Familiar Tales From A Warped Economy

US jobless claims edged up last week and a gauge of services sector activity suggested the pace of economic expansion remained relatively robust in December, data out Thursday showed.

207,000 Americans filed for unemployment benefits in the week to January 1, 7,000 more than the prior week’s upwardly revised headline reading.

The four-week moving average, which dropped below 200,000 to the lowest level since 1969 late last month, rose to 204,500 (figure below).

Continuing claims rose to 1.754 million in the week ended Christmas Day, above consensus and up from the prior week.

Although the headline initial claims print was above the 195,000 economists expected, the balance of evidence supports the notion that once one factors in the structural shift in the participation rate brought about by the pandemic, the US economy is likely near full employment. That argues for Fed tightening.

Meanwhile, ISM services came in well below expectations, albeit still squarely in expansion territory. At 62, the headline print was a woeful miss. The market wanted 67. The range, from more than four-dozen economists, was 63 to 69.

Recall that the gauge hit a record in November, at 69.1. So, the deceleration in December should be viewed in that context.

The details weren’t as amenable to positive spin as ISM manufacturing which, despite an underwhelming headline read, suggested US factories moved towards “something that resembles normal” in December, to quote one respondent. Under the hood of the services headline, gauges of activity and new orders dropped sharply, and the employment index moved lower.

“Although there was a pullback for most of the indexes in December, the rate of growth remains strong for the services sector,” ISM’s Anthony Nieves said Thursday, adding that respondents “indicated they continue to struggle with inflation, supply chain disruptions, capacity constraints, logistical challenges and shortages of labor and materials.”

The deliveries gauge moderated, but the anecdotes still contained words like “congestion” and “shortage.” Unfortunately, the prices index rose again. 82.5 was the third-highest reading in history, exceeded only in September of 2005 and October of last year.

The color accompanying the final read on IHS Markit’s services PMI for December painted a familiar picture. Business activity was “robust” but “eased slightly” from prior months. Labor shortages were pervasive and firms reported difficulties in retaining workers.

Commenting on inflationary dynamics in the US services sector, IHS Markit said “soaring wage bills and greater supplier prices led to the steepest increase in cost burdens on record.” Firms charged more, and the only thing keeping them from raising prices even further last month was “competition for customers.”