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Weekly Economic and Financial Commentary: Winter Is Here

U.S. Review

Winter Is Here

  • Emergency authorization of the Pfizer-BioNTech COVID vaccine appears imminent, but the virus is running rampant across the United States today, pointing to a grim winter.
  • Despite continued negotiations, additional COVID-relief remains elusive (see topic of the week on page 7) while initial claims for unemployment insurance have increased in three out of the past five weeks.
  • Consumer prices rose 0.2% and the underlying trend in inflation looks set to firm over the course of next year.
  • We released our 2021 Annual Economic Outlook this week.

Winter Is Here

Recent data continue to suggest a resilient economy, but the recovery has undeniably shifted into a lower gear amid rising virus cases. Medical advisers to the FDA recommended approval of the Pfizer-BioNTech COVID vaccine this week, clearing the way for FDA emergency authorization. Vaccine approval is undeniably a positive end to a year shaken by the pandemic, but the virus is running rampant across the United States today. The reality is that vaccines won’t be available to the general public for months, and further fiscal support would be instrumental to ensure a continued economic recovery in the event virus cases lead to a renewed pullback in activity.

Local governments have re-instated stay-at-home guidelines and mobility restrictions like curfews to try and curb the spread of the virus. Even in the absence of government-mandated restrictions however, activity may subside. We continue to expect a decent holiday sales season for retailers, but households may rein in spending in the new year as recent case counts point to a grim winter. Consumer sentiment, however, has held up in early December rising to the second-highest level since March. Sentiment was likely boosted by vaccine hopes and the glimpse of a possible end to the pandemic, with both current conditions and expectations improving.

Still, many households continue to struggle and the absence of an additional fiscal relief package would leave millions of Americans without unemployment benefits at the start of the new year. Further, an additional 853K workers, up 137K from the week prior and representing the highest weekly increase since March, filed an initial claim for unemployment insurance last week. Although job openings have improved, they remain about 5% lower than February. It’s not just decreased demand for labor that continues to constrain the jobs recovery, but also supply. The labor force has fallen by a whopping 4.1M workers since February as childcare and health concerns have stopped millions from looking for jobs.

Optimism of small business owners has also recently wavered as the Small Business Optimism Index subsiding in November. With earnings continuously under pressure and operating costs rising, the share of businesses expecting to raise prices continues to trend higher and foreshadowing inflation. Indeed, consumer prices increased 0.2% last month as initial pandemic-effects continued to unwind. The 12-month change in inflation should jump in the second quarter due to favorable base effects after the pandemic led to historic price declines this year. While the underlying inflation trend should firm over the course of the year, the roughly 2 ½ percent rate of core CPI in Q2-2021 is unlikely to last, and we expect will be dubbed “transitory” by the FOMC.

Is It 2021 Yet?

As we look to next year, we echo many of these themes in our 2021 Annual Economic Outlook. Our latest projections have the U.S. economy contracting 3.5% this year before increasing 4.5% in 2021 and again in 2022. Although there remains a great deal of uncertainty in the outlook, as the calendar flips to 2021, we increasingly see light at the end of the tunnel. Although it may still be a long trek back to a pre-pandemic economy, it appears we are well on our way.

U.S. Outlook

Industrial Production • Tuesday

In prior cycles, the rebound in manufacturing has taken longer than the recovery in broader economic activity. But in this cycle we have already seen industrial production retrace more than half of its losses from the cratering in output from the shutdowns in the spring.

A few factors are at play here. The first is that goods-spending has been the primary driver of the consumer rebound, even as spending on services has been sharply curtailed. The other is that the manufacturing sector is better suited for the implementation of social-distancing, mask-wearing and other safety protocols.

But a full recovery depends upon a sustained upturn in global growth and that, in turn, will depend upon vaccine distribution. We expect another solid monthly increase when industrial production for November is published on Tuesday.

Previous: 1.1% Wells Fargo: 0.4%
Consensus: 0.3% (Month-over-Month)

Retail Sales • Wednesday

The level of retail sales is higher now than it was before the pandemic, but that varies quite a bit when you look at spending by store type. Gas stations are seeing fewer fill-ups as many former office workers have eliminated their commutes. The work from home (WFH) trend has also diminished spending at clothing stores, although that is starting to rebound. The big winner has been e-commerce (non-store retailers in the chart to the left).

We will be on pins and needles Wednesday morning waiting for the November figures to hit the wire as it will be critical for holiday sales. We are banking on a monthly decline for November—as a lot of holiday-oriented spending got pulled into October this year with Prime Day and other early savings specials with stores “season pushing” on us. A larger-than-expected decline could cast doubts for retailers in these make-or-break year-end months.

Previous: 0.3% Wells Fargo: -0.2%
Consensus: -0.2% (Month-over-Month)

Housing Starts • Thursday

Who knew that a pandemic would be so good for residential construction activity? The combination of a desire for more elbow room along with a sharp drop in mortgage rates has resulted in more single-family homes going up than at any point since the height of the housing boom in the mid-2000s.

Admittedly, multifamily starts, the bulk of which are apartments, have been unchanged since August at 351,000 units and we would not be surprised to see this segment level off near the current level. There is still an immense undersupply of all types of housing, particularly affordable rental housing which may keep multifamily construction f