Weekly Economic Reports: Week ending Dec. 18, 2020

Oil forecast for 2021

Following OPEC in cutting its forecast for oil demand growth in 2021, the IEA also expects a slower rebound than initially anticipated as the aviation sector takes longer to recover from the pandemic amid border closures and travel restrictions. "It is possible that, after the upcoming holiday season, a third wave of the virus will affect Europe and other parts of the world before vaccines have time to take effect. It will be several months before we reach a critical mass of vaccinated, economically active people and thus see an impact on oil demand." While the "market remains fragile," global consumption is expected to be 96.9M barrels per day next year, about 200K bpd below earlier forecasts. However, the IEA still expects that the crude glut left behind by the pandemic will clear by the end of next year as the global economy recovers and OPEC+ keeps a tight rein on supplies.

A larger-than-expected U.S. inventory draw helped lift oil prices to a nine-month high. West Texas Intermediate futures settled at more than $49 a barrel today for the first time since February.

The crude boost was also helped by the optimism over a stimulus bill, and by a steadily weakening dollar. Commodities priced in the currency—like oil, gold, or lean hogs—are worth more dollars when the value of the dollar declines.

Industrial production still recovering 

Industrial production increased 0.4% in November, double the consensus of 0.2%. It has increased in six of the past seven months, but is still 4.8% below its level in February, and is 5.5% lower than a year ago, underscoring the depth of the recession. 

Manufacturing output, which accounts for about 3/4 of industrial production, rose 0.8% last month, led by a 5.3% jump in vehicle output. Excluding vehicles, manufacturing was up 0.4%, with notable gains in primary metals, computer and electronic products, aerospace and miscellaneous transportation equipment, as well as some nondurables such as food and paper products. Mining output increased 2.3%, while utilities output dropped 4.3%, as warmer-than-normal weather reduced the demand for heating. 

Core industrial production, which excludes vehicles, energy, and high-tech, rose 0.4%, led by business equipment. But similar to overall industrial production, it has yet to regain its pre-recession level and is still down 3.6% from a year ago. 

The capacity utilization rate picked up 0.3 ppt to 73.3%, above the consensus of 73.0%. It has bounced back significantly from the record low in April, as factories reopened, but it remains below its pre-recession level, and is 6.5 ppt below its 1972-2019 average. This suggests there is plenty of production slack in the economy, which tends to put downward pressure on inflation.

Regional manufacturing growth surprisingly decelerates, Fed set to begin final meeting of 2020

The Empire Manufacturing Index, a measure of activity in the New York region, declined to 4.9 in December from 6.3 in November, where the Bloomberg forecast called for it to remain. However, a reading above zero denotes growth. The report marks the sixth-straight month of expansion, as employment growth accelerated solidly but the expansion in new orders slowed slightly.

The Import Price Index (chart) ticked 0.1% higher month-over-month (m/m) for November, versus expectations of a 0.3% gain, and compared to October's unrevised 0.1% dip. Versus last year, prices declined 1.0%, compared to forecasts of a 0.9% decrease and matching October's unadjusted fall.

Also, the Federal Open Market Committee (FOMC) is expected begin its two-day monetary policy meeting today. The FOMC is not expected to make changes to policy, but the markets will likely pay close attention to any guidance on how/if/when it may tweak its asset purchase program amid the threat of near-term disruptions due to rising COVID-19 cases, the recent moves in the Treasury markets, the prospects of an expedited economic recovery as the vaccine gets broadly distributed, and after the European Central Bank boosted its emergency purchase program last week. The FOMC decision will precede monetary policy decisions later in the week from the Bank of England and the Bank of Japan.

Import prices still in deflation territory 

Import prices edged up 0.1% in November, below the consensus of 0.3%. Fuel prices rebounded 4.3%, its first increase in three months, with both natural gas and petroleum contributing to the advance. But nonfuel import prices fell 0.3%, its first decline since April, led by a sharp 2.2% pullback in food prices, the most since June 2018. On a y/y basis, import prices were off 1.0%, and have been in deflation territory almost continuously since late 2018. Despite an uptick from the prior month, fuel prices were still down 24.6% from a year ago, representing the biggest drag on annual import price inflation. But it is worth noting that the deflationary pressures have eased in the past several months, largely due to the weakening U.S. dollar. We maintain a bearish outlook for the U.S. dollar for 2021, which could feed into some import price inflation, as well as a moderate acceleration of CPI inflation to 2.2% next year.

Advance retails sales fall

Advance retail sales (chart) for November fell 1.1% month-over-month (m/m), well below the Bloomberg forecast of a 0.3% decrease and following October's negatively-adjusted 0.1% decline from a previously-reported 0.3% gain. Last month's sales ex-autos dropped 0.9% m/m, compared to expectations of a 0.1% rise and October's figure was downwardly revised to a 0.1% decline from a 0.2% increase. Sales ex-autos and gas were off 0.8% m/m, compared to estimates of a 0.1% increase, and October's reading was adjusted lower to a 0.1% dip from a 0.2% gain. The control group, a figure used to calculate GDP, decreased 0.5% m/m, versus of projections of a 0.2% increase and October's negatively-adjusted 0.1% decline from a 0.1% rise.

Mortgage applications rise

The MBA Mortgage Application Index rose by 1.1% last week, following the prior week's 1.2% drop. The increase came as a 1.4% rise in the Refinance Index was met with a 1.8% gain in the Purchase Index. The average 30-year mortgage rate declined 5 basis points (bps) to 2.85%.

