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Look Back: January 28 week ends with employment report surprise to the upside

Note: The Census Bureau has begun to address the backlog of reports and it is going to be confusing for a while as they sort out the best way to release the data. The Bureau of Economic Analysis has not posted its plans yet, although they will provide data for the upcoming joint report with the Bureau of Labor Statistics for productivity and costs. So far:

  • Sales of new single-family homes for November (was Thursday, December 27 at 10:00 ET) was reported on Thursday, January 31.  The date for the December numbers has not been announced.
  • Advance international trade, retail inventories, wholesale inventories for November (was Friday, December 28 at 8:30 ET) was cancelled entirely.
  • Construction spending for November (was Thursday, January 3 at 10:00 ET) was reported on Friday, February 1.
  • Wholesale trade for November (was 10:00 ET on Thursday, January 10) was reported on Friday, February 1.
  • Factory orders for November (was 10:00 ET on Monday, January 7) will be released on Monday,
    February 4.
  • International trade in goods and services for November (was 8:30 ET on Tuesday, January 8) will be released on Wednesday, February 6.
  • Business inventories for November (was 10:00 ET on Wednesday, January 16) will be released on Thursday, February 14.
  • Retail and food sales for December (was 8:30 ET on Wednesday, January 16) TBA.
  • Advance report on international trade in goods, retail inventories, and wholesale inventories for December (was 8:30 ET on Tuesday, January 29) TBA.
  • Advance estimate for fourth quarter GDP (was 8:30 ET on Wednesday, January 30) TBA.
  • Personal income and spending for December (was 8:30 ET on Thursday, January 31).
  • and food sales for December (was 8:30 ET on Wednesday, January 16) TBA.
  • Housing starts and building permits issued for December (was 8:30 ET on Thursday, January 17) TBA.
  • Advance report on orders for durable goods in December (was 8:30 ET on Friday, January 25) TBA.
  • Sales of new single-family homes in December (was 10:00 ET on Friday, January 25) TBA.

A look back at the January 28 week is a reasonably dull one up until the FOMC meeting on Wednesday and the employment data on Friday.

The FOMC statement released on Wednesday at 14:00 ET was not significantly changed in terms of the assessment of economic conditions, although that had a slightly more dovish tone in regard to economic growth – a mild downgrade from “strong” to “solid” – and indicated that the inflation picture was little changed with a hint of a slight decrease in inflation compensation measures. What was more important was the language regarding risks to the outlook which move away from “roughly balanced” to suggesting that the softening in the global economy and uncertainty for domestic fiscal and trade policy was causing Fed policymakers to be more “patient” regarding further rate hikes. It was a statement welcomed by markets.

Chair Powell’s remarks during the subsequent briefing – the first of the now routine post-meeting Q&A sessions with the press – were entirely consistent with the statement and reassuring that the next rate hike is probably further off than previously thought.  Any changes in the FOMC’s collective forecast won’t be seen until after the March 19-20 meeting. However, it is a reasonably safe bet that absent evidence of a strong pickup in growth in the first quarter – unlikely with the government shutdown – the FOMC is on hold for now and may even reduce their implicit expectation for two hikes in 2019. Naturally Powell would not commit to any particular action by the FOMC and indicated once again policy is not on a preset course and was data dependent, and “patient” was guidance, not a promise.

In the end, the main topic of Powell’s Q&A was not rates, but what the FOMC plans are for the Fed’s balance sheet holdings. The subject has been much talked about in recent weeks. The FOMC decided to try to offer some clarification in the form of reaffirming its strategy as previously outlined and communicating that its program for tapering is unchanged but could be should that prove necessary. Powell indicated that the normalization program is likely to wind up sooner than was originally thought, which in turn means that the size of the balance sheet will be larger than had the program continued longer. He also indirectly indicated that the “abundant reserves” environment is likely to prevail rather than a return to the “corridor” system of administered rates prior to the financial crisis and recession.

The economic data in the week related to the labor market showed only hints of impacts from the government shutdown that lasted most of January. Of these, the initial jobless claims for the week ended January 26 saw a substantial jump and as the lengthening shutdown forced some contractors to start layoffs and the state of California announced it would accept claims for federal workers affected by the closures. However, the government reopening on Monday, January 28 will negate the necessity to add these workers to the continuing claims rolls.

The ADP National Employment Report for January surprised to the upside with a solid number of job adds for the private sector. The Challenger Reports on layoff intentions was up, although much of the increase was related to continued contraction in the retail sector while hiring intentions were also dominated by retail.

The release of the Employment situation also provided a significant  upside surprise in the form of a 304,000 increase in January from December.  Although it was on the heels of a large downward revision to December and a mild upward one for November (net down 70,000), the size of the increase cannot be dismissed as month-to-month noise. Subtracting out the net revision still leaves the monthly gain well above the level needed to absorb new workers and encourage re-entrants into the labor market. In fact, the headline U-3 unemployment rate rose to 4.0% in January from December, and the U-6 unemployment rate was up five-tenths to 8.1%. December graduates are entering the job market, but it would appear that marginalized workers are also returning. Another hopeful sign was the one-tenth increase in the participation rate to 63.2%, suggesting a slight improvement in resource utilization.

Consumer confidence was clearly shaken by the government shutdown in January. Both the Conference Board’s Consumer Confidence Index and the University of Michigan’s Consumer Sentiment Index reflected deep concerns about conditions six months from now for business activity and the job market. Present conditions were generally still viewed as quite good. However, even if confidence fails to rebound in February, the respective index readings are by no means weak and only disappointing relative to the exceptionally high levels in the past year or so.

The mix of numbers for the housing market in November and December suggest that the mild improvement in November won’t carry over into December. However, there is a ray of hope that recent declines in mortgage interest rates will encourage a fence-sitters to enter the market while there is some power to negotiate on price and lock in a lower rate.

Sales of new single-family homes in November – a catchup release from the reported originally expected in late December – was surprisingly strong. However, last month’s report on December sales of existing homes points to weaker conditions.

The S&P CoreLogic Case-Shiller Home Price Index for November told a similar story to the FHFA House Price Index with prices still rising, but less rapidly.

The NAR’s Pending Home Sales Index for December broke below the 100-mark for the first time since and indicated that there is less home purchasing momentum going into January.

The ISM Manufacturing Index for January didn’t follow the lead of the regional surveys from the Fed District Banks. The moderation in activity that set in in December gave way to a mild rebound in January with strong new orders and production that will ease some of the concerns about conditions in the factory sector.

The fourth quarter Employment Cost Index rose about in line with expectations, but it also left open the potential that rising wages and salaries could start to pass through into overall price inflation.

 

 

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