Market Data (Jobless Claims, Productivity & Factory Orders)

The US equity markets are very bullish as today’s early-morning because U.S. reports revealed declines in initial and continuing claims that slightly outperformed assumptions, with a -33k initial claims drop to a still-elevated 779k in the last week of January, and a -193k continuing claims decline to a slightly tighter than expected 4,592k.

The insured jobless rate fell to a new cycle-low of 3.2% from 3.4%. We left our January nonfarm payroll estimate at 100k. We also saw a Q4 productivity contraction rate of -4.8%, after an expected Q3 boost to 5.1% from 4.6%, leaving a weaker Q4 reading that reflected a surprisingly large 10.7% hours-worked rise alongside the expected 5.3% output increase. A 1.7% compensation increase translated to a hefty 6.8% Q4 unit labor cost gain.

Key Market Data Points:

  • Initial Claims fell -33k to 779k from 812k (was 847k).
  • Initial claims on an NSA basis fell -24k to 816k, after a -97k plunge to 840k (was 874k).
  • Continuing claims fell -193k to 4,592k from 4,785k (was 4,771k).
  • The insured jobless rate fell to a new cycle-low of 3.2% from 3.4%.
  • Productivity grew at a -4.8% pace in Q4, after a 5.1% (was 4.6%) Q3 pace.
  • The BLS output index grew at a 5.3% Q4 pace, after a 44.1% (43.4%) Q3 gain.
  • Compensation per hour grew at a 1.7% Q4 pace, after a -2.2% (was -2.3%) Q3 pace.
  • Unit labor costs grew at 6.8% Q4 pace, after a -7.0% (was -6.6%) Q3 pace.
  • Factory orders rose 1.1%, after a 1.3% (was 1.1%) November gain.
  • Factory orders ex-transportation rose 1.4%, after a 1.1% (was 1.0%) November gain.
  • Factory shipments rose 1.7%, after a 0.8% (was 0.7%) November gain.
  • Transportation orders fell -0.8% (was -1.0%), after a 2.0% (was 1.9%) November gain.
  • Defense orders fell -5.1% (was -6.4%), after a 0.9% (was 1.0%) November gain.
  • Factory inventories rose 0.3%, after a 0.8% November gain.
  • The weekly Bloomberg Consumer Comfort Index fell to 44.6 from 45.7, following a 46.8 average in December.

Initial and Continuing Claims

The -33k initial claims drop to a still-elevated 779k in the last week of January followed big revisions that left a -63k drop to 812k (was 847k) in the week of the MLK holiday from 875k (was 914k) in the BLS survey week. We have three consecutive drops to a level that almost exactly matched our assumption. Claims on an NSA basis fell -24k to 816k, after a -97k plunge to 840k (was 874k) in the prior week. Continuing claims fell -193k to a slightly tighter than expected 4,592k, after a -190k drop to 4,785k (was 4,771k). The mix of data was slighter tighter than expected.

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We attribute the big holiday season gyrations to both the usual seasonal claims rise to a peak in early January before falling, combined with the difficulties of seasonal adjustment in this odd holiday season, and a surge in applications after the passage of the stimulus package. We will leave our January nonfarm payroll estimate at 100k.

Initial claims are averaging 844k in January, after averages of 828k in December, 749k in November, and 786k in October.

The 875k January BLS survey week figure followed prior survey week readings of 892k in December, 748k in November, and 797k in October.

Continuing claims fell -537k between the December and January BLS survey weeks, following prior drops of -767k in December, -1,734k in November, -4,924k in October, -1,745k in September, -2,459k in August, -2,280k in July, and -1,610k in June.

Our 100k January nonfarm payroll estimate follows a -140k drop in December, but prior gains of 336k in November and 654k in October. Our forecast tracks the moderating continuing claims downtrend. We have firm MBA purchase index readings with the housing boom, a solid 174k ADP rise, and a strong path for producer sentiment. Vehicle sales bounced 2% in January, though assemblies have been restrained in recent months.

Productivity

We saw a Q4 productivity contraction rate of -4.8%, after an expected Q3 boost to 5.1% from 4.6%, leaving a weaker path than assumed. The big productivity drop reflected an upside surprise for hours-worked, which rose 10.7% in Q4, versus an 8.2% pace in the monthly jobs data, after an unrevised 37.1% Q3 pace. The BLS output measure exactly tracked assumptions, with a 5.3% Q4 rise after an expected boost to 44.1% from 43.4% in Q3, as implied by the last GDP report. We saw a 1.7% Q4 gain for compensation per hour that beat assumptions, after an expected boost to -2.2% from -2.3% in Q3 that was signaled by the last round of income data. We saw Q4 unit labor cost (ULC) growth of 6.8%, which exceeded estimates due to the upside compensation surprise, after an expected trimming to -7.0% from -6.6% in Q3. The big 2020 ULC and hourly earnings swings reflect erratic gyrations in the GDP compensation data through the pandemic, alongside big output and hours-worked swings.

