Recovery falters; Congress stalls; Fed tweaks - Capital Economics
US Economics

Recovery falters; Congress stalls; Fed tweaks

US Economics Weekly
Written by Paul Ashworth
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The decline in retail sales in November confirmed the message from the slumping high-frequency activity data and the rising trend in jobless claims – namely that the restrictions imposed by many states to stem the surge in coronavirus infections are beginning to weigh on the economy. That should provide a little more impetus, if any was needed, for Congress to pass another fiscal stimulus within the next few days.

The decline in retail sales in November confirmed the message from the slumping high-frequency activity data and the rising trend in jobless claims – namely that the restrictions imposed by many states to stem the surge in coronavirus infections are beginning to weigh on the economy. That should provide a little more impetus, if any was needed, for Congress to pass another fiscal stimulus within the next few days.

Economy on the ropes

Retail sales declined by 1.1% m/m last month, led by declines in food services, clothing and electronics, which were all hit hard during the initial lockdowns last spring too. The high-frequency data show that the drop-off in restaurant dining numbers didn’t begin in earnest until the middle of last month – and worsened this month. (See Chart 1.) Air travel and hotel occupancy numbers have also started to weaken in recent weeks. The jobless claims figures paint a similar picture – with claims hitting 885,000 last week, up from a recent low of 709,000.

Chart 1: High-Frequency Activity Indicators (%y/y)

Sources: TSA, OpenTable, Refinitiv

Admittedly, restaurant dining is still only down 65% y/y compared with the 100% drop last spring. And, at 885,000, jobless claims are nowhere near the peak of more than 6.5 million from earlier this year. Nevertheless, these are clear indications that the recovery has gone into reverse. Non-farm payroll employment did still increase in November, but that is probably because the survey week around the 12th pre-dated the more significant decline in activity.

Our guess is that both the employment and spending data will look even worse in December. We are hopeful, however, that industrial production will hold up better than it did in the spring. A few months of manufacturing output outpacing spending would help to rebuild inventories, which still look unusually low, particularly for this early stage of the recovery.

Congress still stalling

Congress is still struggling to get a proposed $900bn stimulus package over the finish line, which means there could be a short government shutdown for a few days, since it also needs to pass a continuing spending resolution at the same time. The bill being discussed includes new money for another round of stimulus cheques, a three-month extension of expiring unemployment benefits and more funds for the Paycheck Protection Program (PPP).

It remains to be seen whether the headline figure is all “new” money or whether it includes some re-purposed funds left over from the CARES Act – such as the more than $400bn that will no longer be needed to capitalise the Fed’s expiring 13(3) lending facilities. And, with no funding for state and local governments, the stimulus will also generate less bang-for-the-buck in terms of the boost to GDP. According to the CBO, assistance for state and local governments in the CARES Act had a multiplier of 0.88, whereas the multipliers for the stimulus cheques and PPP loans were 0.60 and 0.36 respectively.

Fed tweaks guidance on asset purchases

The Fed switched from time-based to outcome-based guidance for its asset purchases this week. Whereas before the statement pledged that the Fed would continue buying $120bn of assets a month “over coming months”, the new statement promises to continue until there has been “substantial” progress toward meeting its full employment and price stability goals.

The week ahead

Next week we expect November’s durable goods data to show that the recovery in business equipment investment continued, whereas the personal spending data should show consumption in decline.

Data Previews

Durable Goods (Nov.) 08.30 Wed. 23rd Dec.

Forecasts

Previous

Median

Capital Economics

Headline orders

+1.3%

+0.6%

-1.0%

Core (ex-transport)

+1.3%

+0.5%

+0.8%

Continued strong gains in core orders

We expect another solid rise in underlying durable goods orders in November, consistent with business equipment investment continuing to rebound strongly.

Despite registering its first 737 MAX orders since the plane was cleared to fly again, Boeing still suffered a net 61 cancellations last month. That drag means that, despite a strong rise in motor vehicle orders, transport orders probably fell by 5.0% in November.

