The Frog Prince
Contrary to most other economic indicators, the manufacturing sector grew at the fastest pace since the beginning of the pandemic last spring (we’re about to lap a full year around the sun with this nonsense…). The ISM manufacturing index increased to 60.7 in December (anything above 50 indicates growth) and this is actually the highest level we’ve seen in almost two and a half years. Most encouraging, the employment piece of the index, which had been negative for 14 months straight, rose above 50 for the first time in October and again in December as well.
Moral of the story: This index basically measures whether things are getting better or worse for the manufacturing industry, but doesn’t actually measure how much better or worse. Though the index is at the highest level in two and a half years, manufacturers aren’t actually doing better today than they were a year ago. Getting back to “normal” and growing from there will still take a while, but this index is a good gauge for optimism in the manufacturing industry overall. Though it’s not as exciting or sexy as the tech sector, positivity out of the manufacturing sector could be great for 2021.
The Federal Reserve increased its expectations for the US economy in the near term. Growth in 2020 is expected to fall just 2.4%, compared to the prior expectation for a 3.7% decline. Additionally, the growth forecast for 2021 was increased to 4.2% from 4.0%. Importantly, they’re also expecting unemployment to fall to 5% by the end of 2021 and inflation to come in around 1.8%.
Moral of the story: The Fed’s mandates for maintaining full employment and stable prices (inflation at ~2%) will still take some time to accomplish. However, given the amount of money that’s being pumped into the economy because of the Federal government’s stimulus packages and the Fed’s accommodative policy (bond buybacks, near 0% interest rates), that inflation expectation could start creeping up quickly. Though 2-3% inflation will be a welcome change of pace, anything much higher could become an issue.
The Ugly Duckling
The biggest economic report of the week came Friday and the December jobs report was U-G-L-Y. We lost 140k jobs in December, which marks the first month of job losses in eight months. The hospitality industry lost 498k jobs, 372k from restaurants and bars alone. Since January 2020, the hospitality industry has lost 3.9m jobs, which is almost a quarter of the total labor workforce in the industry. Support your local restaurants!
Moral of the story: This jobs report is a clear indication that the labor market recovery didn’t just stall, but started deteriorating again. There were job gains in several industries, including retail and transportation, though many are likely to be temporary just for the seasonally busier holiday shopping season. We are not starting 2021 with a great jobs story but this was about as significant to the market as it could be given the events of the week and stocks didn’t react very much on the news.