We saw a Q4 drop-back in productivity that only partly reversed a huge two-quarter climb through Q3, as the gauge copes with huge pandemic swings in output, hours worked, and compensation. The data will be hard to interpret until we get figures through 2021.

For the Q4/Q4 metrics, we saw growth of 2.5% for productivity, -2.7% for output, -5.0% for hours-worked, 7.8% for hourly compensation, and 5.2% for unit labor costs.

For our Q1 productivity forecasts, we expect a 2.0% pace, alongside Q1 gains of 3.9% for output and 2.0% for hours worked. We expect a lean 0.5% Q1 growth rate for hourly compensation as we further unwind the pandemic boost, and a -1.5% pace for unit labor costs.

We saw 2020 productivity growth of 2.6% y/y and 2.5% Q4/Q4, following 2019 gains of 1.7% y/y and 1.9% Q4/Q4, leaving back-to-back annual gains that mark the strongest annual increases since 2010.

For annual data, we saw 2020 growth of 2.6% for productivity, -4.2% for output, -6.6% for hours-worked, 7.0% for compensation, and 4.3% for unit labor costs.

We saw respective 2018 growth of 1.7%, 2.5%, 0.7%, 3.6%, and 1.9%. We saw respective 2018 growth of 1.4%, 3.5%, 2.0%, 3.4%, and 1.9%.

Factory Orders

Today’s factory report beat estimates across the board in December, after small November boosts for most measures. Factory orders rose by a solid 1.1% in December after a 1.3% (was 1.1%) November gain, leaving an eighth-consecutive rise. Ex-transportation orders rose by 1.4%, while transportation orders fell -0.8% (was -1.0%). We saw a 1.7% surge for both nondurable shipments and orders, and total shipments. Nondurable inventories beat estimates with a 1.1% rise, after a November boost to 0.7% from 0.5%, while the factory I/S ratio fell to a 17-month low of 1.39 from 1.41. We saw tiny upward revisions in all the major equipment aggregates from the durables report. We now expect a Q4 GDP growth boost to 4.3% (was 4.2%) from 4.0%, but we’ll still assume a 3.2% Q1 gain.

The equipment sector has rebounded sharply since May despite heightened business uncertainty. The ex-air capital goods shipments figures have set new 6-year highs in every month since August, and we’ve seen 12-year highs for shipments of computers and electronic equipment shipments since July, though we saw a temporary -1.4% November pull-back. Total equipment shipments will reach new highs by early 2021 now that Boeing 737 MAX shipments are approved. Production bottlenecks in some industries are boosting equipment demand.

The transportation orders rebound from March and April declines was trimmed in December, despite a surge in Boeing orders to a 2-year high of 90 planes from 27 in November and zero in October. Boeing shipments surged to a nearly 2-year high of 39 planes from 7 in November and 13 in October. We saw a drop-back in the vehicle assembly rate to a 10.7 mln pace from an 11.1 mln clip in November however. We saw a low of just 0.2 mln last April.

We expect a Q4 GDP growth boost to 4.3% from 4.0%, with hikes of $6 bln for both factory inventories and residential construction and $4 bln for public construction, but a -$2 bln trimming for nonresidential construction.

We expect Q1 GDP growth of 3.2%, with a 17% growth rate for equipment spending after a 33.5% Q4 clip. We expect a $73 bln inventory addition to Q1 GDP growth, after an estimated $54.3 (was $48.3) bln addition in Q4, as we further reverse the 4-quarter inventory liquidation through Q3. We saw a -$287.0 bln record liquidation rate in Q2.

We assume a 0.5% December business inventory gain after a 0.5% November rise. We assume December inventory gains of 0.1% for wholesalers and 1.0% for retailers, as shown in the advance indicators report.

The overall factory I/S ratio fell to a 17-mln low of 1.39, versus 1.40 pre-pandemic readings over the four months ending in February, from 1.41 in October and November. We saw an all-time high of 1.70 in April, a peak from the last recession of 1.46 in early-2009, and an all-time low of 1.14 in December of 2005.

The factory durable I/S ratio fell to an 18-month low of 1.67 (was 1.68) in December from 1.70 in November and 1.69 in October, versus a 2.24 all-time high in April. We saw a 1.88 high from the last recession in April and May of 2009, and a 1.59 expansion-low in November of 2018 that was previously seen in November of 2013.

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