Economic Outlook – 10 January 2021


  • The December nonfarm payrolls fell 140K, a result much worse than the +50K print expected by consensus. The negative surprise was partially offset by a 135K upward revision to the prior month’s results. The private sector shed 95K jobs while employment in the public sector dropped 45K.
  • Without wishing to minimize the losses suffered during the month, it must be said the drop was concentrated in only a few industries. The leisure/hospitality segment was particularly hard hit, which is not surprising considering surging COVID-19 caseloads and hospitalizations in the US. The extension of the recovery in other industries gives hope that the current weakness is only temporary.
  • Another worry is that the number of Americans who have been seeking work for 27 weeks or more was still rising in December, to a 7-year high of 4 million. Since the consequences of joblessness increase with duration, the swelling of the ranks of the long-term unemployed is an indicator to be watched closely in coming months. Luckily, more federal aid is now on the way to support jobseekers. The USD$900 billion fiscal stimulus includes provisions for the sending of checks worth USD$600 to most Americans and the extension of special unemployment insurance programs set up to deal with the pandemic.
  • The ISM Manufacturing PMI rose 3.2 percentage points to 60.7, one tick short of its August 2018 cyclical high. According to the ISM, historical data suggest that such a strong reading could be consistent with a 5.2% GDP annualised growth rate.
    • The Production index notched in above 60% for the sixth month in a row, climbing four percentage points to 64.8. Of the 18 manufacturing industries, 13 reported higher production and two, lower production.
    • Following a disappointing reading in November (48.4%), the Employment index gained 3.1 percentage points to 51.5%.
    • The New Orders index perked up even more, jumping 2.8 percentage points to 67.9, which bodes well for the coming months.
    • Inventories printed above 50 for the third month in a row, edging up 0.4 point to 51.6.
    • The Supplier Deliveries index came in at 67.6, compared with 61.7 the previous month.
    • The Service index rose 1.3 percentage points to 57.2.
    • After pegging in above 50 for three straight months, the Employment index slid 3.3 percentage points to 48.2. This was not surprising in light of the new boom in COVID-19 cases.
    • Although the Prices Paid index sank to 64.8 from 66.1 in November, it remained elevated. This suggests that inflation pressures were building up beyond the manufacturing sector.
  • Construction spending rose 0.9% to US$1,459.4 billion after increasing 1.3% (revised down from 1.6%) in October. It was up 3.8% compared with November 2019.
  • Residential spending sprang 2.7% month-on-month to a seasonally adjusted annual rate of USD$658.1 billion, while private non-residential activity was down 0.8% to a seasonally adjusted annual rate of USD$453.8 billion.
  • Public expenditures dipped 0.2% to USD$347.6 billion.
  • The goods and services trade deficit widened USD$5.0 billion to USD$68.1 billion.
  • Exports rose USD$2.2 billion (1.2%) to USD$184.2 billion and imports increased USD$7.2 billion (2.9%) to USD$252.3 billion.
  • Compared with where they stood prior to the pandemic in February, goods imports were up 8.0% while goods exports were down 7.8%. Imports of capital goods (considered a proxy for domestic investment by firms) climbed 2.1% to USD$58.1 billion from October.
  • According to the US Department of Commerce, the November increase in the goods and services deficit reflected a jump of USD$5.0 billion in the goods deficit to USD$86.4 billion and a decrease of less than USD$0.1 billion in the services surplus to USD$18.2 billion.
  • The goods trade deficit with China increased USD$3.5 billion to USD$30.0 billion. Exports fell USD$0.5 billion to USD$12.6 billion and imports rose USD$3.0 billion to USD$42.6 billion.
  • The Federal Reserve published the minutes of its two-day policy meeting held December 15 and 16, 2020. The focus was squarely on the Fed’s asset purchases, with many market participants calling for greater forward guidance and an extension of the weighted average maturity (WAM) of the Fed’s bond buying. In the end, an enhancement to the Fed’s forward guidance was introduced (asset purchases will continue “until substantial further progress has been made toward the Committee’s [goals]”) but the composition and amount of purchases was left unchanged. Importantly, a WAM extension was not ruled out as a future policy move.
  • The FOMC minutes provided a little more insight into the Fed’s thought process on its shift in forward guidance. That said, the timeline for how long asset purchases will continue at the current pace remains unclear as the minutes shed little clarity here. Undoubtedly, this will depend primarily on how COVID-19 case counts progress and how well vaccines are rolled out. In any event, the Fed will continue to keep overall financial conditions accommodative, which implies asset purchases will likely continue for “a while” (Charles Evans, January 4).
  • The major indexes continued to march to record highs despite one of the most tumultuous weeks in the nation’s political history. Small-caps outperformed large-caps by a wide margin, and value stocks outpaced growth shares. Energy stocks led the gains within the S&P 500 Index, after Saudi Arabia made a surprise announcement that it was unilaterally cutting oil production by 1 million barrels per day. A surge in longer-term Treasury bond yields boosted financials shares by holding out the promise of improved lending margins, but rising rates weighed on the small real estate sector.
  • Some attention will be on December’s CPI report. The core index could have increased 0.2% in the month, as supply chain disruptions and a weaker US dollar compensated for a slowdown in the pace of recovery. The headline index, meanwhile, could have progressed 0.4% month-on-month on a surge in gasoline prices. As a result, the annual headline rate could move up one tick to 1.3%.
  • In other news, headline retail sales might have contracted for a second month in a row in December, as government benefits expired and pent-up demand continued to ease. Heavy COVID-19 caseloads in some states probably weighed on headline outlays as well.
  • The recovery in industrial production could have continued, helped by an expansion in the manufacturing sector. Mining output may also have contributed positively, reflecting a rebound in oil production. A 0.6% monthly gain should nonetheless leave output roughly 4.3% below its pre-crisis (February) level.


