The Week Ahead: Did Employment Grow in December?

Well ahead of the market open investors are busy thanks to comments from Federal Reserve chairman Ben Bernanke over the weekend. 

Noting widespread criticism that the housing bubble was inflated largely as a result of monetary policy that was too accommodative in the early 2000’s, Bernanke provided a synopsis of the arguments and the data, concluding that that policy was appropriate and that counter-arguments are “weak.”

“Economists who have investigated the issue have generally found that, based on historical relationships, only a small portion of the increase in house prices earlier this decade can be attributed to the stance of U.S. monetary policy,” Bernanke said.

“Regulatory and supervisory policies, rather than monetary policies, would have been more effective means of addressing the run-up in house prices . . . Policy during that period--though certainly accommodative--does not appear to have been inappropriate, given the state of the economy and policymakers' medium-term objectives.”

As for looking at current monetary policy, Bernanke’s colleague Donald Kohn addressed that topic over the weekend, maintaining that interest rates will remain low for the near future.

“The FOMC has recently reiterated its expectation that the considerable remaining slack in labor and product markets and subdued trends in inflation and inflation expectations are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Kohn also said economic activity will return will be “gradual” and that the drop in the unemployment rate will be “slow.”

Key Data This Week:

Monday:

10:00 ― The ISM Manufacturing Index should start end the decade by advancing for the fifth straight month, a significant achievement after 18 months of contraction. The prospects for rapid climb in the nationwide manufacturing report look good: regional surveys from Chicago, Dallas, and Philadelphia all advanced in December, and even softer readings from New York and Richmond were still in growth mode. 

“There appears to be further upside momentum for U.S. manufacturing sector activity,” said Millan Mulraine from TD Securities. “In the coming months, we expect the ISM headline index to sustain its above-50 momentum as the global economic recovery gathers steam.”

A more cautious note comes from Ian Shepherdson, economist at High Frequency Economic, who said while it’s a good bet that the index will rise this month, the index overstates the actual strength of the economy. 

“Large manufacturers, who dominate the survey, are doing much better than their smaller non-manufacturing counterparts,” he said. “The weakness of the dollar is supporting manufacturing exporters, and big firms are much less reliant on bank credit than smaller companies.”

10:00 ― Construction Spending fell 1.6% in September and was flat in October, but the decline is set to resume in November for the both public and nonresidential areas.

Economists from IHS Global Insight note the downturn in nonresidential construction is “intensifying” and that, in addition to falling a 2-3% in this report downward revisions are also “likely” for prior months.

“Two nonresidential categories have been in a freefall recently, lodging, and a part of manufacturing construction that the Census does not itemize,” they said. “Expect big drops in both categories.” 

Meanwhile, HFE’s Ian Shepherdson said the data will be “meaningless”, noting that recent revisions have been so large that he has “no faith in the first estimates.”

10:15 ― Dennis Lockhart, president of the Atlanta Fed, speaks on the government’s response to the financial crisis at the American Economic Association.

1:15 ― Elizabeth Duke, a governor at the Fed, speaks at the 2010 Economic Forecast Forum at the Progress Energy Center in Raleigh, NC.

• Treasury Auctions:
• 11:30 ― 3-Month Bills
• 11:30 ― 6-Month BIlls

Tuesday:

10:00 ― The Pending Home Sales Index beat most economists’ expectations in October when it climbed for a 9th consecutive month. The consensus this month is pretty unanimous that a drawback will be seen in November (consensus: -3.0%), but predictions are difficult because of the government incentive program which has been skewing the data upward. 

HFE’s Ian Shepherdson wrote a typically cautious note: “Sales were massively boosted in the fall by the tax credit, which was originally scheduled to expire on November 30. Accordingly, we now expect pending sales to drop by about 10%, but this is a guess; be prepared to be surprised.”

10:00 ― Factory Orders rose 0.6% in October and are expected to rise another 0.4% in November. The index is little more than an expanded version of the durable goods report and thus gets scant attention from economists or the market.

• Treasury Auctions:
• 11:30 ― 3-Week Bills

Wednesday:

8:15 ― The ADP Private Employment Report has held a shaky history throughout the recession, but just days ahead of what could be the first positive nonfarm payrolls report in two years, one can expect the report certainly won’t be ignored even if all who view it do so with a skeptical eye. The consensus is for 75k private jobs to be lost ― Friday’s report should be more positive as it includes growth in the public sector. 

10:00 ― The ISM Non-Manufacturing Index  gets less attention than its manufacturing cousin because it has less of a history, even though this survey covers the services, finance, and construction sectors, which together make up almost 90% of the economy. In November the NMI unexpectedly fell to 48.7, indicating that after two months of growth there was a sluggish period in most of the economy (below 50 = contraction). In December the consensus is that the survey will return to growth but the 50.5 consensus prediction leaves much to be desired.

“Freight activity continued to move up through November, although rough weather temporarily may have disrupted some freight loadings in mid-December,” note economists at IHS Global Insight. “Financial markets maintained good positive momentum. However, employment conditions are still expected to be a drag on the composite index, with an employment index reading still tracking below 50.”

2:00 ― Considering the wealth of economic material presented over the weekend, the release of the FOMC Minutes should be reason for few headlines. Why read what Fed officials were thinking several weeks ago when more recent material is available? Not only that, but nothing significant occurred at the last meeting: all participants voted to keep the Fed Funds rate in the zero to 0.25% range.

Thursday:

8:30 ― With just a day before the release of December’s nonfarm payrolls employment report, the Jobless Claims survey is sure to get a lot of attention. But the reality is that the data can’t say much for a few weeks; the holiday period simply skews data too much. 

“The weekly data are deeply unreliable over the holidays, and you should be ready for anything over the next couple of weeks,” said Ian Shepherdson from High Frequency Economics. The consensus view is for the seasonally-adjusted number of claims will be 445k, more than the prior week’s 432k figure.

1:00 ― Tom Hoenig, president of the Kansas City Fed, speaks on the economic outlook at the Central Exchange in Kansas City.

Friday:

8:30 ― The Employment Situation report is the most influential and closely watched data point to be released each month. For December the attention will be even more heightened as many economists are predicting the first signal of labor growth in the economy since December 2007. Of the economists polled by Bloomberg, the median estimate is precisely zero, with predictions ranging from -50k to +50k. 

“December could be the month where we see the first increase in payroll employment since December 2007, and even if it doesn't happen this month, job gains won't be long delayed,” said economists from IHS Global Insight. “Job losses slowed so sharply in November that we think a modest setback is more likely this month, and expect payroll employment to decline by 30,000.”

Analysts at Deutsche Bank added, “Initial jobless claims fell 22k to 432k—recall that they averaged 560k in Q3 and 627k in Q2. In turn, we are looking for +50k on December payrolls.”

Aside from the payrolls number the report will released the unemployment rate, which in November fell two ticks to 10.0%. A return to single-digits could be convincing that the jobless peak was reached in October.

10:00 ― Well, let’s not kid ourselves, few will be thinking about the Wholesale Trade report. But for those who care, the consensus is for a 0.3% decline.

10:15 ― Eric Rosengren, president of the Boston Fed, speaks on the economy at the Connecticut Business and Industry Association's annual economic summit.

12:45 ― Dennis Lockhart, president of the Atlanta Fed, will speak on the economic outlook at Atlanta, GA.

3:00 ― Consumer Credit has contracted for nine straight months and it looks as though that will continue in November. Estimates range from a $7 billion contraction to an increase of $3 billion in credit outstanding, but the consensus view is for a $5 billion cut.