Not the quiet first week back we were all hoping for - Capital Economics
US Economics

Not the quiet first week back we were all hoping for

US Economics Weekly
Written by Paul Ashworth
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Although we think that markets are still over-estimating the potential for additional large-scale fiscal stimulus this year, the Democrats’ unexpected victories in both Georgia Senate run-off elections has undoubtedly shifted the balance of risks a little, as has the Republican party’s descent into near civil war. Under those circumstances, the resulting rise in longer-term Treasury yields is understandable, particularly when the Fed appears to be in no rush to expand the pace or composition of its asset purchases.  Nevertheless, we still think that the Fed would step in with enhancements to its asset purchases to prevent a more significant rise in yields, particularly with the economy still in such a fragile state, illustrated by the renewed decline in employment in December.

Although we think that markets are still over-estimating the potential for additional large-scale fiscal stimulus this year, the Democrats’ unexpected victories in both Georgia Senate run-off elections has undoubtedly shifted the balance of risks a little, as has the Republican party’s descent into near civil war. Under those circumstances, the resulting rise in longer-term Treasury yields is understandable, particularly when the Fed appears to be in no rush to expand the pace or composition of its asset purchases. (See Chart 1.) Nevertheless, we still think that the Fed would step in with enhancements to its asset purchases to prevent a more significant rise in yields, particularly with the economy still in such a fragile state, illustrated by the renewed decline in employment in December.

Chart 1: Treasury Yields (%)

Source: Refinitiv

It wasn’t a complete surprise that the Democrats won both of Georgia’s Senate seats. The polls had been favourable over the past week or so. But no-one has a lot of confidence in polls these days and even on election day betting markets still put the odds of the Democrats capturing control of the Senate at slightly less than 50%. Given that Jon Ossoff beat David Perdue by less than 1% of the vote, betting markets weren’t that far off – it was close to a coin toss.

The fact that Democrats did achieve a clean sweep – with Vice President Kamala Harris’ tiebreaking vote giving them narrow control of the Senate – will make a significant difference in some respects. As President, Joe Biden will have a much easier time getting his cabinet nominees confirmed, since that only requires a simple majority in the Senate. It will also allow the Democrats to use the Congressional Review Act (CRA) to block post-election regulatory changes made by the Trump administration. Finally, with Chuck Schumer as Senate Majority Leader, the Democrats will be able to control what bills are debated on the floor – including a clean bill that increases the stimulus payments to $2,000.

But the Democrats are still well short of a filibuster-proof 60 seat majority in the Senate. Admittedly, they could try to implement more large-scale stimulus, partly funded by tax increases, via budget reconciliation, which is not subject to the cloture rule. But that process can only be used once a year and, as we saw with the Republicans’ failed attempt to reform health care, it would require the support of even the most centrist Senate Democrats. In this case, Joe Manchin, Kyrsten Sinema, or even the newly elected Mark Kelly, could end up playing the obstructionist role that the late John McCain did with the Republicans in 2017. The upshot is that, while we acknowledge the risk of more stimulus is higher than it was on Monday, we still think that, on balance, it is less than 50-50.

It remains to be seen how events on Capitol Hill this week reshape the Republican party. It’s possible that it will embolden centrist Senators like Mitt Romney to break with the pro-Trump Republicans, and to seek more bipartisan compromise instead. If the schism was big enough, the Biden administration might find it possible to garner enough votes to avoid the filibuster, increasing the chances of more stimulus. But the further Biden moves to the centre to attract Republican votes, the more he could enrage the more progressive congressional members of his own party.

The week ahead

With markets still focused on the last days of the Trump presidency, the economic data may not do much to move the needle. We anticipate news of a further decline in retail sales in December, although higher gasoline prices likely pushed up headline CPI inflation last month.


Data Previews

Consumer Prices (Dec.) 08.30 Wed. 13th Jan.

Forecasts

Previous

Median

Capital Economics

Consumer Prices

+0.2%(+1.2%)

+0.4%(+1.3%)

+0.5%(+1.4%)

Core Consumer Prices

+0.2%(+1.6%)

+0.1%(+1.6%)

+0.2%(+1.7%)

Base effects to push inflation well above 2% soon

We expect that headline and core CPI inflation picked up marginally in December, but base effects will push both well above 2% by the spring.

The 8% m/m jump in gasoline prices last month will add close to 0.3ppts to headline inflation. The new round of restaurant closures could put renewed upward pressure on grocery prices, although any impact will be far smaller than that seen during the initial lockdowns last year.

Excluding food and energy, we don’t expect the latest virus wave to have much impact on core prices. The plunge in core inflation last spring was largely driven by a few of the most travel-sensitive categories. (See Chart 2.) But with hotel bookings and airport traffic continuing to rebound in recent weeks, those prices are unlikely to see renewed declines. Otherwise, there is scope for a rebound in medical care prices, while continued low inventory levels along with the weaker dollar will probably push core goods prices higher. We expect a 0.2% m/m rise in core CPI, with the headline index up 0.5% m/m.

Chart 2: Core CPI Inflation (%)

Sources: Refinitiv, Capital Economics

Retail Sales (Dec.) 08.30 Fri. 15th Jan.

Forecasts

Previous

Median

Capital Economics

Retail Sales

-1.1%

-0.2%

-0.1%

Core Retail Sales (Less Autos)

-0.9%

-0.1%

-0.7%

Virus restrictions continue to take their toll

We estimate that retail sales fell slightly in December, with the hit to services spending resulting from the spread of the virus meaning that overall consumption probably saw a larger decline.

