U.S. Initial Jobless Claims Ease, but Are Still High
Initial claims for unemployment insurance fell to 900,000 in the week ended January 16 from 926,000 the prior week, which was revised from 965,000. The latest week was very close to the Action Economics Forecast Survey estimate of 903,000.
Initial claims for the federal Pandemic Unemployment Assistance (PUA) program, which covers individuals such as the self-employed who are not included in regular state unemployment insurance, increased again in the latest week to 423,734 from the prior week’s 284,886; that earlier figure was marginally revised from 284,470. Note that the brief history of this program, starting on April 4, 2020, means these data and other COVID-related series are not seasonally adjusted. Thus, the increases in the last couple of weeks may simply reflect a return to regular business schedules after the Christmas and New Year’s holidays.
Continuing claims for regular state unemployment insurance decreased to 5.054 million in the week ended January 9 from 5.181 million the week before; that earlier week was revised down from 5.271 million. Continuing PUA claims, which are lagged an additional week and not seasonally adjusted, declined to 5.707 million; this covers the week ended January 2 and is the lowest level since late April. Again, this latest week’s move may be holiday-related. Similarly, the Pandemic Emergency Unemployment Compensation (PEUC) claims also decreased in the January 2nd week, reaching 3.027 million from 4.166 million the week before. This program covers people who were unemployed before COVID but exhausted their state benefits and are now eligible to receive benefits through March 11, 2021.
The total number of state, federal and PUA and PEUC continuing claims decreased in the January 2 week to 15.995 million, down from the prior week’s 18.407 million and the smallest amount since April 4.
FLASH PMIs
Eurozone economy suffers steepening decline at start of 2021
Eurozone business activity fell at an accelerated rate in January as companies continued to struggle amid the ongoing pandemic and related restrictions. The rate of factory output growth weakened to the slowest since the recovery began and the service sector saw output fall at the second-fastest rate since May.
The headline flash IHS Markit Eurozone Composite PMI® fell from 49.1 in December to 47.5 in January, indicating a third successive monthly decline in business activity and the steepest deterioration since November. However, the last three months have seen the PMI remain higher than during the initial months of the pandemic in the spring of last year, suggesting that the economic impact of the second wave of virus infections has so far been considerably less severe than in the first wave.
The worsening performance in January was broad based across the eurozone, albeit with marked variations. Business activity growth in Germany waned to the slowest since the recovery began in July, but the sustained expansion contrasted with output falling at quicker rates in France and the rest of the eurozone as a whole. The flash composite PMI for France fell from 49.5 in December to 47.0, while the index for Germany merely slipped from 52.0 to 50.8. The rest of the eurozone collectively meanwhile saw an even steeper rate of contraction than France, with output falling for a sixth straight month as the index dropped from 46.1 to 44.7. However, like France, the decline remained less severe than in November.
The greatest signs of resilience amid the ongoing pandemic continued to be evident in manufacturing. Eurozone factory output expanded for a seventh consecutive month in January thanks to sustained growth of new orders, exports and backlogs of work. Although the overall pace of factory output growth slowed to the lowest in seven months, it remained among the highest seen over the past three years. Strong manufacturing output growth in Germany contrasted with a renewed fall in production in France and a comparatively subdued rise in the rest of the eurozone.
Some of the manufacturing slowdown was attributed by survey respondents to weaker demand growth from both corporate and consumer clients, in turn linked in many cases to the ongoing pandemic, but the January survey also saw an increased incidence of supply constraints limiting production. With the exception of last April, when global factory closures hit supply lines, the lengthening of supplier delivery times in January was the greatest since survey data were first available in 1997.
Tighter coronavirus disease 2019 (COVID-19) restrictions were meanwhile commonly blamed for a further deterioration in service sector business activity, which fell for a fifth successive month in January. Increased rates of decline of service sector output were seen across Germany, France and the rest of the eurozone as a whole, causing the overall rate of contraction to accelerate. New business inflows into the service sector fell for a sixth month running, also declining at a steeper rate than in December. However, the latest falls in service sector output and new work were less marked than those seen in November and between March and May.
January also saw employment across the eurozone fall for an eleventh consecutive month, albeit with modest increases in employment seen in both France and Germany helping to ease the overall rate of decline to the lowest recorded since the pandemic began. Modest job losses were again reported in both manufacturing and services.
Business expectations about output in the coming 12 months pulled back from December’s recent peak, largely linked to worries about the persistence of the pandemic’s impact on demand, though remained the second-highest since May 2018. While sentiment about future prospects cooled slightly in the service sector, optimism among manufacturers improved to a three-year high.
Average rates charged for goods and services meanwhile fell for an eleventh successive month, dropping at the sharpest rate since September. Although manufacturing prices rose, albeit only modestly and at a reduced rate, prices levied for services fell at the steepest rate since June, reflecting slumping demand.