Excluding transport, the surveys generally remain at high levels, suggesting the solid rebound in underlying durable goods orders continued. (See Chart 2.) We expect a slightly slower 0.8% m/m gain last month, but that is still unusually strong growth given that core orders are already above their pre-pandemic February level.

Chart 2: Markit Mfg. New Orders & Core Durables

Sources: Refinitiv, Markit

Personal Income & Spending (Nov.) 08:30 Wed. 23rd Dec.

Forecasts

Previous

Median

Capital Economics

Personal Income

-0.7%

-0.3%

-0.4%

Personal Spending

+0.5%

-0.1%

-0.6%

Recovery heading into reverse

Our calculations suggest that consumption fell for the first time in six months in November, declining by 0.6%.

The 0.5% fall in control group retail sales, along with a drop in auto sales and a marginal fall in gasoline consumption, suggests goods consumption fell by 0.7% last month. The retail sales report showed food services spending fell by 4% in November. (See Chart 3.) We expect demand for other services to have held up, although healthcare is a wildcard if hospitals cancelled routine operations to clear space for COVID-19 patients. All told, we have pencilled in a 0.6% drop in services consumption, translating into a similar decline in overall consumption. Assuming a 0.2% rise in the PCE deflator, that suggests a 0.8% fall in real consumption, and we expect a bigger fall in December.

Despite the muted 245,000 gain in payrolls last month, our model suggests wages and salaries still rose by 0.7% last month. But that will be outweighed by the expiry of the FEMA emergency UI benefits authorised by the Trump administration and the fading boost from PPP loans to business incomes. As a result, we forecast a 0.4% fall in personal incomes.

Chart 3: Food Services Consumption (% m/m)

Source: Refinitiv

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EST (GMT-5)

Previous*

Median*

CE Forecasts*

Mon 21st

No Significant Data Released

Tue 22nd

GDP (Q3, 3rd Est.)

08.30

+33.1%

+33.2%

+33.1%

Conference Board Consumer Confidence (Dec)

10.00

96.1

97.5

101.0

Existing Home Sales (Nov)

10.00

6,850,000

6,700,000

6,700,000

Wed 23rd

Durable Goods Orders (Nov)

08.30

+1.3%

+0.6%

-1.0%

Core Durable Goods Orders (Nov)

08.30

+1.3%

+0.5%

+0.8%

Personal Income (Nov)

08.30

-0.7%

-0.3%

-0.4%

Personal Spending (Nov)

08.30

+0.5%

-0.1%

-0.6%

PCE Deflator (Nov)

08.30

0.0%(+1.2%)

+0.1%(+1.2%)

+0.2%(+1.3%)

Core PCE Deflator (Nov)

08.30

0.0%(+1.4%)

+0.1%(+1.4%)

+0.2%(+1.6%)

Initial Jobless Claims (w/e 19th Dec)

08.30

885,000

900,000

New Home Sales (Nov)

10.00

999,000

990,000

990,000

Thu 24th

No Significant Data Released

Fri 25th

Christmas Day Holiday – Markets Closed

Mon 28th

No Significant Data Released

Tue 29th

Case-Shiller House Prices (Oct)

09.00

+1.4%(+6.6%)

Wed 30th

Advance Goods Trade Balance (Nov)

08.30

-$80.4bn

-$81.8bn

Thu 31st

Initial Jobless Claims (w/e 26th Dec)

08.30

Fri 1st

New Year’s Day Holiday – Markets Closed

Selected future data releases and events

5th Jan

Georgia Senate Runoff Elections

ISM Manufacturing Index (Dec)

10.00

6th Jan

Fed FOMC Minutes (16th Dec)

14.00

7th Jan

International Trade (Nov)

08.30

ISM Services Index (Dec)

10.00

8th Jan

Employment Report (Dec)

08.30

20th Jan

Presidential Inauguration

12.00

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


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