Our calculations suggest that headline sales fell by only 0.1% m/m, partly propped up by a rebound in auto sales, as flagged by the manufacturers’ unit sales data. But it also reflects the 8% m/m jump in gasoline prices, which means that, despite a further fall in demand, the value of gas station sales rose.

The biggest drag on sales will come from a further slump in spending on food & drink services, with the restrictions imposed on bars and restaurants reflected in the continued decline in diner numbers reported by OpenTable. (See Chart 3.) Control group retail sales exclude that category and may have received a boost from a renewed jump in spending at grocery stores, but we suspect that spending at clothing, health & personal care and department stores saw further falls last month. As a result, we expect a 0.5% m/m fall in control group sales.

Chart 3: OpenTable Diners & Retail Sales

Sources: Refinitiv, OpenTable

Industrial Production (Dec.) 09.15 Fri. 15th Jan.

Forecasts

Previous

Median

Capital Economics

Industrial Production

+0.4%

+0.2%

+1.4%

Manufacturing Output

+0.8%

+0.3%

+1.0%

Industrial recovery continues unabated

We estimate that industrial production rose by a strong 1.4% m/m in December, as the manufacturing recovery remained resilient to rising coronavirus infections.

The EIA’s electricity generation data point to a rebound in utilities output last month, while mining output also looks to have increased, as the continued recovery in oil prices lifted drilling activity and crude oil production.

Manufacturing was hit hard by the lockdowns last spring and might have been expected to suffer from the latest wave of new cases. But with the sector generally unaffected by the restrictions put in place by state and local authorities, the evidence suggests it has continued to recover at a fairly rapid pace. The further rise in employee hours worked points to output rising by 1.0% m/m or so last month, which would be consistent with the continued strength of the manufacturing surveys. (See Chart 4.)

Chart 4: Manufacturing Output Surveys

Sources: Refinitiv, Markit

Uni. of Michigan Consumer Confidence (Jan.) 10.00 Fri. 15th Jan.

Forecasts

Previous

Consensus

Capital Economics

Headline index

80.7

81.0

78.0

Capitol Hill riots could hit confidence

We expect the University of Michigan measure of consumer confidence index to decline in January.

Politics rather than economic fundamentals appear to have driven consumer confidence in recent months, with Democrats’ confidence rising more than Republicans’ confidence fell, the opposite of what we saw following the 2016 elections. (See Chart 5.) News that Democrats have won control of the Senate may give a further partisan boost in January. But we suspect that could be outweighed by a hit to confidence from the Capitol Hill riots.

Meanwhile, other drivers of confidence have been mixed. The S&P 500 has continued to rise to record highs, driven by optimism on vaccines and more fiscal stimulus. But jobless claims data suggest that labour market conditions have deteriorated over recent weeks.

On balance, we are pencilling in a fall to 78.0, from 80.7. Together with tighter coronavirus restrictions, that suggests consumer spending will remain weak in the first quarter.

Chart 5: UoM Confidence by Political Affiliation

Source: University of Michigan


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EST (GMT-5)

Previous*

Median*

CE Forecasts*

Mon 11th

No Significant Data Released

Tue 12th

NFIB Small Business Optimism (Dec)

06.00

101.4

JOLTS Job Openings (Nov)

10.00

4.5%

Wed 13th

Consumer Prices (Dec)

08.30

+0.2%(+1.2%)

+0.4%(+1.3%)

+0.5%(+1.4%)

Core Consumer Prices (Dec)

08.30

+0.2%(+1.6%)

+0.1%(+1.6%)

+0.2%(+1.7%)

Monthly Treasury Statement (Dec)

14.00

-$13.3bn

Fed’s Beige Book

14.00

Thu 14th

Initial Jobless Claims (w/e 9th Jan)

08.30

787,000

800,000

Import Prices (Dec)

08.30

+0.1%(-1.0%)

+0.7%

Fri 15th

Retail Sales (Dec)

08.30

-1.1%

-0.2%

-0.1%

Core Retail Sales (Dec)

08.30

-0.9%

-0.1%

-0.7%

Control Group Retail Sales (Dec)

08.30

-0.5%

+0.2%

-0.5%

Producer Prices (Dec)

08.30

+0.1%(+0.8%)

+0.4%(+0.7%)

+0.4%(+0.7%)

Core Producer Prices (Dec)

08.30

+0.1%(+1.4%)

+0.1%

Empire State Manufacturing Index (Jan)

08.30

+4.9

+3.8

+10.0

Industrial Production (Dec)

09.15

+0.4%

+0.2%

+1.4%

Capacity Utilization (Dec)

09.15

73.3%

73.3%

74.1%

Manufacturing Output (Dec)

09.15

+0.8%

+0.3%

+1.0%

Business Inventories (Nov)

10.00

+0.7%

+0.4%

+1.0%

Uni. Of Mich. Consumer Confidence (Jan)

10.00

80.7

81.0

78.0

Selected future data releases and events

20th Jan

Presidential Inauguration

12.00

21st Jan

Housing Starts (Dec)

08.30

22nd Jan

Markit Flash PMIs (Jan)

09.45

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)

(+5.5)

(+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

6.8

6.4

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

0.93

1.00

1.00

1.00

1.00

0.93

1.00

1.00

S&P 500, End Period

3363

3756

3900

4000

4100

4200

3756

4200

4500

$/€, End Period

1.18

1.22

1.22

1.23

1.24

1.20

1.22

1.25

1.30

¥/$, End Period

106

103

103

102

101

105

103

100

95

Sources: Refinitiv, Capital Economics


Paul Ashworth, Chief US Economist, paul.ashworth@capitaleconomics.com