A Slightly Brighter Outlook for the U.S. Economy
- The proposed deal between the White House and some members of Congress to extend Bush-era tax cuts, reduce payroll taxes and renew emergency unemployment benefits dominated headlines. GDP growth should get a slight boost in the coming year.
- Weekly first-time unemployment claims fell by 17,000 to 421,000 in the week ending December 4, the lowest reading of the year.
- The U.S. trade deficit narrowed sharply from $44.6 billion in September to $38.7 billion in October driven by strong export growth.
While it was a fairly light week for economic data, the proposed deal between the White House and some members of Congress to extend the Bush-era tax cuts, reduce payroll taxes and renew emergency unemployment benefits dominated headlines. Once the details are ironed out and some semblance of the package passes, most economists agree that GDP growth should get a slight boost in the coming year. This is indeed good news as the pullback in federal government spending next year was one of the major challenges for economic growth. We now expect real GDP to grow at a 2.6 percent annual pace in 2011 (for more details, please see our report: Annual Economic Outlook 2011).
The increase in economic growth, however, will still not be enough to bring the unemployment rate significantly lower. The unemployment rate should remain stubbornly above 9 percent well into 2012. As economic growth picks up in the coming quarters, much of the upward momentum in the unemployment
rate will likely come from discouraged workers re-entering the workforce due to improving labor market conditions.
While an obstinately high unemployment rate seems daunting (and despite the disappointing November employment report), there are clear signs employment is improving. To help illustrate this point, we turn to five reliable indicators to gauge the strength of employment growth: temporary hiring, length of the workweek, initial jobless claims, the ISM index of employment and job openings relative to the size of employment. All measures have shown signs of stabilizing in recent months.
Weekly first-time unemployment claims fell by 17,000 to 421,000 in the week ending December 4, the lowest reading of the year. The four-week moving average, which is our preferred way to look at the volatile series, fell to 427,000 the lowest level since August 2008. The decline in the four-week moving average
suggests improved payroll numbers ahead, but we still need claims to drop below 400,000 on a consistent basis for a self-sustaining recovery.
The number of people receiving extended and emergency benefits also dropped last week. We suspect the decline is related to claimants who exhausted all available benefits options. These numbers will probably continue to decline in the weeks ahead, until legislation extending unemployment benefits is passed.
Other data highlighting employment conditions were the Job Openings and Labor Turnover Survey. The job openings rate increased to 2.5 percent from 2.3 percent. The increase brings the number of job openings to 3.4 million and the ratio of unemployed to job openings to 4.4.
Another clear sign the economy continues to grow is the recently released data on the trade balance. The U.S. trade deficit narrowed sharply from $44.6 billion in September to $38.7 billion in October driven by strong export growth. All things being equal, we expect the decline in the deficit to have a positive effect on GDP growth in the fourth quarter.
Producer Price Index • Tuesday
The October Producer Price Index rose 0.4 percent, led by increases in energy prices. The core PPI, which excludes food and energy, declined 0.6 percent in October, which was mostly due to falling prices for light trucks and passenger cars, which were down 4.3 percent and 3.0 percent, respectively. Intermediate goods prices increased in October to 1.2 percent, with core intermediate goods also rising 0.6 percent. Increases were also observed in crude goods which rose 4.3 percent, likely due to increases in commodity prices.
We expect that the November PPI rose 0.3 percent on a monthly basis, and the core PPI edged up as well. With manufacturers unable to pass along higher prices to consumers there may be a negative effect on profits going forward. Our forecast indicates that the producer price index will rise 3.4 percent in the fourth quarter of 2010 on a year-over-year basis.
Previous: 0.5% Wells Fargo: 0.3%
Consensus: 0.7%
Industrial Production • Wednesday
Industrial production (IP) in October was unchanged, held back by unseasonably warm weather, which resulted in a 3.4 percent drop in utility output. Production in the factory sector rose 0.5 percent in
October due to a 1.6 percent increase in motor vehicle output and a 1.4 percent increase in machinery. Output of business equipment rose 1.1 percent in October and is up 10.1 percent on a year-over-year basis.
In contrast, production of consumer goods has pulled back, up only 3.7 percent year-over-year. Increased
exports are likely helping to boost manufacturing output and will probably offset any drag from the reduction in inventory building.
We estimate that IP increased 0.4 percent in November. Our forecast continues to indicate a slowdown in IP through the end of this year and the first quarter of 2011, mostly due to continued reductions in inventory building.
Previous: 0.0% Wells Fargo: 0.4%
Consensus: 0.3%
Housing Starts • Thursday
Housing starts declined substantially in October, down 11.7 percent. Declines were observed across the board with multifamily starts plunging 44 percent and single-family homes falling 1.0 percent. Building permits rose slightly to 555,000, which is likely the new normal—at least for the time being—for the housing market.
Some good news can be seen in the apartment market where demand has been rising steadily over the past year. We expect housing starts increased slightly to 540,000 in November due to continued low mortgage rates and some payback from the disappointing levels observed last month. Our forecast continues to indicate that housing starts have bottomed out, but new starts are estimated to total only 560,000 in the fourth quarter of this year.
Previous: 519K Wells Fargo: 540K
Consensus: 550K
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