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The Weekly Bottom Line: Green Shoots Threatened by Viral Outbreak

U.S. Highlights

  • U.S. manufacturing activity expanded in January for the first time since July and the services sector was the strongest since August.
  • The coronavirus outbreak continued to disrupt trade and supply chains, impact financial markets, and force multinational companies to make production decisions with limited information.
  • Even with downward revisions to 2019 employment data, the U.S. job creation streak continues with the labor market adding 225k jobs to kickoff 2020.

Canadian Highlights

  • In contrast to the last week’s selloff, global equity markets have staged a rebound this week, with the S&P/TSX following its global peers higher. Global benchmark oil prices remained under pressure, however, Canadian oil prices rose on positive developments regarding the Trans Mountain pipeline expansion and Line 3 replacement.
  • In addition to the good news in the domestic oil sector, the much-awaited employment report did not disappoint today. The labor market added 35k new jobs in January, marking a second consecutive monthly gain.
  • Following temporary disruptions due to the shutdown of the Keystone pipeline and the CN Rail strike in November, exports rebounded strongly in December. The trade deficit narrowed to $370 million, down from $1.2 billion in November.

U.S. – Green Shoots Threatened by Viral Outbreak

Events surrounding the outbreak of the novel coronavirus continued to impact economic activity this week. Several airlines have suspended flights to China, a move expected to further dampen tourism activity, which was already negatively impacted by restrictions on tour groups leaving the country. Closures of Chinese factories and shutdown of business operations by some U.S. owned companies in China (Apple, Tesla, Starbucks) will likely depress profits and investment stateside, further weighing on economic activity.

In related news, China reported that it would reduce tariffs on $75 billion of U.S. imports by as much as 50% beginning February 14th. The move comes amid growing concerns about China’s ability to implement its responsibilities under the phase-one trade deal. The coronavirus outbreak currently underway has resulted in a near-standstill in economic activity in the country, making it more difficult for China to achieve the deal’s import targets ($200 billion over the next two years). The gesture may also aim to foster goodwill between the two countries as China hopes for flexibility in meeting its requirements under the deal.

Closer to home, the ISM Non-Manufacturing Index edged higher in January to 55.5, registering 120 consecutive months of expansion. Survey respondents generally conveyed a sense of optimism. The index’s manufacturing counterpart also managed to eke out a return to growth for the first time since July 2019 rising to 50.9 in January from 47.8 in December (Chart 1). A word of caution, however – both surveys may have been completed before uncertainty over the coronavirus disrupted global trade. With several factories in China closed until February 10th and possibly later, the downside risk to global manufacturing supply chains is very real, threatening to blunt the nascent recovery in the sector, while services are impacted via lower tourism and air travel.

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In the meantime, the U.S. trade deficit widened for the first time in three months, rising to $48.9 billion in December. Just as it was starting to give cause for concern, imports bounced back in December. Following three months of contractions, good imports surged, rising by 2.7% on the month. For 2019, the trade deficit narrowed for the first time in six years as disputes on several fronts reshaped trade relationships. Exports also declined for the first time since 2016, but imports fell more sharply, resulting in a 1.7% reduction in the overall trade deficit for 2019.

Finally, on the employment front, total nonfarm payrolls increased by 225k in January, compared with an average monthly gain of 175k in 2019. Notable job gains occurred in construction (+44k) and health care (+36k) while manufacturing was down (-12k). The labor department also implemented benchmark revisions which resulted in a net 12k reduction in previously published 2019 data (Chart 2). Even with downward revisions, the U.S. was still able to maintain its longest streak of job creation. Overall, the U.S. economy continues to show its resiliency. The corona-outbreak’s widening fallout will test it again.