This week brought more evidence that the economic rebound has faded in the closing weeks of the year. The near-term risks are still skewed firmly to the downside, even as the vaccine rollout gets underway.
This week brought more evidence that the economic rebound has faded in the closing weeks of the year. The near-term risks are still skewed firmly to the downside, even as the vaccine rollout gets underway.
Economy goes into reverse in December…
Infection numbers have been rising since early October, but it is only in recent weeks that stricter restrictions on activity and perhaps some voluntary withdrawal from public spaces have really begun to bite. We already know that non-farm payrolls growth slowed sharply in November. We expect the retail sales report due out next week to confirm a drop back in spending. (See previews overleaf.)
But the economic impact appears to have intensified significantly in the final weeks of November and early December. The sharp rise in jobless claims last week, to 853,000 from 716,000, suggests the drop back the week before was a head fake, and means claims have been trending higher over the past four weeks. Many of the high-frequency indicators were distorted by the Thanksgiving holiday, but there are now clear downward trends in restaurant diners, air passenger numbers and hotel occupancy. Those trends are backed up by the latest survey evidence, which shows consumers increasingly choosing to remain at home in recent weeks. (See Chart 1.)
Chart 1: Consumer Behaviour (% of Respondents) |
 |
Source: Axios/Ipsos Coronavirus Index |
As a result, we think consumption will fall outright in December. With the employment-intensive leisure and hospitality sectors bearing the brunt of renewed restrictions, payrolls will probably decline too. The renewed weakness comes too late to have much impact on fourth-quarter GDP growth, which we expect to be near 3% annualised. But the weak handoff, together with infections and restrictions still proliferating nationwide means the first quarter will be even weaker. For all the optimism over the outlook for 2021, which we share, the near-term risks to our forecasts are still firmly titled to the downside.
…While policymakers fiddle
Stimulus talks in Congress appear to have made little tangible progress over the past week, with negotiations tied with the 2021 budget, both sides have agreed a short continuing resolution, to prevent a shut down and allow negotiations to continue. The chances of a deal this year appear to be slim, especially with the possibility that the upcoming Georgia Senate run-offs could alter the balance of power in Congress. Another continuing resolution next week could punt the issue into the new year.
Without a deal, a range of federal unemployment insurance programs will lapse at the end of December. That will be a heavy blow for the more than 10m individuals receiving them, and the drop off in fiscal support comes just as the economic hit from the virus is intensifying again. But the expiry will reduce aggregate incomes by less than 1%, so the macroeconomic impact is likely to be muted. (See here.)
We’ve seen plenty of suggestions that the lack of fiscal policy support raises the pressure on the Fed to deliver more easing. But we suspect it will use its meeting next week only to firm up its guidance about how long its asset purchases will run for, rather than increasing the pace of its QE. (See here.)
The week ahead
Aside from the negotiations in Congress and the FOMC meeting next week, the key releases are the November retail sales and industrial production reports which will provide a clearer picture of how far economic activity slowed last month.
Data Previews
Industrial Production (Nov.) 09.15 Tue. 15th Dec.
Forecasts | Previous | Median | Capital Economics |
Industrial Production | +1.1% | +0.5% | +1.4% |
Manufacturing Output | +1.0% | +0.5% | +0.3% |
Manufacturing holding up
Renewed restrictions to curb virus numbers are hitting the services sector, but manufacturing output looks set to have posted another modest increase in November, while the rebound in oil prices is boosting mining production.
The further slowdown in hours worked in the manufacturing sector, together with the still-solid expansion in railroad traffic, suggests that manufacturing output continued to expand last month, although our model suggests the pace of growth slowed to just 0.3% m/m, following the larger 1.0% rise in October. (See Chart 2.)
Industrial production looks set to have posted a much stronger increase, with weekly electricity generation figures pointing to a large 8.0% m/m rebound in utilities output, while the rise in global oil prices is now more clearly feeding through to a rebound in mining investment and production. Mining output probably rose by more than 2% m/m in total, driven by a rise in crude oil output and a continued surge in mining support services. All told, industrial production looks set to rise by 1.4% m/m.
Chart 2: Manufacturing Output (% m/m) |
 |
Sources: Refinitiv, Capital Economics |
Retail Sales (Nov.) 08.30 Wed. 16th Dec.
Forecasts | Previous | Median | Capital Economics |
Retail Sales | +0.3% | -0.1% | -0.7% |
Core Retail Sales (Less Autos) | +0.2% | +0.2% | -0.1% |
New virus restrictions start to take their toll
We estimate that retail sales declined in November, as auto sales fell back and the rising tide of restrictions on leisure sector activities took its toll.
The surge in virus cases across the country has seen a widespread reimposition of curbs on bars and restaurants. With the OpenTable diner numbers and consumer foot traffic both clearly dropping back, we suspect spending on food & drink services fell again in November. (See Chart 3.) We also know that auto manufacturers’ unit sales fell by 4.5% m/m last month, which may indicate that the earlier post-lockdown boom in vehicle demand is fading.
Excluding those items, we estimate that control group retail sales still increased, but only modestly. The impact of Black Friday sales shifting largely online is a wildcard. Overall, we expect a 0.2% m/m rise in control group sales, which would see overall retail sales fall by about 0.7%. With virus cases and restrictions continuing to proliferate, the December data are likely to be even weaker.
Chart 3: Consumer Foot Traffic & Food Services Sales |
 |
Sources: Refinitiv, NinthDecimal |
NAHB Index/Housing Starts (Dec./Nov.) 10.00/08.30 Wed. 16th/Thu. 17th Dec.
