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Economic & Housing Weekly Note

Despite Further Job Gains, a Complete Labor Market Recovery Not Likely to Occur Soon

November 6, 2020

Key Takeaways:

  • The Federal Open Market Committee (FOMC) left the federal funds rate unchanged at its November meeting and once again reiterated that asset purchases would continue at the current pace of at least $80 billion a month in Treasuries and $40 billion a month in MBS.
  • Nonfarm payroll employment increased by 638,000 in October, according to the Bureau of Labor Statistics, the fourth straight month of deceleration. Total nonfarm employment remains approximately 6.6 percent below the level seen at the peak in February. Well over half of the job growth in October was concentrated in the leisure & hospitality and professional & business service sectors. Government employment fell by 268,000, driven by large declines in temporary Census workers and state & local education jobs. Residential construction employment (including specialty trade contractors) rose 23,800. The unemployment rate fell one percentage point to 6.9 percent.
  • Light vehicle sales fell 0.8 percent to 16.4 million annualized units in October, according to Autodata. From a year ago, light vehicle sales fell 2.8 percent, the eighth straight month of annual decline.
  • The ISM Manufacturing Index jumped 3.9 points in October to 59.3, the fifth increase in six months and the highest level in just over two years. Any reading above 50 indicates expansion. The increase was driven by every subcomponent, including new orders, production, and employment indices. The ISM Service Index fell 1.3 points to 56.6. The decline in services was driven by business activity, new orders, and employment, though all three subcomponents remained in expansion territory.
  • Nonfarm business productivity increased 4.9 percent annualized in Q3 2020, the second largest increase since 2009, according to the preliminary estimate from the Bureau of Labor Statistics. While this represents a deceleration from the second quarter, details from the report showed a large number of people returning to work. Total hours worked jumped by a record 36.8 percent annualized, though it remained well below the recent Q4 2019 peak. Real output posted an even larger increase of 43.5 percent annualized. Unit labor costs decreased 8.9 percent annualized.
  • Factory orders and shipments rose 1.1 percent and 0.3 in September, respectively, according to the Census Bureau. Nondurable goods orders increased 0.3 percent, though they remain well below early-2020 levels. Core capital goods orders and shipments rose 1.0 percent and 0.5 percent, respectively.
Forecast Impact:

Economic data continue to show a steady economic recovery, but at a slower pace than in prior months. Job growth continued to see solid gains in October, though it does not appear on track to reach pre-pandemic levels even within the next year, highlighting the severity of this recession. The deceleration in October service sector activity and decline of light vehicle sales both support our view of slowing consumer spending. After a record Q3, we expect growth to decelerate across the board. The manufacturing sector continued to show strength in September, with solid capital goods orders (a leading indicator) suggesting further growth in business investment in the coming months. While new daily COVID-19 infection rates and deaths are accelerating again, we do not think the U.S. will return to the same breadth of shutdowns as seen in April in the UK, France, and other parts of Europe; however, numerous localized shutdowns and a further decline in consumer sentiment could lead to a pullback in consumer spending which would drag on growth.

Ricky Goyette
Economic and Strategic Research Group
November 6, 2020

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic & Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views, including assumptions about the duration and magnitude of shutdowns and social distancing, could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.