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The Week Ahead: Manufacturing and Service Activity
An exciting week ahead is jam-packed with several data releases that will provide investors with insights as to the health of the manufacturing and service sectors.
The week will begin with the release of construction spending for December, which is expected to go up by 0.4% (versus 0.6% prior).
Low interest rates and strong labor markets provided the much-needed tailwind to the housing market. However, the inventory of houses available for sale is at multiyear lows and has been a drag on existing home sales.
Construction spending related to residential property, on the other hand, is benefiting from the low inventories, and construction projects are on the rise.
The widely watched U.S. manufacturing gauge, the ISM Manufacturing PMI, will also be released on Monday.
The December ISM registered a decade low of 47.2, highlighting the issues faced by some of the large manufacturers reeling from the impact of the trade war with China.
The global manufacturing industry is recovering from a cyclical downturn and is starting to show early signs of stabilization. With the signing of the phase one trade deal with China, analysts are expecting an uptick in the January ISM numbers to 48.0.
Tuesday will see the release of data pertaining to factory orders in December (consensus 0.7% versus -0.7% prior).
Preliminary durable goods orders for December, which is a subset of the larger factory orders category, rose 2.4%. The increase came primarily from an increase in defense spending. Nondefense aircraft spending has been impacted by production stoppages relating to Boeing 737 Max jets.
Durable goods orders excluding the volatile transportation component fell by 0.1% in December. With the recent Markit PMIs also pointing to slower manufacturing activity, a larger increase to factory orders is not expected.
ADP employment change for January (consensus 150,000) will be the first data release for Wednesday.
ADP employment tracks change in nonfarm “private” employment. The private sector had added 202,000 jobs in December, the largest gain since April 2019.
ADP precedes the release of a few widely watched indicators, change in nonfarm payroll data and the unemployment rate, which will be available on Friday and can provide some insights as to the state of the labor market.
The U.S. labor market has been a pillar of stability and support for the economy in 2019, and it is expected that the trend will continue this year with some moderation in job growth and earnings.
The U.S. had added 145,000 nonfarm jobs in December, which was slightly lower than expectations. Analysis suggests that hourly earnings growth also peaked in 2019 but is likely to stay above 2.5% this year.
Unemployment rate in December stood like a rock at 3.5%, a 50-year low, and is likely to stay around that range.
Also releasing on Wednesday will be the December trade balance. The trade balance in November fell by 8.2% to -$43.1 billion as exports to China spiked.
President Donald Trump refers to trade deficit as a gauge for assessing progress on the trade war front. With the signing of the phase one deal, analysts expect the numbers in December to be in line with analyst expectations of -$46.0 billion.
ISM Nonmanufacturing PMI for January will be the last release for Wednesday with expectations for the numbers to stay around the December range. December ISM numbers had surprised to the upside, coming in at 55.
The manufacturing and service sectors are continuing to diverge, and the ISM nonmanufacturing readings for December stood in stark contrast to the December manufacturing readings. Manufacturing is expected to start accelerating in the second half of 2020.