Although average selling prices fell, average input costs continued to rise, increasing at the steepest rate since January 2019. Although a modest upturn in costs was seen in services, it was manufacturing where the greatest inflationary pressures were recorded, with average input prices rising at a rate not seen since February 2018. Higher prices were commonly linked to demand exceeding supply availability for many inputs.
ING:
Overall, the contraction in business activity indicated by the survey remains mild compared to the first wave impact, but the impact of the second wave is much more spread out over time. With lockdowns being extended further into 1Q, the risk is that sectors bearing the brunt of this face a much more significant, longer lasting impact, such as bankruptcy. (…)
With lockdowns now extended into February and more aggressive variants of the virus increasing the risk of further extensions being necessary, expect this pattern to continue. Manufacturing growth moderating and a sharp contraction in services will lead to a first quarter contraction in GDP. A bleak start to a year which should, at some point, see a quick turnaround in economic output as vaccinations take hold.
Japan: Rising Covid-19 Cases Extend Private Sector Downturn
The Japanese private sector economy entered the new year as it ended the last, with flash PMI survey data signalling a faster deterioration in business activity in January. Demand conditions weakened further, as new business inflows contracted for the twelfth successive month, weighed down by a further fall in export sales. That said, new
orders in manufacturing recorded an expansion for the first time in two years.
At 49.7 in January, the headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI)® fell from 50.0 in December to signal a renewed deterioration in business conditions across the manufacturing sector. Despite a return to growth in new orders for the first time since December 2018, falling output and employment levels and rising cost pressures dampened operating conditions at the start of 2021. Business expectations softened to the weakest since June, although optimism in the manufacturing sector remained strong overall.
The au Jibun Bank Flash Japan Services Business Activity Index fell to 45.7 in January from 47.7 in December, indicating a stronger fall in business activity. Both activity and incoming new business have been in decline for a full year, with the latest contraction in the latter the sharpest since May. Employment levels, meanwhile, provided a bright spot as firms recorded a broadly stable labour market. Business optimism softened for a third month in a row in January, with the level of positive sentiment only modest.
Samsung Considers $10 Billion Texas Chipmaking Plant, Sources Say The aim is to kick off construction this year in the Austin area.
(…) Samsung is taking advantage of a concerted U.S. government effort to counter China’s rising economic prowess and lure back home some of the advanced manufacturing that over the past decades has gravitated toward Asia. The hope is that such production bases in the U.S. will galvanize local businesses and support American industry and chip design. Intel Corp.’s troubles ramping up on technology and its potential reliance in the future on TSMC and Samsung for at least some of its chipmaking only underscored the extent to which Asian giants have forged ahead in recent years. (…)
If Samsung goes ahead, it would effectively go head-to-head on American soil with TSMC, which is on track to build its own $12 billion chip plant in Arizona by 2024. (…)
A Surfeit of Cash Now Brightens the Business Outlook (Moody’s)
Perhaps the most under-reported major financial development since the arrival of COVID-19 is the unprecedented surge by the M1 and M2 monetary aggregates. The record fast year-over-year growth rates for the 3-weeks-ended January 6 were 55.4% for M1 and 24.9% for M2. Moreover, fourth-quarter 2020’s M1 version of the money supply approximated a record-high 30% of GDP versus 18% as of 2019’s final quarter, while M2 soared from fourth-quarter 2019’s 71% to fourth-quarter 2020’s unprecedented 89% of GDP.
Both M1 and M2 now exceed what might be deemed normalized levels by staggering amounts. Assuming a 22% ratio of M1 to GDP is what would probably hold under normal conditions, then M1 now tops its normalized estimate by $1.8 trillion. And if the normal ratio of M2 to GDP is 74%, then M2 exceeds its normalized estimate by $3.2 trillion. Today’s excess amounts of highly liquid assets will eventually pay off debt, fund the purchase of real and financial assets, as well as finance spending on capital spending, goods and services.
As inferred from third-quarter 2020’s Federal Reserve’s “Financial Accounts of the United States” (the latest available survey), the liquid financial assets of nonfinancial corporations soared 37% yearly to third-quarter 2020’s record-high $3.5 trillion, while the liquid financial assets of households advanced by a record-fast 21.2% to a record-high $15.9 trillion. Prior to the third quarter, the liquid financial assets of nonfinancial corporations soared higher from a year earlier by an unprecedented 59.0%.
During 2020’s third quarter, the household-sector’s holdings of liquid financial assets (deposits and money market funds) approximated an unrivaled 89.6% of disposable personal income. Household-sector liquid financial assets former zenith vis-a-vis disposable personal income was the 87% ratio of 1986’s final quarter. Prior to the arrival of COVID-19, the deposits and money market funds held by households equaled 82% of disposable personal income.