  • The December flash annual consumer price index was flat at -0.3 % year-on-year compared to the previous month, which was in line with expectations. That was also the case for core inflation, which was 0.2 %. The main drivers this month appear to have been a fall in food prices compared to the previous month cancelling out a correspondingly lower decline in energy prices.
  • Headline inflation remain suppressed in core eurozone countries. France, Germany, Italy and Spain saw headline (harmonised) inflation rates of 0, -0.7, -0.3 , and -0.6 % respectively year-on-year in December. In all of those countries, headline inflation remains at or below the 10th percentile of the post-2010 distribution.
  • As restrictions in the wake of the second lockdown have limited spending in many services sectors (such as travel and hospitality), it is harder than usual to assess underlying price pressure from headline data. The ECB has repeatedly stated its concerns over the inflation outlook. Market-based inflation expectations have returned to levels preceding the pandemic, with 5y euro inflation swaps at 1.3 %.
  • Better-than-expected German industrial production and trade figures for November, together with stronger factory orders data, signalled that the economy may have expanded in the fourth quarter. Industrial output rose 0.9% in the month versus a consensus forecast of 0.7%.
  • Exports grew 2.2%, beating a forecast for 1.0% growth and a monthly increase of 0.8% in October. Imports climbed 4.7%, compared with 0.3% in the previous month. Factory orders rose 2.3%.
  • The Italian government is planning to draw EUR€200 billion from the EU’s coronavirus emergency fund and EUR€22 billion from other EU programs to help revive its economy, according to a draft document seen by Reuters. The plan needs Cabinet approval, but it has been criticized by coalition partner Italia Viva, led by former Prime Minister Matteo Renzi, who wants more spent on health care and infrastructure. He also wants the government to seek a loan from the eurozone bailout fund to help hospitals.


  • British finance minister Rishi Sunak is expected to delay plans for tax rises until late this year, The Times newspaper reported on Friday, citing a senior government source. The source said the upcoming budget on March 3 was the “wrong time” for tax rises and the plans were likely to be delayed until autumn at the earliest, the newspaper reported. Sunak has also rejected calls to extend a temporary cut to taxes on property purchases, known as stamp duty, that is due to expire at the end of March, the Times reported.


  • For 2021, economists forecast that China’s economy will expand from 8% to 9%. The forecast range implies average growth of 5% to 6% over the 2020 to 2021 period and is seen as an achievable level given China’s success in recovering from the coronavirus pandemic.
  • China is expected to report the fourth-quarter GDP on January 18. Analysts expect the GDP to be around 5.5% to 6.0% for the full year and as high as 15% for the quarter, given the low base in 2020 amid the pandemic. With policy stimulus effectively on hold, China is expected to place renewed emphasis on financial stability in the coming months. Few expect the government will start tightening policy in the near term.
  • China’s regulators introduced a cap on bank loans to the real estate sector for the first time. The move comes after micro or local property curbs in recent years did little to dampen a buoyant property market. Under the new rules, loans to developers may not exceed 40% of total credit for large banks, while mortgage exposure should not exceed 32.5%.
  • In economic readings, the Caixin manufacturing Purchasing Managers’ Index declined to a weaker-than-expected 53 in December, a three-month low. The services gauge also came in below consensus.
  • Chinese stocks began the year on a strong note, with the CSI 300 Index of large-cap stocks up 5.5% and the Shanghai Composite Index adding 2.8% since December 31. Nevertheless, sentiment was shaken after the New York Stock Exchange said it would move ahead with delisting three Chinese telecommunications companies, reversing itself for the second time in one week, following an executive order by President Donald Trump.

Sources: T. Rowe Price, Reuters, National Bank of Canada, Danske Bank, Handelsbanken Capital Markets, M. Cassar Derjavets.