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Weekly Economic and Financial Commentary: The Shot Heard Round the World

U.S. Review

The Shot Heard Round the World

  • This week marked the first U.S. COVID vaccinations and the imminent rollout of a second vaccine. But, the resurgence of the virus and increased mobility restrictions further show why fiscal support would help ensure the economic recovery.
  • The highest number of individuals since September filed an initial claim for unemployment last week.
  • Retail sales missed expectations in November and foreshadow the impending air pocket for durables consumption, which will also have implications for the rebound in manufacturing.
  • Housing remains a bright spot with starts up 1.2% last month.

The Shot Heard Round the World

The first U.S. COVID vaccinations began on Monday, just days after the Pfizer-BioNTech vaccine received FDA emergency authorization. On Thursday, a second vaccine, the Moderna COVID vaccine, was recommended for approval by medical advisers to the FDA. FDA emergency authorization is imminent.

News of the second vaccine comes following the deadliest day of the pandemic yet in the United States as the virus rages across the nation. The resurgence of the virus continues to lead to more mobility restrictions to curb the spread of the virus causing businesses to close and lay off workers as a result, who again are increasingly turning to unemployment benefits for assistance. Last week, 885K additional workers filed an initial claim for unemployment insurance, marking the second consecutive weekly increase and the highest reading since early September. The rise in claims came during the nonfarm payroll survey week, which increases the odds of a negative print for December employment.

A total of 20.6 million individuals continue to collect some form of unemployment insurance, with 14 million relying on assistance from a temporary program (such as PUA or PEUC). With the December 26 expiration of these temporary enhanced benefits quickly approaching, all eyes remain on Congress if an additional COVID-relief package will come to pass. We now view it more likely than not that a relief bill will become law and will include among other things, the extension of enhanced benefits. See Topic of the Week on Page 8 for more detail on COVID-relief.

Impending Air Pocket in Goods Consumption

The economic data this week foreshadowed the impending air pocket we expect for goods consumption, which has soared since the lifting of lockdowns in April. Retail sales declined a more-thanexpected 1.1% in November. The decline in sales likely, in part, reflects renewed concern of the virus as nonstore retailers (online sales), grocery stores and building material stores—retailers that benefited at the onset of the crisis—were the only three retailers to report an increase in sales during the month. The retail figures suggest some downside risk to durables consumption in the fourth quarter, but our holiday sales (HS) forecast for a 9% year-over-year gain remains more or less intact. Since HS exclude some of the categories that are struggling, like gas stations, autos and restaurants, the decline in November HS was just 0.3%. We would not be surprised to see December post a modest decline as well, but since HS are coming off such a high level of spending already, a big year-over-year increase is still in the cards.

The composition of consumer spending favoring goods outlays has benefited manufacturing, which advanced 0.8% in November. But, total manufacturing output remains 5% shy of its pre-virus peak and the anticipated slowdown in goods outlays suggests a sputtering in industrial production, particularly in categories that have outperformed recently, like consumer goods and information processing equipment. Therefore, the upside of the country and the world getting back on its feet will also mean a shift in spending back to the services economy, which means less wallet-share for durable goods purchases. At that point, it will fall to business spending on equipment to pick up the slack and become the locomotive of growth for manufacturing production.

U.S. Outlook

Existing Home Sales • Tuesday

The housing market’s hot streak continued in October as existing home sales blew past expectations and reached a 6.85-million-unit annualized pace, the highest reading since 2006. Inventories dropped to 1.42 million, 19.8% below year-ago levels, and month’s supply fell to 2.5 months, the lowest on record. Home prices are soaring thanks to scarce supply and robust demand. Median single-family home price rose 16% from a year ago to $317,700.

While we expect this strong pace of sales to continue, the rate of improvement may soon slow. Pending home sales, which lead existing sales by a month or two, fell 2.0% in September. Similarly, mortgage purchase applications have started to come back down from the lofty heights reached this summer. We look for a modest decline in November’s existing home sales to a 6.78-million-unit annualized pace. Even at this slightly lower level, however, the housing sector remains a bright spot of the 2020 economic recovery.

Previous: 6.85 Million Wells Fargo: 6.78 Million Consensus: 6.70 Million (SAAR)

Personal Income & Spending • Wednesday

November appears to be the mo