And that leads us to
THE BIG DEBATE
The Bank of Canada this week entered the big debate on what will happen with all this cash:
Based on the current vaccine rollout plans, as we move into the second half of this year and more Canadians are vaccinated, we expect to see sustained strength in consumption, with services picking up from very depressed levels. This should support job creation, particularly for workers who have been most affected by the pandemic. And as we move toward broad immunity, we can expect uncertainty about the pandemic to fade and business confidence to improve. This will lead to stronger business investment and exports, consistent with a more broad-based and sustainable recovery.
All this will translate into strong economic growth in the second half of this year and first half of 2022. Expressed in annual average terms, we project an expansion of 4 percent this year and almost 5 percent in 2022, easing to about 2½ percent in 2023. But even with this strong growth, Governing Council expects the recovery will be protracted, reflecting how far the economy still has to climb back to reach its full potential. In the MPR projection, economic slack is not fully absorbed until into 2023.
We now project inflation to return to around 2 percent in the first half of the year, but this is expected to be temporary. The anticipated increase in inflation mainly reflects the effects of the sharp declines in gasoline prices at the onset of the pandemic. As those base-year effects fade, inflation will fall again, pulled down by the significant excess supply in the economy. As the economy absorbs this excess supply, we expect inflation to move up gradually and return sustainably to the 2 percent target in 2023.
So, the BOC sees accelerated growth without accelerating inflation. That is for the Canadian economy where the output gap does not close before 2023.
But the BOC’s view for the USA is also rather subdued even though “the US output gap is projected to close near the end of 2021, with inflation reaching 2 percent in late 2022.”
Bank staff estimate that the pandemic will have a long-term effect on the economy and will remove about 1¼ percent from the level of US potential GDP by the end of 2022. Households will likely remain somewhat cautious, keeping the saving rate elevated compared with historical averages. An increased desire for precautionary savings is expected to dampen demand through 2023.
Compared with the October Report, US GDP is revised up by about 2½ percent by the fourth quarter of 2022. This change is due to the additional fiscal stimulus, earlier-than-expected availability of vaccines and easier financial conditions. Reduced trade tensions also provide further support.
The Bank assumes that households do not boost their consumption spending using the savings that many have accumulated since the start of the pandemic. The savings rate is anticipated to decline but remain somewhat higher than its pre-pandemic level. This assumption is consistent with lasting effects on consumer behaviour, such as heightened demand for precautionary savings. For example, nearly half of respondents to the Canadian Survey of Consumer Expectations in the fourth quarter of 2020 reported that they plan to keep most of their extra savings as a safeguard.
The recovery in business investment is likely to be uneven. In the winter Business Outlook Survey, about one-third of businesses, mostly those that provide high-contact services, do not anticipate sales to return to their pre-pandemic levels by the end of 2021.
Quite a sticky number this “2% inflation”, whether the output gap closes or not…
Cryptos Won’t Work as Actual Currencies, UBS Economist Says They have a fundamental flaw, says the bank.
The “fundamental flaw” inherent in cryptocurrencies is that supply can’t be reduced when demand is slumping in most cases, Paul Donovan, chief economist at UBS GWM, said in a video this week. That means they can’t be considered currencies, he said.
A “proper currency,” as Donovan termed it, can be a stable store of value, providing certainty that it will be able to buy the same basket of goods tomorrow as it buys today. That confidence is derived from central banks’ ability to reduce supply when demand is falling. There is no such mechanism for switching off supply on most cryptocurrencies, and therefore their value can slide — leading to a collapse in spending power. (…)
Covid-19
Biden warns US Covid deaths will top 500,000 next month US president signals incoming administration will be unable to dramatically speed up vaccinations
Johnson Signals Third U.K. Lockdown Could Last Into Summer
Study: Lilly Drug Prevents Covid-19 in Nursing Homes Drugmaker plans to ask U.S. health regulators to expand bamlanivimab’s use to protect nursing-home residents and staff from Covid-19
The drug, called bamlanivimab, reduced the risk of both staff and residents getting sick with Covid-19 by about 57% compared with a placebo eight weeks after receiving doses, Lilly said Thursday. The effect was more pronounced among residents, the company said, an 80% reduction in risk of Covid-19. (…) “It’s not an alternative for a vaccine. It’s for people who haven’t been vaccinated, and there’s an outbreak in their facility—this could be a last resort.” (…)
So far, at least 1.9 million Covid-19 vaccine doses have been administered in long-term-care facilities, according to the U.S. Centers for Disease Control and Prevention. It estimates there are about 3 million residents of long-term-care facilities in the U.S., each needing two doses of the new vaccines. (…)