Manufacturing PMI declines

The preliminary Markit U.S. Manufacturing PMI Index for December declined by a smaller amount than expected to 56.5 from November's unrevised 56.7 figure but remaining solidly in expansion territory denoted by a reading above 50. Estimates called for the index to decrease to 55.8. However, the preliminary Markit U.S. Services PMI Index showed output for the key U.S. sector slowed by a larger amount than anticipated, declining to 55.3 from November's 58.4 figure, and compared to forecasts of a decrease to 55.9, but a reading above 50 also denotes expansion.

Home builders sentiment declines

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment in December declined more than expected to 86 versus forecasts calling for a decline to 88 from November's record high of 90. A level north of 50 depicts positive conditions. The NAHB said builder confidence fell back from historic levels in December, as housing remains a bright spot for a recovering economy, but adding that the issues that have limited housing supply in recent years, including land and material availability and a persistent skilled labor shortage, will continue to place upward pressure on construction costs. "As the economy improves with the deployment of a COVID-19 vaccine, interest rates will increase in 2021, further challenging housing affordability in the face of strong demand for single-family homes," the report noted.

Business inventories rise

Business inventories (chart) rose 0.7% m/m in October, versus forecasts calling for a 0.6% increase, and compared to September's upwardly-revised 0.8% gain.

Fed policy remains basically unchanged

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting today, opting to leave its stance and interest rates unchanged, as was widely anticipated. In its statement, the Committee again said that while the recovery from the disruption of the COVID-19 pandemic is continuing at a moderate pace, "The path of the economy will depend significantly on the course of the virus," adding that, economic activity and employment "have continued to recover but remain well below their levels at the beginning of the year." As well, the FOMC indicated that the ongoing public health crisis "will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term" and that accommodative policy will remain in place until inflation reaches or exceeds its 2% target and the unemployment rate falls to a level deemed sustainable without leading to higher inflation.

One of the more closely watched aspects of the FOMC decision, was the focus on the asset purchase program, of which the FOMC opted to leave the composition unchanged. However, the Federal Reserve did provide updated forward guidance language, saying it will continue its bond buying program at the current rate of $80 billion in Treasuries and $40 billion in mortgage-backed securities per month "until substantial further progress has been made toward the Committee's maximum employment and price stability goals."

In his scheduled press conference following the statement, Chairman Jerome Powell said the Fed is committed to achieving its dual mandate of price stability and full employment, and that it maintains the flexibility to provide further accommodation. Powell also continued to reiterate the need for some sort of fiscal aid, noting that it is up to Congress to act.

Jobless claims continue to accelerate, housing construction activity beats forecasts

Weekly initial jobless claims came in at a level of 885,000 for the week ended December 12, above the Bloomberg estimate of 818,000, and compared to the prior week's upwardly-revised 862,000 level. The four-week moving average rose by 34,250 to 812,500, while continuing claims for the week ended December 5 fell by 273,000 to 5,508,000, above estimates of 5,700,000. The four-week moving average of continuing claims dropped by 215,500 to 5,726,250.

Housing starts for November rose 1.2% month-over-month (m/m) to an annual pace of 1,547,000 units, above forecasts of 1,535,000 units, and compared to October's downwardly-revised pace of 1,528,000 units. Also, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, rose 6.2% m/m at an annual rate of 1,639,000, north of expectations of 1,560,000 units, and compared to the downwardly-revised 1,544,000 unit pace.

The Philly Fed Manufacturing Index fell more than expected but remained in expansion territory (a reading above zero) for December, dropping to 11.1 versus estimates of a decline to 20.0 from November's 26.3 level. Growth in new orders, shipments and employment all decelerated.

The December Kansas City Fed Manufacturing Activity Index unexpectedly moved further into a level depicting expansion (a reading above zero). The index rose to 14 from November's 11 reading, and compared to forecasts calling for a decrease to 9.

U.S. Dollar Index falls below 90

The U.S. Dollar Index (DXY) fell below 90 for first time today since April 2018. Commonly referred to as the "Dixie," it measures the dollar against a basket of other currencies. After spiking during February's and March's market turmoil, the index has declined steadily since as investors moved back into risk assets.

The Dixie's latest leg down came after the Federal Reserve's promise yesterday to keep monetary policy ultra-easy even as the U.S. economy improves. That could mean some greater inflation down the line, decreasing the value of the dollar.

LEI rises at slower pace 

The Conference Board’s Leading Economic Index (LEI) rose 0.6% in November, slightly above the consensus for a 0.5% gain. It was the seventh straight increase, albeit the smallest in the sequence. Seven of the ten components made positive contributions, led by weekly jobless claims and the ISM’s New Orders Index. The economic recovery has slowed amid rising COVID cases and waning fiscal stimulus, with conditions likely worsening in December based on early signs from some high frequency data. 

On a y/y basis, the LEI was down 2.2%, while our Composite Leading Index (which combines the LEI and Co/Lag) was off 2.1%. Both have seen momentum improve significantly since bottoming in April, but the negative readings suggest there’s still more to go until we reach normalcy. 

The Coincident Index (CEI) edged up 0.2%, also its seventh straight, but smallest, gain. The CEI has increased 11% since its April low, but it’s still 4.2% below its pre-COVID level in February. Even so, the continued improvement in the LEI and CEI kept our Economic Timing Model at 24, just one point shy of its pre-COVID level.