any improvement for the index would be a positive signal for continued consumer spending growth in March.

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