Weekly Economic Update: January 31, 2021

A very turbulent week, marked by volatility, ended with a robust finish. Last Friday’s gains were enough to push several of the benchmark indexes higher by the end of the week. The Dow advanced 1.3% and the S&P 500 gained 0.8%. A late-week tech rally was enough to move the Nasdaq back to where it began the week. Crude oil prices advanced for the sixth straight week, with prices reaching a nearly seven-year high. With supplies remaining limited, more projections are pointing to a return to $100.00 per barrel. Ten-year Treasury yields have risen 27 basis points since the beginning of January, while the dollar moved 1.7% higher. Gold prices, which had been gaining ground, fell back last week. Fourth-quarter corporate earnings have been generally favorable, with about 80% of the companies that have reported earnings so far this season beating projections.

Last Week’s Economic News

·     No surprises followed last week’s Federal Open Market Committee meeting. The Committee noted that while indicators of economic activity and employment have continued to strengthen, supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. The FOMC decided to keep the target range for the federal funds rate at 0.00%-0.25%. However, with inflation well above 2.0% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. Also, the Committee decided to continue reducing the monthly pace of its net asset purchases, bringing them to an end in early March. It is presumed that the first interest rate hike would occur following the FOMC’s March 16 meeting.

·         The economy accelerated at an annual rate of 6.9% in the fourth quarter of 2021, according to the initial, or advance, estimate of gross domestic product. GDP advanced 2.3% in the third quarter. The increase in GDP primarily reflected increases in private inventory investment, exports, personal consumption expenditures (PCE), and nonresidential fixed investment that were partly offset by decreases in both federal, state, and local government spending. Imports, which are a subtraction in the calculation of GDP, increased. Personal consumption expenditures advanced 3.3% in the fourth quarter compared with a 2.0% increase in the third quarter. The price index for gross domestic purchases rose 6.9% in the fourth quarter, compared with a 5.6% gain in the third quarter. The personal consumption expenditures price index increased 6.5% in the fourth quarter, compared with a third-quarter increase of 5.3%. Excluding food and energy prices, the PCE price index increased 4.9% in the fourth quarter compared with an increase of 4.6% in the third quarter. The PCE price index increased 3.9% in 2021, compared with an increase of 1.2% in 2020.

·         Inflationary pressures continued in December, according to the latest data from the Bureau of Economic Analysis. The personal consumption expenditures price index, a measure of inflation, rose 0.4% last month after climbing 0.6% in November. For the year, the PCE price index rose 5.8%. Energy prices increased 29.9% while food prices increased 5.7%. Excluding food and energy, the PCE price index increased 4.9% in 2021. Personal income climbed 0.3% in December and disposable (after-tax) personal income advanced 0.2%. The increase in personal income in December primarily reflected an increase in compensation that was partly offset by a decrease in proprietors’ income. Within compensation, the increase reflected increases in both private and government wages and salaries. Personal consumption expenditures, a measure of consumer spending, fell 0.6% in December, reflecting a decrease in spending for goods (-2.6%). Within goods, decreases were widespread across most components and were led by declines in spending on recreational goods and vehicles, “other” nondurable goods (which includes newspapers, household supplies, and games and toys), and furnishings and durable household equipment.

·         New orders for durable goods declined for the first time in three months, falling 0.9% in December. Driving the decrease last month was a 3.9% dip in transportation equipment, a 14.4% decrease in nondefense aircraft and parts, and an 11.2% drop in defense aircraft and parts. Despite the December decrease, new orders for durable goods rose 20.9% in 2021.

·         The advance report in international trade in goods saw the December trade deficit come in at $101.0 billion, up $2.9 billion from November. Exports of goods for December were $157.3 billion, $2.2 billion more than November exports. Imports of goods for December were $258.3 billion, $5.1 billion more than November imports.

·         According to the Census Bureau, new home sales jumped 11.9% in December above the prior month’s total. However, sales of new single-family homes decreased 14.0% in 2021 compared to 2020. The median sales price of new houses sold in December 2021 was $377,700. The average sales price was $457,300. Inventory of new homes for sale sat at a supply of 6.0 months at the current sales rate.

·         The national average retail price for regular gasoline was $3.323 per gallon on January 24, $0.017 per gallon more than the prior week’s price and $0.931 higher than a year ago. The Gulf Coast price increased more than $0.05 to $3.01 per gallon, the Midwest price increased nearly $0.02 to $3.13 per gallon, and the East Coast price increased more than $0.01 to $3.25 per gallon. The West Coast price decreased nearly $0.01, remaining virtually unchanged at $4.16 per gallon, and the Rocky Mountain price decreased less than $0.01, remaining virtually unchanged at $3.33 per gallon. As of January 24, residential heating oil prices averaged nearly $3.67 per gallon, almost $0.07 per gallon above last week’s price and nearly $1.10 per gallon higher than last year’s price at this time. Residential propane prices averaged nearly $2.75 per gallon, more than $0.02 per gallon above last week’s price and more than $0.55 per gallon above last year’s price.

·         For the week ended January 22, there were 260,000 new claims for unemployment insurance, a decrease of 30,000 from the previous week’s level, which was revised up by 4,000. According to the Department of Labor, the advance rate for insured unemployment claims for the week ended January 15 was 1.2%, unchanged from the previous week’s rate. The advance number of those receiving unemployment insurance benefits during the week ended January 15 was 1,675,000, an increase of 51,000 from the prior week’s level, which was revised down by 11,000.

Eye on the Week Ahead

Robert G. Carpenter