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Economic & Housing Weekly Note

Employment Growth Remains Muted, Productivity Falls in Q4 2020

February 5, 2021

Key Takeaways:

  • Nonfarm payroll employment increased 49,000 in January, according to the Bureau of Labor Statistics (BLS). Total nonfarm employment remained approximately 6.5 percent below the level seen at the peak in February 2020. Leisure and hospitality employment fell by 61,000, the second straight month of decline. Unlike the December jobs report, the decline in January was much broader, as employment fell notably in retail trade, health care & social services, and transportation & warehousing. However, this decline was offset by strong gains in private, state, and local education, as “pandemic-related employment declines in 2020 distorted the normal seasonal buildup and layoff patterns,” according to the BLS’s press release. Residential construction employment (including specialty trade contractors) was essentially unchanged. The unemployment rate fell four-tenths to 6.3 percent.
  • The ISM Manufacturing Index fell 1.8 points in January to 58.7 (any reading above 50 indicates expansion). The decline was led by downturns in both the new orders index, which fell by the most since April, and the production index, though both remain well above 50. The employment index rose 0.9 points to 53.6, the highest level since June 2019. The ISM Service Index rose 1.0 points in January to 58.7, the highest level in almost two years. The business activity index fell, though it remains above 50, while the new orders index and the employment index both rose, with the latter rising to just below the level seen in February 2020.
  • January light vehicle sales increased 2.6 percent from December to 16.8 million units, according to Autodata. From a year ago, light vehicle sales fell 1.3 percent, the eleventh straight month of annual decline.
  • Nonfarm business productivity fell 4.8 percent annualized in Q4 2020, the largest drop since Q2 1981, according to the preliminary estimate from the Bureau of Labor Statistics. Real output rose 5.3 percent annualized, though was outweighed by a 10.7 percent annualized increase in total hours worked. The decline in productivity, along with an increase in compensation, caused unit labor costs to jump 6.8 percent annualized. From a year ago, productivity increased 2.5 percent.
  • Private residential construction spending increased a further 3.1 percent in December, according to the Census Bureau. Single-family spending rose 5.8 percent for the second month in a row, rising to the highest level since November 2006. Multifamily spending rose 0.1 percent, while spending on improvements rose 0.4 percent to the second highest level in series history.
  • The Federal Reserve Board Senior Loan Officer Opinion Survey (SLOOS) in the three months ending in January showed that, for residential real estate, most large banks eased lending standards for GSE-eligible mortgages, while “modest shares” of smaller banks tightened lending standards for non-GSE-eligible loans, non-jumbo loans, and subprime mortgages. Regarding demand, large banks reported unchanged demand for all mortgage categories, while smaller banks reported stronger demand for most mortgage categories other than government mortgages (for which demand was unchanged), while home equity lines of credit (HELOCs) and subprime demand weakened.
Forecast Impact:

Employment growth in January remained muted as sectors beyond leisure & hospitality experienced notable declines. However, the pandemic and restrictions attempting to curb the spread of the virus are continuing to weigh on these more sensitive industries, limiting the potential recovery in the labor market. Until a larger portion of the population receives a vaccine, we believe further employment growth in these areas will likely remain constrained. While the weak January jobs report supports our expectation for much weaker consumer spending in Q1 2021, the increase in January vehicle sales, as well as the increase in the ISM Services index, suggests some potential upside to consumer spending in Q1. The pace of recovery in the business sector slowed somewhat, though the manufacturing sector is still comfortably in expansion territory. While productivity fell sharply, this was due to a large increase in total hours worked, which outweighed the increase in real output. In housing, the December strength in single-family construction spending continued to climb in December, though we currently expect decelerating residential investment growth in Q1.

Ricky Goyette
Economic and Strategic Research Group
February 5, 2021

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