U.S. ISM services index expected to fall back but remain in strong shape
U.S. labor market expected to improve with claims dropping another notch
U.S. trade deficit expected to widenU.S. ISM services index expected to fall back but remain in strong shape — The consensus is for today’s Aug ISM services index to show a -1.1 point decline to 57.0, more than giving back July’s +1.0 point increase to a 1-1/2 year high of 58.1.
Meanwhile, today’s final-Aug Markit U.S. services PMI is expected to be revised slightly lower by -0.1 to 54.7 after the sharp +4.8 point gain to 54.8 seen in the preliminary-Aug report.
The 1-1/2 year high in the July ISM services index illustrates that business confidence is returning in sectors of the economy that have been able to mostly return to normal after the pandemic shutdowns this past spring. The housing industry, in particular, is very strong due to low mortgage rates and the surge of people buying new homes to get more room or escape from urban areas and multi-family housing.
In a positive sign for today’s ISM services index report, Tuesday’s manufacturing ISM for August was favorable with a +1.8 point increase to a 1-3/4 year high of 56.0, stronger than expectations of +0.6 to 54.8. In a particularly good sign, the ISM manufacturing new-orders sub-index rose by another +6.1 points to a 16-year high of 67.6.
U.S. labor market expected to improve with claims dropping another notch — Today’s unemployment claims report is expected to show that the U.S. labor market continues to slowly improve.
However, the U.S. labor market has a very long way to go before normalizing. The initial claims series is currently 789,000 above the pre-pandemic level seen in February, and the continuing claims series is 12.836 million above the pre-pandemic level. That means that 12.8 million more people are still on the unemployment rolls than before the pandemic.
The consensus is for today’s initial unemployment claims report to show a decline of -56,000 to 950,000, adding to last week’s -98,000 decline to 1.006 million. Meanwhile, today’s continuing claims report is expected to fall by -535,000 to 14.000 million, adding to last week’s decline of -223,000 to 14.535 million.
On the labor front, the markets are mainly looking ahead to Friday’s Aug unemployment report. The consensus is for Friday’s Aug payroll report to show an increase of +1.400 million, adding to July’s increase of +1.763 million. Payrolls in May-July rose by a total of 9.3 million jobs, but that recovered only 42% of the -22.2 million job plunge seen in March-April. Payrolls would need to rise by another 12.9 million in order to get the record-high job level of 152.5 million seen in February before the pandemic emerged.
It will likely take at least several years for the U.S. to get back to that job peak. After the Great Recession, it took six years for the job level to recover to its previous peak. This time, the recovery should be much quicker if there is an effective and widely-available vaccine that becomes available next year.
The consensus is for Friday’s Aug unemployment rate to fall by -0.4 points to 9.8%, adding to July’s -0.9 decline to 10.2%. However, even if Friday’s unemployment rate falls to 9.8% as expected, the rate will remain near the peak of +10.0% seen during the Great Recession. The current unemployment rate is roughly triple the full-employment rate of 3.5% seen in February before the pandemic battered the U.S. economy.
The Fed last week said that it has adopted a new policy where it will no longer assume that low unemployment levels will push inflation higher, thus doing away with the discredited Phillips curve concept. The Fed will now allow unemployment rates to fall to levels that might be below what is thought to be the natural rate of unemployment. The markets can now be assured that the Fed will not raise interest rates preemptively just because the unemployment rate is low.
U.S. trade deficit expected to widen — The consensus is for today’s July U.S. trade deficit to widen substantially to -$58.0 billion from June’s -$50.7 billion. Today’s expected deficit of -$58.0 billion would be the widest deficit in nearly 12 years.
U.S. exports and imports both plunged during March-May due to the pandemic, but finally showed a partial recovery in June. U.S. exports and imports should continue to improve as the global economy slowly recovers, but the rise in exports and imports will be choppy, and the trade deficit figures will continue to be volatile.
In the meantime, President Trump will not be happy that the U.S. trade deficit of -$50.7 billion seen in June was wider than the -$42.9 trillion level that was seen in January 2017 when he took office.
The wider trade deficit seen since the pandemic began in March has been due to the fact that U.S. exports have suffered more than imports. On a year-to-date basis, U.S. exports are down -25% while imports are down by -19%.
The markets continue to watch China’s progress in buying U.S. goods to satisfy its phase-one trade deal promises. China has ordered a record amount of U.S. oil to be delivered in September, and the markets are expecting China to buy large quantities of U.S. soybeans as the harvest comes in ahead of the November 3 election. However, China remains far behind its purchasing targets. President Trump at any time could decide to cancel the phase-one trade deal, which would likely mean a big new round of tariffs.