Forecasts | Previous | Consensus | Capital Economics |
NAHB Index | 90 | 89 | 88 |
Housing Starts (000s, Annualised) | 1,530 | 1,528 | 1,530 |
Starts to slow as production constraints bite
The surge in single-family housing starts means builders are rapidly running up against constraints on production, and we therefore expect only a small rise in starts to 1.19m annualised in November.
Lumber prices are once again on the rise (see Chart 4), lots are in short supply and even with unemployment elevated it will take time to train new construction workers. Those constraints have not yet dented homebuilder confidence, which rose to a record high in November. But with new home sales now levelling off, we expect confidence edged back to 88 in December.
Multifamily building permits have dropped back in each of the past three months, as builders have reacted to rising rental vacancy rates and a large development pipeline. We expect a small drop in multifamily starts to 340,000 annualised in November, leaving total starts at 1.53m.
Chart 4: Lumber Price (1st Pos. Futures, $ per 1,000 sq. ft.) |
 |
Source: Refinitiv |
Economic Diary & Forecasts
Date | Release/Indicator/Event | Time EST (GMT-5) | Previous* | Median* | CE Forecasts* |
Mon 14th | No Significant Data Released | – | – | – | – |
Tue 15th | Import Prices (Nov) | 08.30 | -0.1%(-1.0%) | +0.3% | – |
Empire State Manufacturing Index (Dec) | 08.30 | +6.3 | – | +10.0 | |
Industrial Production (Nov) | 09.15 | +1.1% | +0.5% | +1.4% | |
Capacity Utilisation (Nov) | 09.15 | 72.8% | 73.0% | 74.0% | |
Manufacturing Output (Nov) | 09.15 | +1.0% | +0.5% | +0.3% | |
Net Foreign Purchases of US Securities (Oct) | 16.00 | -$66.1bn | – | – | |
Wed 16th | Retail Sales (Nov) | 08.30 | +0.3% | -0.1% | -0.7% |
Core Retail Sales (Nov) | 08.30 | +0.2% | +0.2% | -0.1% | |
Control Group Retail Sales (Nov) | 08.30 | +0.1% | +0.2% | +0.2% | |
Markit Manufacturing PMI (Dec) | 09.45 | 56.7 | – | – | |
Markit Services PMI (Dec) | 09.45 | 58.4 | – | – | |
Business Inventories (Oct) | 10.00 | +0.7% | +0.4% | +0.7% | |
NAHB Housing Market Index (Dec) | 10.00 | 90 | 89 | 88 | |
Fed Policy Announcement | 14.00 | 0.00%-0.25% | 0.00%-0.25% | 0.00%-0.25% | |
Thu 17th | Philly Fed Manufacturing Index (Dec) | 08.30 | +26.3 | +20.0 | +15.0 |
Housing Starts (Nov) | 08.30 | 1,530,000 | 1,528,000 | 1,530,000 | |
Initial Jobless Claims (w/e 12th Dec) | 08.30 | 853,000 | – | – | |
Fri 18th | Current Account Balance (Q3) | 08.30 | -$171bn | -$192bn | -$170bn |
Index of Leading Indicators (Nov) | 10.00 | +0.7% | +0.4% | +0.5% | |
Selected future data releases and events | |||||
22nd Dec | GDP (Q3, 3rd Est.) | 08.30 | |||
23rd Dec | Personal Income & Spending (Nov) | 08.30 | |||
24th Dec | Durable Goods Orders (Nov) | 08.30 | |||
27th Jan | Fed Policy Announcement | 14.00 | |||
*m/m(y/y) unless otherwise stated Sources: Bloomberg, Capital Economics | |||||
Main Economic & Market Forecasts | |||||||||
%q/q ann. (%y/y) unless stated | Q3 2020 | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | 2020 | 2021 | 2022 |
GDP | +33.1 | +3.2 | +1.8 | +9.4 | +4.8 | +4.5 | (-3.6) | (+5.0) | (+4.5) |
CPI Inflation | (+1.3) | (+1.3) | (+1.7) | (+3.3) | (+2.5) | (+2.4) | (+1.3) | (+2.5) | (+2.3) |
Core CPI Inflation | (+1.7) | (+1.8) | (+1.8) | (+2.8) | (+2.3) | (+2.2) | (+1.7) | (+2.3) | (+2.2) |
Unemp. Rate (%), Period Ave. | 8.9 | 7.1 | 6.7 | 5.4 | 5.1 | 4.8 | 8.2 | 5.5 | 4.7 |
Fed Funds Rate, End Period (%) | 0.00-0.25 | 0.00-0.25 | 0.00-0.25 | 0.00-0.25 | 0.00-0.25 | 0.00-0.25 | 0.00-0.25 | 0.00-0.25 | 0.00-0.25 |
10y Treas. Yld., End Period (%) | 0.69 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 |
S&P 500, End Period | 3363 | 3750 | 3900 | 4000 | 4100 | 3500 | 3750 | 4200 | 4500 |
$/€, End Period | 1.18 | 1.20 | 1.22 | 1.23 | 1.24 | 1.20 | 1.20 | 1.25 | 1.30 |
¥/$, End Period | 106 | 105 | 103 | 102 | 101 | 105 | 105 | 100 | 95 |
Sources: Refinitiv, Capital Economics | |||||||||
Michael Pearce, Senior US Economist, +1 646 583 3163, michael.pearce@capitaleconomics.com